Welcome to the final post in our Alternative Fee Arrangements Series! This fall, we’ve covered the old, the new, and the current standard billing models for lawyers. In this blog, we’re going to be covering almost everything else.
We’ve been covering alternative fee arrangements this season because we want to explore every option we can for improving your firm. If there’s been any unifying lesson for the series, what we’ve seen is that every firm is different, and there isn’t a one-size-fits-all billing model that works for every firm.
To that end, in the last blog in this series, we’ll be handling some less well-known or less common billing methods in quick succession. Stick around if you’re wondering if any of these methods might be right for your firm.
What Is Value-Based Billing?
Value-based billing actually describes a wide range of billing practices, all of them united by a different perspective on legal billing. Firms that use value-based billing don’t have set pricing schemes or a menu for every legal service they might offer like a flat-fee firm might. Instead, they evaluate the value of their work based on the value of that work to their clients.
Rather than coming up with a price for a service or for their work by the hour, value-based firms put the client first. By figuring out the value of their time and services to each individual client, they make sure to tailor their services to the client from step one.
Of course, value is subjective, so there is a bit of collaboration between the client and the attorney when determining pricing. Full transparency is the best way to get to a price that works for both parties. This is not a billing method for firms that want to do things the easy way!
Pros of Value-Based Billing
This method does focus primarily on the clients’ needs, more so than other fee structures. That means you’re focused on making the client happy. Of course, you’re making money while you do; this isn’t pro bono work. Just that the pricing of your services is straightforward and custom-tailored to your clients.
That means your clients will almost never be unhappy with a bill. And, since most value-based firms bill upfront, that means you won’t have to spend time chasing down invoices and making sure you get paid.
Value-based billing is also very flexible. You can bill by the hour, you can charge a flat fee, you can even bill a subscription. You can do litigation or deliverables. It all depends on being able to put in the work to find the right cost.
Cons of Value-Based Billing
That’s the big issue with this billing method, however. There is a risk of undercharging or overcharging a client, especially at the beginning of a switch to value-based models. It’s a good idea to present several different pricing options to a client, depending on how much they want to spend and what kind of services they need.
This keeps haggling off the table. It also allows you to secure clients who might not be able to afford or may not need more thorough services while giving clients who want the best service their money can buy what they need without undercharging.
The problem is, it will be a considerable amount of work to get the pricing right. You’ll have to consider the scope of each matter, a competitive price that doesn’t undervalue your services, and you’ll have to do this each time. The good news is that this is a skill like any other, and with practice it can be mastered.
What Kinds Of Firms Work Best With Value-Based Billing?
As mentioned above, value-based billing is a flexible fee arrangement, and so fits any number of kinds of law firms. This can be an especially lucrative model for firms that provide documents like contracts, trademarks, and estate planning. Rather than charging a flat fee for a document, these firms would be able to assess the value of the document to their client and charge accordingly.
Firms focused on litigation, meanwhile, can bill based on the scope of a legal matter. Finding the right price point will allow these firms to bill upfront while still representing the client through all the ups and downs of any given case. In addition, according to research done by Deloitte, value-based billing is popular among corporate firms because businesses value the reduction in inefficiency caused by misaligned priorities in billing by the hour.
Everything You Need To Know About Legal Unbundling
The term unbundled legal services doesn’t exactly describe a billing method, but more a way of running a law firm. Rather than representing a client throughout the whole of their legal matter, firms that have unbundled the legal process only handle a part of the work on any given matter.
That can mean anything from advising a client on their rights in a specific matter to drafting documents and even to appearing in court on their behalf, usually in a limited capacity. Because the legal process is unbundled, it never means all of those things at once.
Also known as limited-scope representation, legal unbundling is a way for law firms to service clients without taking on the whole of a legal matter. A menu of services, each offered à la carte, is what sets this fee arrangement apart from others.
It’s quite popular with clients, too. In their 2022 Legal Trends Report, Clio found that 67 percent of clients wanted unbundled legal services, second among all the billing methods they polled!
Why Offer Unbundled Legal Services?
Unbundling allows you to expand your client base to include clients who may not be able to afford traditional legal services. Studies show that three out of five litigants in civil cases don’t have a lawyer when they decide to enter litigation. Unbundled legal services can allow those clients to get access to the legal help they need without all of the extra costs involved.
Perhaps more common, however, would be unbundling deliverable legal documents. Unbundling allows you to focus on your area of expertise. If you’re a very efficient drafter, for example, you can offer just that service alone, without any of the other services that might come with it. At the very least, it’s a very easy way to bring in some extra money for your firm without needing to bring in clients who need help throughout the whole of a legal matter.
