As a result of the economic downturn in the late 2000’s, law firms experienced a drop in revenue unprecedented in recent history. Large corporations balked at the fee structure and automatic increases charged by law firms and subsequently reduced their engagement levels and demanded fixed fees and discounts. Many large law firms responded by laying off associates, releasing unprofitable partners and reducing compensation. Some small law firms responded by listening to clients and revamping their business model.
Traditional – Billable Hours
The traditional business model for law firms is the billable hours model. Law firms using this model charge a set fee per hour of their time, usually ten minute increments. The fees vary based on the skill level or rank of the person working on the client’s behalf. For example, the firm may charge $500 per hour for a partner and only $200 per hour for a second year associate. This traditional model also uses retainers. A client pays a monthly retainer to ensure attorney availability when needed. The attorney bills against the retainer before billing the client for overages.
Litigation attorneys who specialize in personal injury lawsuits or workman’s compensation claims typically operate on a contingency basis. They charge their clients no fees. Instead, their clients sign contracts agreeing to pay a percentage, typically 33 percent, of the lawsuit or settlement’s proceeds to the attorney as compensation. Many of the individuals who file lawsuits do not have the funds to pay for an attorney through trial. This high percentage compensates for those lawsuits the attorney loses and receives no revenue for.
A flat, fixed fee for a defined service is a pricing model that some small business law firms utilize. Firms may charge a one-fits- all- fee for basic services and tailor fees got larger engagement based on the size and scope of the legal undertaking. One benefit: clients know upfront how much a particular legal service will cost. One drawback: law firms must accurately predict the amount of time needed to provide the service and the non-attorney associated costs involved.
In the value add pricing model the law firm takes a percentage stake in or flat fee of the proceeds of a particular successful outcome. This model approximates the model some consulting firms use in which the firms charge clients a percentage based on the money saved or raised or a predetermined fixed amount when the client achieves its goal. When a law firm successfully defends a contractual dispute or helps a company raise money, the firm would receive a percentage of monies saved or raised or a predetermined fixed fee as a value add fee.
- George Washington University: The Law Firm Crisis: Changing Business Models [http://business.gwu.edu/files/james-bailey-law-firm-crisis-3-11.pdf]
- American Bar Association: Dawn of a New Business Model [http://www.americanbar.org/publications/law_practice_magazine/2013/january-february/dawn-of-a-new-business-model.html]
- American Bar Association: Legal Fees and Expenses – What Are Contingent Fees?[http://www.americanbar.org/groups/public_education/resources/law_issues_for_consumers/lawyerfees_contingent.html]