Wednesday, May 2, 2007

Fixed fees, fixed costs, fixed income - a win-win?

The Wall Street Journal had a good feature today on law firms and alternative billing arrangements. The billable hour still reigns supreme, but big firms and companies are starting to get the hint when it comes to flat-fee billing arrangements; namely, that it can work out well for all. Here's the link for you subscribers.

I like flat fees, especially in real estate. The hard part is figuring out a flat fee for more complicated mid-market deals. (The largest portfolio deals can, in my view, be treated like a corporate deal.) Just charging a percentage of the dollar value does not always work because sometimes, the bigger the deal the easier it is. I've worked on $10 million transactions that took twice as much time as $100 million ones. But certainty is a good thing all the way around. Clients like fixed costs, and lawyers like knowing there is set income. It will be a long time coming before we see the end of the lawyer's most dreaded companion: the billable hour.

There have been niches in our field where flat or blended fees have been the norm for a while now. Residential lawyers charge flat (and really low, much of the time - I've seen $195!) rates for house closings, and routine retail leasing is often done at a flat rate. With a little bit of thought and perspiration on the front end this can be translated to other real estate transactions as well. But I also think attorneys have to be ware about getting lazy in a flat fee arrangement. You still have to work hard for the client to get the job done.

The hardest part of the equation is making sure neither the client or the firm is completely hosed by the flat fee. If things get out of hand or the deal tanks there needs to be an understanding as to a breakage fee or a true-up for an extraordinary situation, which takes some of the certainty out of the equation but also allows for fairness. At the end of the day, though, clients and attorneys need to trust one another in a long-term relationship and realize that, if both sides look at things fairly, things will even out. No such trust? Then no flat fee.