Possible Pitfalls Of Unbundled Legal Services
Of course, nothing comes without its cost. It is possible, though unlikely, to tie your firm’s name up in business that gets poorly represented by another firm. If, for example, you take care of some documents for a client who then retains another lawyer who represents them poorly, there could be complaints rendered that include your firm.
On that note, depending on your area, your local bar could have strict ethics codes governing limited-scope representation. Check out the ABA’s resource on unbundling here to see how your state’s bar rules on unbundling legal services.
Firms That Would Benefit From Offering Unbundled Legal Services
As an alternative to full legal representation, legal unbundling could be a powerful financial tool to any firm willing to put in the work. Regardless of your firm’s practice area, opening your client base up to those who might not be able to afford the full scope of your services will take some work, but would certainly provide a new, solid source of income for your firm.
Any firm ready to handle many smaller tasks that don’t individually bring in a lot of profit but when taken in aggregate can lead to a successful firm is an especially good fit. Firms that specialize in brief court cases like traffic violations and firms that do a lot of work in deliverable documents work well in an unbundled legal world.
At the end of the day, this billing method does come down to personal preference. Do you want to do a little extra work to bring in some clients you might not otherwise have had? Are you willing to offer your clients a popular option they might not find elsewhere? If so, unbundling your legal services for some clients might be an avenue you should consider.
How Do Success Incentives Work?
Also known as contingency fees or performance incentives, success incentives describe extra compensation contingent on success in a legal matter. While it is unethical to, for example, take a fee based on a promised amount of alimony in a divorce case, in a civil settlement, it is ethical for attorneys to take a percentage of the settlement as part of the legal fee.
Success incentives are very popular with clients, too. Possibly because they would pay less in an unsuccessful case or because they believe it motivates success, both results and outcomes-based billing were the most popular billing method among those polled for Clio’s 2022 Legal Trends Report. (“Results-based and outcomes-based billing” is just another pair of terms for success incentives.)
Also interesting to note, from that same survey, is that only 10 percent of law firms surveyed offer contingency fees to their clients as a billing option. There’s a considerable gap between client expectations and firms delivering on those expectations. Firms that implement success incentives might find themselves able to pivot on that point and please their clients in ways other firms may not be willing to do.
Reasons To Adopt Success Incentives
Of course, within the name, the biggest advantage to success incentives is that they reward success. This lines up your motivations with your clients’. Ethics aside, the billable-hour model does not reward success or efficiency; it rewards time. Combining that model with a success incentive, however, can align your motivations better—possibly a reason it’s so popular with clients.
To that end, another benefit of contingency fees is that they can be combined with any other fee structure to reward a favorable outcome to litigation. You can mix success incentives with any kind of billing we’ve mentioned in this series and see your firm’s profits boosted—provided you’re successful in winning your clients’ in their legal matters.
Possible Pitfalls Of Contingency Fees
Because they reward success, however, obviously success incentives do not reward the opposite. Legal matters can be unpredictable, and a favorable outcome is never guaranteed. There may be some cases that would have paid slightly more for an unfavorable outcome had you relied on simply billing by the hour.
Thus, contingency fees can only ever be supplemental to another fee structure. Relying on winning as your sole way of making money is a recipe for financial disaster. When anything can happen, putting too much of a reliance on success is essentially gambling your firm’s future.
Firms That Would Thrive With Success Incentives
Outside of firms focused on litigation, there aren’t many firms that could use this fee arrangement. That said, litigation firms do stand to gain a lot, pending their success.
Again, it’s worth pointing out that clients love this billing method. Popular perception of success incentives is that the client pays the lawyer less if the legal matter is unsuccessful, but that isn’t exactly how it works.
You can set up your fees so that you stand to gain a lot more from success than you lose from its opposite. If you regularly handle civil litigation, for example, success incentives could work out to a percentage of any settlement or award given for the case.
Answering Legal Is Flexible Enough For Any Firm
Thank you for joining us on our deep dive into legal billing! People enter into the legal field for any number of reasons, but the fact of the matter is that without incoming money, most firms would go under in months. Making sure your bills are getting paid, that you’re making enough money for how hard you’re working, is one of the most important parts of being a law firm.
Our goal with covering alternative fee arrangements was always to give smaller law firms the tools they need to compete with the big guys. While larger law firms might not have an issue with the billable hour, many smaller firms do. None of the billing methods we covered are necessarily one-size-fits-all solutions, either.
No two firms are alike. What works for one firm might be disastrous for another. We here at Answering Legal understand that, and that’s why our answering service isn’t a one-size-fits-all solution either. Every part of our service is customizable, from the beginning of a call to its end.
Need a very specific legal intake process? We’ve got you covered; click here to check out how. Want your messages delivered to several different email addresses, phone numbers and CRMs? Click here to find out how that works. At the end of the day, our service has to work for your firm, and that means customization.
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