We recently posted about some of the challenges which firms that are struggling financially face in preserving their client relationships. Let's face it, there is always an uneasy balance of "friend or foe" between clients and their hourly billing law firms. Some commenters replied that clients need to "trust but verify" the hourly billing engaged by their law firms, perhaps even more carefully now that there is a lot of financial stress in the system. Others noted that big law firms who are cutting lawyers should be more trustworthy since they are at least taking measures to cut costs. Other firms who aren't cutting lawyers may simply be engaging in "make work" projects which provide very little value to clients.
But the real problem with the "trust but verify" model of hourly billing is that most companies don't have an in-house legal department, don't understand whether a lawyer's hourly billings are legitimate or not, or even have the resources to engage in this kind of auditing activity.
Fortune 500 companies are a very small piece of the legal pie. The foundation of business for most law firms are smaller companies. They are asked to, and regularly do, simply trust that the hourly bill they receive every month is in fact accurate and that the activities on the bill were necessary. In most instances, they engage in this "trust relationship" with skepticism and a heavy dose of uneasiness. But doesn't this really get at the most problematic aspect of hourly billing as a business model?
Any system which requires the client to trust the service provided is bad for the client but worse for the service provider. The best law firms are built on long lasting relationships with clients. The last thing you want to be worrying about day in and day out is whether or not the client does in fact trust you or how a client might react because of your activities if they should not see the value. The best business models are ones which encourage, not threaten, trust.
One of the most amazing things about flat fee defined deliverable billing is that it cuts at the very heart of the "trust" problem. There is no initial issue as to whether or not the client can "trust" the "flat fee" delivered by the attorney. Trust is a complete non-issue. The client either determines that the deliverables are worth the flat fee price or not. They don't care, nor should they, how much time is spent providing the deliverables. They have the option of "going hourly" by contacting another law firm, although they aren't so stupid as to think that is a better alternative. If they do opt out of the flat fee for hourly, they inevitably come back, realizing they actually paid more and are still searching for the deliverables that you had agreed to provide them on a flat fee basis.
During the project, there is no worry about calling the attorney, providing information, or collaborating towards the client's goals. Time is no longer a factor in the equation. The client does not have to worry about whether or not your activities are "driving up the bill", since the bill has already been agreed upon.
Flat fee defined deliverable billing creates a foundation of trust between the attorney and the client. That foundadtion, more often than not, results in long-term relationships where the lawyer becomes a resource rather than a line item expense which is "regretably necessary."
I know these things to be true because I spent most of my career billing exclusively by the traditional hourly billing method. Perhaps the most dramatic difference I see day to day is the impact which the flat fee model has on communications, relationships, and the sense of trust between attorney and client.