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Experience is the best tool for predicting fees. A lawyer’s experience in dealing with different problems can be found in closed files and billings, which offer a treasure trove of information on the steps needed for certain transactions, how long certain procedures might take, and what resources might be needed. To predict the future, as when estimating costs and setting fees, a good approach is to know what has happened in the past. Two steps should be taken:
- Examine closed files and billings.
- Begin documenting experience on current transactions by modifying current timekeeping systems so that you can segment matters into tasks and subtasks.
In your review of closed files and bills, you may discover that with certain types of services there are recurring “uncertainties,” or variables. Although the variables may differ slightly from matter to matter, if you can determine the typical range of time required to deal with the variables, you can factor that into your fees. Using a simple estate-planning example, you may find that the cost of preparing the documentation is fairly constant from matter to matter, but the two major variables are the time spent in the initial phase of conferring with the clients, gathering basic facts and helping them decide what they want, and revising documentation because the clients change their minds as to the terms of the wills you are asked to prepare. You may determine that the documents themselves can be charged at a fixed fee but the conferences and analysis require an hourly rate. This kind of approach is sometimes referred to as “cost pricing” (fixed plus variable plus profit).
Documenting current experience will help you fine-tune the knowledge gained by reviewing closed files and bills and will provide a monitoring capability that you can use to examine the validity of estimates made on new matters. This can then allow you to develop and maintain templates for different types of matters, not only to estimate costs (and profitability) but also to help convey value to the client.
Recurring Variables or Uncertainties
It has been said that one cannot predict the future, but one can shape the future by planning. Variables and uncertainties make planning difficult (sometimes impossible) because we cannot identify all of them.
However, there are common variables and uncertainties that lawyers learn about as they gain experience. They also quickly learn that some of these are under their control and others are not. Each lawyer should develop a list. Here are some to use as a starting point:
Variables or Uncertainties Under Control of the Lawyer
- effectiveness of negotiating fee and payment arrangements
- methods used to define the “problem”
- view as to necessity for a “Cadillac” solution or a commercially acceptable solution
- type of resources required to develop a solution
- resources previously developed in similar matters
- priority placed on matter solution
- effectiveness of resource supervision
- quality of resources used
- diligence in timely billing and collection follow-up
Variables or Uncertainties Not Under Control of the Lawyer
- client’s view of desired solution
- client reactions
- actions of opposing counsel
- court or administrative actions
- resource availability and performance
- new, conflicting demands affecting priorities
- new facts and circumstances
- acts of God
Once you have developed a fairly comprehensive list of variables for different types of transactions, you can start estimating the ranges of impact the identified variables are likely to have on the resources and time required to complete the various tasks and subtasks.
Also keep in mind that you need “cushions” to minimize the impact of incorrect estimates or unpredicted events.
Using What You Have Learned About Your Costs
You can use these techniques in “bite-size” pieces to see what your costs of providing services really are—this isn’t an all-or-none exercise. Even spending just a little time looking at past matters using the variables above will likely yield some surprising and beneficial results. Then you will be ready to try some cost accounting to determine the cost of production to be used as a guide in setting fees—whether estimates for hourly billing or establishing alternative fee arrangements. Consider the advantage of knowing your cost of production broken down as follows (remember that you are seeking your cost, not the fee to be charged):
- by firm
- by lawyer
- by practice area
- by department
- by office (if you have more than one)
- by staff other than paralegals (fee chargers)
- by paralegals (fee chargers)
- by use of technology (word processing, computers, etc.)
- by designated matter (or package of services)
In making your analysis, be on the lookout for groups of related services that you might package and be able to define in a “scope of the engagement” letter. For example, in business organization, you might include initial conferences with the client, preparation of articles of incorporation, by-laws, initial meeting minutes, state and federal filings, and conference for execution of the documents. This exercise will be useful for learning whether you have made a profit on those services—and for determining whether it would be possible to enter into a fixed or flat fee agreement for that package of services.
A helpful technique for deciding fees for services that are easily packaged and normally recurrent is to keep track of the time spent in a number of representations. At the outset, review bills for similar work and write down your estimate of the minimum and the maximum number of hours that will be expended to provide a defined service or package of services. Keep careful track of the actual time spent, then compare the actual to the estimated time. See whether the actual time falls within the estimated minimum and maximum times.
After a number of such exercises, you will know whether you are a realistic estimator. Averaging the actual time spent in doing the same defined services for a number of clients, or repetitively for the same client, will give you a realistic basis for setting fees using any billing method. If you are considering billing on an hourly basis, you will have a sound foundation for setting the hourly rate and giving a range of charges to your client. If you contemplate billing on a fixed fee basis, this process will help you know whether the fixed fee will be satisfactory to you. If you work for a contingency fee, you will know whether that kind of work is profitable.
These exercises will not tell you whether your charges will be acceptable in the competitive marketplace nor will they necessarily reflect the actual or perceived value of those services. The analysis that you will have made will enable you to determine the profitability of certain types of work. This information will be useful and may raise the following questions:
- On matters with low profit, can you increase the volume enough or apply technology or other forms of leverage to make it desirable to continue that type of work?
- Was low profitability the result of strong competition?
- Was low profitability the result of inefficiencies, and can those inefficiencies be reduced?
- Was low profitability due to inappropriate staff mix, and can that be adjusted?
- Can you justify low-profit work because it will enable you to get or keep high-profit work? (This is called a loss leader.)
- Did you purposely set your fee low and with low profitability to enter a new market? (This is called penetration pricing and is designed to enable you to win a market share.)
Now you have laid the foundation for developing transaction plans through creation of mini-systems.
Featured image from shutterstock.
Move Beyond the Billable Hour
This post was adapted from the Law Practice Division’s publication Alternative Fees for Business Lawyers and Their Clients. In this book, author Mark Robertson shares real case studies of business lawyers and firms successfully using alternative fee arrangements to deliver value to both the clients and the lawyers.
