How one Family Law Firm has Used this Model for the Past 10 Years
By Dan Couvrette, CEO, Family Lawyer Magazine, Divorce Magazine and Divorce Marketing Group.
Guest Speaker: Lee Rosen, Rosen Law Firm.
SUMMARY OF THIS ARTICLE:
- Family Lawyer Lee Rosen explains the rationale for flat fees
- He provides practical insight into how he makes it work
- He tells the story of how his transition to fixed fees nearly put him out of business
- He explains the practical economics of running a practice without the burden of keeping time records
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Today we’re very pleased to have North Carolina family lawyer Lee Rosen as our guest speaker. Lee is going to talk about flat fees for services. He’ll explain the rationale for flat fees, and provide practical insight into how he makes it work with his firm. He’ll tell you stories about his transition to fixed fees nearly put him out of business, and explain the practical economics of running a practice without the burden of keeping time records.
Thanks Dan. Let’s talk about fixed fees. I’ve been doing it for about 10 years. We started doing this way back. It’s evolved a little bit, and it’s really working for us — so I’m a big fan of fixed fees. We don’t do anything on an hourly basis. The entire practice is done using the fixed fee model, and there are a whole bunch of reasons, which I think warrant consideration for using fixed fees.
I think that the model that so many practitioners use — the hourly billing model — really puts us at odds with our clients in a lot of instances. But when you switch to a fixed fee model, you very much get into alignment with your client. They want it over with, you’d like to have it over with, and everybody wins because you’re all heading in the same direction trying to accomplish the same thing.
The hourly billing system truly rewards inefficiency, and penalizes the use of technology. You know: the faster you get, the more efficient you become, the fewer dollars you’re able to collect for the case that you’re working on. A fixed fee system rewards efficiency, and it rewards you for adopting technology — all of which seem like pretty good ideas to me. When you’re using the old hourly billing system, you end up doing things from an administrative standpoint that costs your clients’ money, but often doesn’t really benefit them.
For instance, most firms that are doing hourly billing are running a bureaucracy to account for all of that hourly billing. When you move to the fixed fee, you can eliminate a significant portion of your administrative overhead because you’re no longer dealing with that function.
Also, one of the biggest reasons to get away from hourly billing is that all of us hate keeping time records! When you go to a fixed fee model, you don’t have to do that for the most part – because it’s not necessary.
There are some other reasons that I think fixed fees will help a practice. Right off the top, you get paid for the work you do. So much of what people are experiencing when they’re billing hourly, is that they’re billing for time that they’re not getting paid for. What I mean is, that they’re sending out invoices, and then they end up with receivables — and those receivables don’t get 100% paid. So people end up writing down some portion of it and entering into settlements with clients for some piece of the fee. All of that goes away when you move to the fixed fee model. You minimize all of those fee conversations, like having to call clients and ask them to replenish trust accounts. It often feels like you’re engaged in never-ending conversations about fees when you’re doing the hourly model.
When you eliminate those conversations, you also eliminate an opportunity for conflict — because those conversations are always sensitive, and they have a tendency to make clients upset. And if you don’t have to keep calling about payments, then you don’t have to get into those kinds of unpleasant interactions. You’re all heading the same direction, wanting the same thing — which is a resolution that the client is happy with.
Another reason to do this is that fixed fees are, in many markets, a competitive advantage. If everyone else in the market is billing hourly and you’re doing the fixed fee, there will be many clients who appreciate that and see what you’re offering a benefit they can’t get elsewhere — and so it has a tendency to generate more business for you.
Another thing that happens with fixed fees is that you get clients telling you everything that they need to tell you. That is, you no longer end up being kept in the dark about important details because a client didn’t want to pay to fully inform you.
Finally, from a lawyer’s perspective, fixed fees can allow you to drive away unprofitable business and focus on premium work, such as the cases that you really want to do — and you will be able to do fewer of them. You’ll find that this really enhances the overall quality of your practice.
And from a client’s standpoint, the benefits of fixed fees are fantastic. Clients love knowing what things costs. Can you imagine getting on a flight and not being told what it was going to cost? Imagine the airline telling you: “Well, we can’t tell you how much the ticket is, because we don’t know what the weather is going to be, we don’t know which way the wind will be blowing, we don’t know exactly how much the fuel is going to cost, we don’t know if the pilots are going to demand a raise, and so when we get you there we’ll let you know what is costs.”
We wouldn’t tolerate that when we have to go and make purchases — and our clients don’t like it either so when they come in and meet with us. That uncertainty drives them bananas. So you can provide the client with certainty, which reduces their anxiety and enables them to make better decisions if they proceed through the case — and that’s really one of the key things we need for clients to be happy. You won’t be facing a client who says: “Well, I don’t know if I should file the lawsuit or pursue this particular issue because I don’t really know what it’s going to cost.” If you’re using a fixed fee, they’ll know precisely what it’s going to cost, and they’ll be able to evaluate whether pursing that particular issue is something that’s worth it to them, and can therefore make a smart cost-benefit decision.
