Maximizing Law Firm Profits: Why Ditching the Billable Hour Model is Essential
Chelsea M. Williams ????Chief Financial Architect
I help law firm owners understand their numbers so they can scale and exit profitably with financial systems I Chief Financial Architect I Podcast Host
I know, you keep hearing about flat fees and how it’s the thing to do. You also have your doubts about why it might not work for you, or you don’t know where to start to make this transition. Truth be told, not every practice area is a good fit for a flat fee model. However, most of them are. And with a little bit of data, you can make the switch without sacrificing profits.
How Your Clients Really Feel About Being Billed by the Hour?
They may think they’re saving money by paying hourly, but that’s not how they feel when the invoice comes. When you show clients you are billing every minute, they start to question your efficiency. They think to themselves, “I read that email and there’s no way it took thirty minutes to write”! They see a laundry list of things they don’t understand and so they start to pick it apart and question it. Why give them the opportunity? If you communicate the value of flat fees from their perspective before they engage in services with you, they’ll appreciate not being bothered with random invoices that are two pages long. Let me challenge you with a new line of thinking that is illustrated marvelously in The E-myth Attorney by Michael E. Gerber : read page 92.
It Promotes the Wrong Things
Let's face it: hourly billing promotes inefficiency. The longer a case drags out, the more billable hours there are, and the more hours your team gets paid for. This not only frustrates clients but also wastes valuable time and resources for law firms. Not to mention the instances where your team forgets to clock their time so you never get paid for it anyway. Flat fees promote efficiency within your team and deliver progress to your clients. All while saving them stress, and stabilizing your profit margins.
The Benefits of Flat Fees
By setting a flat fee, your law firm will revolve around the idea that the more efficient you become, the more your profit margin grows. It forces you to streamline your services and look at who is doing what in your firm. By delegating tasks that can be done by someone else, you can maximize attorneys' time and focus on the things that only they can do. This sets you up to offer competitive compensation plans you feel confident in.
How to Transition to Flat Fees
Compartmentalizing your services is the best way to streamline your services and charge efficiently. Start with one service offering and consider the time and money it takes to deliver that service offering. Run it by your team to make sure you haven’t missed anything. Then, calculate a flat fee for that service based on the constants within it. There may be outliers that make your flat fee structure seem devalued, but as long as you set your fees appropriately, you will average out into a profitable flat fee model. Need help setting your fees? Reach out to business law experts like us for guidance .
Final Thoughts
Ditching the billable hour model is effective for maximizing profits in law firms. By setting flat fees, you can increase efficiency, make clients happier, and ultimately make more money. It's time to bid farewell to the old ways of billing and embrace the new.