Episode  127 – Alternative Fee Structures: How and Why to Move Away from Hourly Billing – Member Case by Sonia Miller-Van Oort

Moving away from hourly billing leads to better margins, higher client satisfaction, and happier employees. Yet, many boutique founders are afraid to do it, and do not know how. In this session, member Sonia Miller-Van Oort shares how she built her 12-person law firm using alternative fee structures.


Greg Alexander [00:00:15] Welcome to the Pro Serv podcast, a podcast for leaders of thriving boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community focused entirely on the unique needs of boutique professional services firms. My name is Greg Alexander. I’m the founder and I’ll be your host today. On this episode, we’re going to discuss moving away from the billable hour. This is a hotly contested issue. Some might even say religious battle in certain sectors. And it’s important for us to have a point-counterpoint discussion around this, because sometimes making this move can increase profitability and client satisfaction quite a bit. And we’ve got a great role model with us today. Her name is Sonia Miller Van-Oort, and she is in the legal sector, which is rather married to the billable hour, and she’s got quite a story to share with us. So we’re very lucky to have her. Sonia, if you wouldn’t mind, please introduce yourself and tell us a little bit about your firm.

Sonia Miller-Van Oort [00:01:25] Sure. My name is Sonia Miller Van-Oort. I am the President and Principal Founder of a law firm called Sapientia Law Group. We’re located in Minneapolis, and we are a 12-attorney law firm that does a variety of work, mostly litigation, about 70% litigation and about 30% transactional work.

Greg Alexander [00:01:45] Okay. And where are you based?

Sonia Miller-Van Oort [00:01:47] In Minneapolis, Minnesota.

Greg Alexander [00:01:48] Okay, very good. So tell us a little bit about how you’ve moved away from the billable hour.

Sonia Miller-Van Oort [00:01:55] Yeah. So we started our firm 12 years ago, and prior to that I was a partner at another firm and this topic of billable hours. This is 2009, 2010 timeframe, clients, really not happy with ever-increasing billable hour rates. At that point, I was a more junior partner and there are a couple of things that I was seeing. One, clients weren’t happy with that system of billing they really wanted more budget certainty. And as a practicing litigator, what I what I observed as well was that the cost and the uncertainty of the cost to the clients became an impediment to them getting to the merits of their case. And as a litigator and advocate, that was a frustrating thing for me, trying to get the best result for them. So it was kind of a combination of those things. I participated in this about with my law school, which was kind of a big think tank about the traditional law firm model. And this issue came up and I started I heard about alternative fees, and it wasn’t so much that it was a new concept at that point people had been talking about for decades. But really very few law firms had really adopted it and were able to be successful in it. And kind of what I perceived was law firms would sometimes reluctantly do an alternative fee structure if the clients came and approached them about it, but they kind of did it kicking and screaming. And so when I was creating a new law firm model to start Sapientia Law Group, that was central to the concept of how could we deliver services differently to our clients, and trying to think how we could, instead of it being a reactionary and reluctant response, how could we lead with that as a something proactively always offered to clients, always giving them the option whether they wanted to do hourly or an alternative fee structure, but presenting it without clients having to kind of ask the question but to be upfront and say, here’s another way we can do this, which works best for your business. So that’s how it got there and how we really focused on that as a key core concept of Sapientia Law Group.

Greg Alexander [00:04:37] Okay, very good. You’ve mentioned alternative fee structure a few times, so if not the hourly or billable hour excuse me, what is the alternative?

Sonia Miller-Van Oort [00:04:47] Yeah, well, I always say the alternative is only limited by your own creativity. So we’ve developed quite a list of options. And so those can range from you can do, and I’ll just, to be clear, I’m a litigator, so that’s the world I live in. And people for years have said, well, you might be able to do alternative fees in law, but really you can’t do them in litigation. Is that way possible because there are just too many unknown factors? And I don’t believe that to be true. And so what we’ve developed are different flat fees, four phases of litigation. We’ve developed subscription fees, which would be more of a kind of that model I always liken it to your cell phone plan and paying for so many minutes a month and you can have rollovers. We do risk collars, which is another way to create some budget certainty that has a collar of risk around the price that you’re studying. And it allows some extra payment if you go beyond it, but it’s reduced and a greater payment if you come below the budget. We’ve done pullbacks, which is another way of saying we’re going to agree upfront. What are the key, key performance factors? And we’re going to hold so much back from what you’re paying us until we reach those milestones. And then one that I often use in complex litigation is the combination of a hybrid of flat fees for certain pieces of the work with success bonuses, again, around milestones or what the client defines as success at the beginning of the engagement. 