So if you haven’t figured it out already, I’m a pretty big fan of fixed fees. Now it’s not billing Nirvana — you take on more risk when you use fixed fees. There will be cases that you’ll lose money on because of charging too little. You’re shifting the risk form the client to you, and that’s a little scary. There will be times where things don’t go the way that you’d like them to. There’s also some complexity if your practice is such that you run credit lines or borrow against receivables. You won’t be able to do that as easily. Banks see receivables as collateral, which they view that as part of your overall financial health. If you don’t have receivables because you’ve been paid in advance, you won’t be in the same borrowing position. However you may not need to borrow because you’ve been paid in advance.
So that’s a little bit of a down side, but I don’t see it as a huge problem. The other is that you’ve got to have in the back of your mind the reality that one day you may end your practice (you may retire, etc.), and you need to be prepared to finish all those cases that were paid on a fixed fee. You’ve got to have a plan for how you’re going to pay to get that work done if you’re not there to do it. Or you have to have a plan for how you’re going to support yourself if you’re the one that does the work, but there are no new clients coming in. You can’t live entirely on the new fixed fees, because one day you’re going to have to let it all catch up and finish the old work.
Now let’s get down to the nitty-gritty of setting fixed fees. Here’s how I did it, and there’s nothing easy about this — it evolves over time. You’re going to have to tweak it. What we did, is that I pulled out five years’ worth of old files. We evaluated them, and figured out what kind of cases they were, starting with litigation cases and cases that settled without litigation. The, we broke them down further into custody, child support, property, spousal support and so on. We identified all of the issues, and then started looking at what we charged. We then came up with averages, gave ourselves a high to low range, and set our fixed fees based off of those ranges.
Now, we didn’t lock into a particular fee. Let’s say we had a case involving child custody, child support property division, no spousal support. Let’s also say that the typical fee was $10,000. We would use that as the basis for coming up with a range, and might say the range is $6,000 – $15,000/$20,000. Then, when a client is in our office in that situation, we look at our range, listen to their story, and determine the fee while they’re in the office based on all of that old data.
While we listen to their story and keep in mind variables that are pretty consistent in terms of their impact on the fee, we also look at aspects like whether they are going to litigate or not, the history between the parties, is there violence, net worth, whether or not they have children, whether they own a business or professional practice, and whether one spouse is financially dependent on the other. Cases with these issues tend to be slightly more expensive than cases where there was no dependency. We also look at who the opposing counsel was. So we look at our historic data and evaluate it in the context of the current case, and set the fee.
Also, we set fees in our jurisdiction for what we call non-litigation. Those are the cases where we’re not agreeing to do anything in court.
We set a non-litigation fee and tell the client: “This is the amount, and this will take care of everything from today until we either settle the case, or reach the conclusion that we can’t settle this case without filing a lawsuit.” We also quote a litigation fee, but not as a single fee. We do it in stages. We break our litigation into about four phases of litigation, and we lay that out for them, either at that initial consult or at some subsequent meeting it we’re not talking about litigation at the first consult.
Clients pay for the first phase of the litigation when we commence litigating, and they stop paying when the case gets resolved (it might be resolved by negotiation, or it might be resolved because of some preliminary hearing that results in a settlement). Whatever it may be, they don’t pay for every stage — they only pay the stages that come due based on the progress of the case.
Every jurisdiction is a little different, and has a different work flow. So you’re going to have to go back and look at when you bill a lot of time, and when you don’t, and determine your fixed fees so that you’re getting paid the appropriate amount when there’s a lot of work involved. You always want to make sure that your clients are paying you before you’re actually doing the work.
Over the years, it has really become more accurate and we find that we’re able to set fixed fees pretty well now. But like I said earlier, some cases you’re going to win on, and some cases you’re going to lose on. It’s just is the nature of having fixed fees. Just like the airlines, I’m sure, make more money one some flights than they do on others.
Now, when we switched from hourly to fixed, overnight we stopped having clients retain us. It was like we went from doing great to doing terrible, and everybody in the first few weeks was wondering, well how this was going to work out.
Then a month went by, and we basically had no revenues. My hard-headedness, however, encouraged me to keep doing this thing and to keep pushing forward. So for about two months we had almost no revenues. Finally, about two and a half months into the process, I caved and I said: “OK, here’s what we’ll do. We’ll offer the fixed fee, but we’ll also offer the hourly fee, and we’ll let each client choose.” Immediately revenue started coming up, and we realized most of the revenues were coming from fixed fees! In other words: we were presenting clients with a choice, and they were choosing fixed fee. Within about six months — just by natural processes, and with no order from me — the lawyers who were doing retainers stopped offering the hourly fee because nobody was interested. The clients didn’t want to do it anyway. So we had then completed our transition to fixed fees.
When I look back, I think what happened was that we were so uncomfortable with the idea of fixed fees that we did a poor job of explaining it. We weren’t conveying it in a positive way, and clients picked up on our discomfort. But from that point forward, there has never been a need to go back to hourly fees — it’s just gone.
