Managing risk in flat fee and fixed fee billing

“What could possibly go wrong?” An ironic or sarcastic question, anticipating that Murphy’s Law will assert itself at some point in the project, usually at a crucial moment. From the 18th Amendment to the Constitution, to technological innovations that promised a paperless office but delivered the opposite, failure to anticipate the risks of bold actions can have significant costs. 

Attorneys are under heavy pressure today to offer alternatives to the hourly fee, and many are taking bold action. The criticisms of the hourly fee are well-known, and typically include uncertainty for the client, firms profiting from inefficiency, no incentive to end the matter promptly, and erosion of trust. Law firms are proposing alternatives and variations such as a flat or fixed fee for the matter, blended hourly rates, fixed/flat fee “plus” (to account for identified variables), capped fees, contingency fees, success fees, and more. Unfortunately, many law firms have been unpleasantly surprised by their realization at the end of the case.     

Since one of Smokeball’s most attractive features is its automatic time tracking function, which allows timekeepers to contemporaneously track the time spent on each task done throughout the day, you might be surprised to find that we are big fans of alternate billing methods. In fact, as providers of cloud-based law firm management software to firms of all sizes, we are keenly interested in helping those firms meet the needs of their clients. We rephrase the question, “What could possibly go wrong?” as “How can we make this the best value proposition for both the client and the firm?” 

Beware first the Planning Fallacy, a cognitive bias causing people to be overly optimistic about the time it will take them to perform a task, while at the same time underestimating the potential negative consequences and costs of the undertaking. This is true even if the person has previously performed the same or a similar task. (Interestingly, the bias exists in predicting your own time to complete, outside observers react in just the opposite way, over-estimating the time you need to complete the task.)  

The Planning Fallacy occurs because people: 

• are naturally optimistic, especially about their own abilities; 
• become “anchored” to an approach due to previous experience or over-reliance on early assumptions; 
• discount negative information; and 
• succumb to pressures not directly related to the prediction, such as deadlines, competitive teammates or firms, or not wishing to be seen as “negative.”  

The Planning Fallacy risk is why, even though you may “feel” comfortable estimating a flat fee that you will be held to, you need empirical data to rely upon. Smokeball delivers granular data about where all the time in each day is spent, for each timekeeper, which allows you to more accurately predict what the true cost, and value, of a project will be.  

To overcome the Planning Fallacy, experts suggest: 

• analyzing previous successful projects; 
• decomposing the project into small pieces; 
• imagining the project in reverse, i.e., from the conclusion to the beginning; and 
• looking at the project from the perspective of a third party observer. 

Smokeball’s robust data collection and management tools are useful in each of these risk mitigation strategies. You can analyze previous successful, and unsuccessful, matters in detail; break down a complex matter into common elements; see your actual time spent (not just billed) on similar components; and use data to help combat the emotion, bias, and unrelated pressures that can influence a decision. 

Smokeball’s time tracking software can even help you devise refinements to traditional fixed or flat fee arrangements while reducing your risk at the same time. It may be easier “getting to yes” if the parties can agree that there will be a reopener if the actual time spent exceeds or falls x% short of anticipated. Using a cloud-based software that contemporaneously captures all time spent on a file gives both the attorney and the client confidence that the arrangement is fair, both at the outset and going forward.  

This same feature can be used to assuage a fear that nags at clients who worry they may have negotiated too good a deal – that the lawyers are not devoting time to the file because of the low fee they have agreed to. With Smokeball, a concerned client can see in an instant the level of effort going into the case and the progress being made. 

So, while there is a lot that can go wrong with fixed fee and flat fee arrangements, Smokeball can help you improve your predictions, make better presentations to clients, manage your cases to a budget, and mitigate the risks associated with alternative billing models.  

Contact Smokeball today for a personalized demonstration.