Greg Alexander [00:06:28] Hmm. Very creative. Thank you for walking us through those alternatives. And when we have our member Q&A on Friday, they’re going to ask a lot of questions about those, particularly the risk collar. That’s one of great interest to me. So if this is better for the client, better for the law firm, and maybe a way for a smaller firm to differentiate, why are founders of firms reluctant to go off of the billable hour?

Sonia Miller-Van Oort [00:06:58] Yeah, I think there’s a couple of reasons. I think the biggest impediment is the traditional law firm mindset, which is how we do business is billable hours and we’re going to, those are our metrics and that’s how we’re going to value our people and we’re going to set goals around how many hours people build. And when you get into that mindset, I will say that it is potentially contrary or conflicting with an alternative fee structure model. And the reason why is because the way I approach alternative fee structures is it’s a shared risk and a shared reward. And what we want to do is the professional services team is to be efficient in getting the results desired. That means you hopefully are using less time and working smarter to get the results. But if you’re in a firm that is going to measure and reward employees by how many hours they put in instead of the results they’re obtaining for clients, those two things get heads. And I think that is just the traditional way of law firms. And so I’ll tell you, when we first started our firm, I wondered, you know, people wanted to talk about the firm. And I was concerned about, do I really want to talk about alternative fees? You know, isn’t that the competitive advantage I’m trying to have and do I really want to be talking about so somebody else can do that. And what I finally came to is I can talk about it all day because as long as law firms won’t change their core structure and the metrics that they value people, how they value them, they can never effectively do alternative fees. And that’s effectively why I want to start a new firm, because I think it’s the whole infrastructure of how you run your business that can make alternative fees work really well. But if you got to look at what you’re compensating, how are you rewarding, how are you value your people, what are they being motivated by, all of those things. And if you don’t have that culture and model, alternative is not going to work. 

Greg Alexander [00:09:09] Yeah. And I agree with you. I mean. Talking about it and doing it. A very true two very different things for sure. So I think that’s a good explanation as to why law firms might do it. When you approach clients with this, I’m assuming maybe incorrectly, it requires quite a bit of education. Is that accurate? And if so, how do you handle that?

Sonia Miller-Van Oort [00:09:32] Yes, it does require some. So, you know, as I said, we are potentially going to be retained. We explain to our client there’s two ways we can do this. And for me to come up with an alternative fee structure, I want to talk about what’s going to be success to you. And I want to talk about what my strategy might be and how I see that playing out. The other challenge, going back to your last question, I think that attorneys and many other professional service organizations have answered the question, how much is something going to cost really when you get my bill, you’ll know approach as opposed to on the front side giving that client budget certainty. And so when you explain to the client what it is you’re trying to do, but you’re also saying but it’s up to you, you know, you decide what’s best for your business right now. Clients really appreciate that. And where I find that they’re more likely to try the alternative fee because there’s some skepticism at times if they’ve not done one before as well what’s the catch? What are they trying to do? Are they trying to get more money out of me? That kind of thing. So where it really works the best is where you have a trusting relationship. You’ve done work with the client before. You explain. Here’s how you’re still going to see. You’re going to get my bills. You’re going to see everyone who’s doing the work. You’re going to see what the work, what’s being done. So I want you to have that data. I want us to both have the data so that at the end of the day, you can look at it and decide, did you get value for it? And I can look at it and make the same determination. So there definitely is an educational process. But I will tell you that, you know, I’m not going to say ten times out of ten that might be too strong, but nine times out of ten, if a client has tried the alternative fee structure, they will do it again because they can see the real value of it.

Greg Alexander [00:11:30] And how about when you’re recruiting attorneys to your law firm, especially those that might have worked in other law firms where this is, you know, completely unconventional, do you have to sell them on why this is good for them or how does that go?