I’ll tell you, though, when you’re administering this kind of a system there are some things that you have to do that are a little bit different. One thing is that you still may have to keep some time records. You’re pursuing attorney’s fees, and some jurisdictions will require you to have time records. Our jurisdiction has slowly shifted to where we now have judges awarding fixed fees as attorney fees award if that’s what the client was charged. But in a lot of jurisdictions, that’s not going to happen any time soon. So you may have to keep some time records in some cases.
You’ll also find that you have to deal with refunds. Your state ethics rules may require you to go back and evaluate what work you did if, for some reason, the case stops prematurely — and so you may be making some refunds. But all in all, it’s a system that I think is so much easier to administer than the hourly billing system. It’s hard for me to imagine an attorney not being pleased with it.
Now one thing I’ll tell you, we’re compared to the average family law firm, we’re a little bit bigger. And that enables us to absorb those cases where we do make bad decisions about the fees.
If you’re in a solo practice and you’re handling a relatively small number of cases each year, and you make too many bad decisions on fees, that’s going to be a problem for you. If you’re in a very small practice and you want to experiment with this, do your very best to set those fees at the higher end of your range.
Of course, you’ll have some clients who won’t hire you because the fee is too high, but you’re not going to get into the position where you’re taking on all of that risk and consistently having underestimated fee. I’ll tell you that the fees can be higher because you’re providing certainty, which clients value. They’re willing to pay a little bit for not having to deal with the anxiety they’d have to withstand if they didn’t know the fee in advance.
I’m not a family lawyer, but I know that a lot of my family lawyer clients find it difficult, as you mentioned earlier, to collect the money that is due to them. So with your system, how do you operate in terms of payment? Is it all up front, or is there set payments at certain times?
With us, there’s always a payment in advance, and if it is a non-litigation case, then the entire fee is paid on day one. If it’s a litigated case, then the entire fee for that first stage is paid on day one, and the subsequent fees are paid as those phases of the litigation kick in.
In North Carolina, we have a fee due at the beginning of the litigation, and we generally have some temporary hearings and some discovery. Then we’ll probably have some sort of alternative dispute resolution process, and then we may have one, two, three or even four hearings on the major issues. Those fees come due at the beginning and during the discovery process, during that alternative dispute resolution process, and then before each hearing.
It’s staged out so that we’re making sure that as a bunch of work comes up a fee is due. And there’s always a fee due before we invest a lot of time. It’s important to have fees properly aligned for when the work is going to be done, because those are also opportunities for settlement — and you want the client to have that fee out there as a reason to go ahead and get things resolved by agreement. So we’re often saying to a client: “If you want to have that hearing its fine we can do that, but you understand that the fee for that is going to be $15,000.” So, if suddenly we are down to fighting over the toaster oven, and it’s a $100 dispute, and they realize they’re about to write a $15,000 cheque, that $100 dispute doesn’t seem so important anymore.
So you feel that over-use of the attorney doesn’t become an issue, and in actual fact you get more information which helps the process along better, and it’s not really clients over-using you just because the fee is fixed?
You know that was a big anxiety for us. We worried that clients would say: “Hey there’s no restraint, I’m going to call like crazy and I don’t have to worry about paying for it.” Well, I’ll tell you we learned very quickly that there are the kinds of clients that call like crazy, and there are the kinds of clients that don’t, and the fee didn’t seem to have any real impact on that. The clients who called like crazy still called like crazy, and the ones that didn’t behave that way, simply didn’t.
So when a prospective client comes into your office and you’re trying to determine what fee you’re going to charge this client, I’m assuming you have some sort of a checklist. You have the obvious checklist for whether you think it’s going to be litigated or not litigated, but what other things do you have in mind? Or do you have a physical list that you check through?
We have a minimum that we publish to the attorneys who do the initial consultation, so that they know that we won’t accept a file for less than the minimum fee.
In terms of how high a fee for should be set above the minimum, we evaluate the net worth of the family, whether they have kids, whether there was violence, whether there’s a business owned, ownership of retirement plans, dependency, and the opposing counsel. These are all variables. I wouldn’t call it a checklist, but if you have a person who owns a business and who has a history of violence, who’s got a bunch of kids, and the opposing counsel is just a classic bomber type who makes everything worse, you’re going to move that fee way up from the minimum. But if you have somebody who walks in and they have relatively small marital estate, no kids, short marriage, no retirement plans, things are going to be much closer to the minimum.
So to go above the minimum really requires some judgement by the attorney who is doing that initial consultation. You know, as I’ve said a couple of times, you’re just not always going to be right. You’re going to do your best. Overall, fixed fees are a strategy that will enhance your business.
Well Lee, thanks so much we’re going to rap this podcast up now. I want to thank Lee for having done this presentation. If you didn’t hear earlier I gave Lee’s website address and I’m going to give it again: www.Rosen.com. You can learn more about Lee’s firm, browse his great website and enjoy lots of information and lots of resources. And if you want information about Divorce Market Group go to www.divorcemarketinggroup.com.
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