Sonia Miller-Van Oort [00:11:46] I don’t know, but I have to sell them on it necessarily. It’s always a point of interest for them when they want to understand how that works. And as I kind of alluded to before. I only think alternative fee structures work for our firm because of how we’ve built the firm. And so let me just give you an example. I’ve not practiced. I practiced in two other firms. I met a partner and other one before creating this firm, but not working environment that was as collaborative as our firm is. And the reason that is, is because that’s how you get alternative views to work. You’re able to identify your team. You can figure out where people’s strengths and you maximize where people strengths are. So on traditional firms, you might have, you know, a partner and an associate, and the clients don’t want to see more than two people on the bill because they’re afraid they’re going to be getting charged too much. But when I explain to them, what you get is a whole team and this is what it’s going to cost you. It doesn’t matter if there’s two or there’s five people. Okay. So your question is, so when I explain that to people about how we really work together, like we do a lot of roundtable brainstorms on the whiteboard, we’re coming up with our ideas and our strategy and how are we doing this? And you got this and I got this. And it’s a much different way to practice law than I’ve seen with other law firms. And so actually, when we’re trying to recruit people and we talk about that, I think they get excited about that.

Greg Alexander [00:13:11] And to a member who is inspired by your story and wants to give it a shot. What would be the first couple of steps you would recommend?

Sonia Miller-Van Oort [00:13:21] So I think, you know, it’s hugely important that you have data that you understand. What your costs are for what you’re going to provide and what the scope of work is. I mean, really for any potential representation, the question is what’s the scope of work? And in some ways, it’s not any different than a contractor who’s building a house for somebody. What is it we’re trying to do here? Yeah, and that’s the first piece that we always start with. What is it that’s going to need to happen? So when I talked about that strategy on the front side, that really is super important in communicating with the client. All right, here’s what I, this is what I see. These are the people who I can envision as witnesses in the case they’re going to get to close. Seems like this is the case with hundreds of thousands of documents or this seems like a case of like, you know, probably less than 500. You’ve got to kind of be able to know how you’re going to approach it. But listen, if you’re an experienced person in whatever industry it is, you do know that.

Greg Alexander [00:14:22] Right.

Sonia Miller-Van Oort [00:14:23] And if you have data, like if you have past matters that you’ve worked on, for me, it’s cases. But, you know, past deals, you’ve done whatever your industry, you glean from that. And that’s, I think, what should take away the fear of the unknown. Because you’re not just you’re just throwing it out like willy nilly and let’s see what happens. It should be based on data one and two, I think a really important thing and I think this really addresses fear, too, is defining the scope of work. And so attorneys are. That’s what they’re afraid of. But here’s the deal. These are my assumptions. So when I present the alternative to the client, I tell them what my material assumptions are. And if we go outside those material assumptions, that’s extra. Yeah, right. So I can take a package of what I can reasonably figure out my costs, what I want, who’s going to work on this, what I want my margins to be, and come up with that. I don’t have to feel like I’m going to dive off a cliff if all of a sudden we end up with twice as much because I provided for that in the agreement. 

Greg Alexander [00:15:32] Great advice. You know, I might add that when we look at our benchmarking data and you cross-reference firm profitability and client satisfaction, our power members that use alternative fee structures as opposed to billable hours tend to be more profitable and they have higher clients. And so that might be something to help people get over their fear as well. Yeah, well, listen, we’re at our time window here. We try to keep these podcasts short, but I’m so excited about the upcoming Friday session. We’re talking about this for an hour and our members will have the opportunity to ask you questions directly. So on behalf of the membership, thanks for coming today and sharing your wisdom with us.

Sonia Miller-Van Oort [00:16:11] Thanks so much. It was fun.

Greg Alexander [00:16:12] All right.  And for those that want to learn a little bit more about this, I’d give you a few calls to action. You can pick up our book called The Boutique: How to Start, Scale, and Sell a professional services firm. You can find that on Amazon. If reading is not your thing, consider joining Collective 54 Insights. And there you’ll get podcasts and videos and charts and things of that nature. You can find that also at the website. And if you want to join and meet fantastic people like our guest today, go to the Contact Us section on our website and fill out that information and then a representative will get back to you. But thanks for listening today and until next time. Best of luck as you try to grow, scale, and exit your firm.