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January 09, 2008

The "What is Value Billing" Discussion Continues....

In response to "The Billable Hour Bash-a-thon Continues" post (you may want to click through to refresh your memory and put the Q & A below in context) I received a thoughtful comment from Per Gynt, a 49 year old law student, which I wanted to publish.  I also asked my friend and value billing 'guru' Allison Shields of LegalEase Consulting to answer Per's question.  I thought maybe others could benefit from the question and answer.

Per Gynt:  What we are talking about is giving the customer more control over her money, not control over our companies. In the case of Cisco it is a case of the latter. I object to this kind of behavior the same way I object to "low ball" bidding for construction projects.

It's not good for the industry. Efficiency and reasonable pricing are certainly desirable, but companies that want to force me to reduce my price on a yearly basis aren't desirable customers because it disallows me the flexibility I may need to train new people or make decisions about the priorities of my own operation, not to mention the allowances for inflation and cost of living. It also suggests that my current price is not fair. What sense does that make? I want to be their lawyer, not their dog. Lastly, I have expenses that are best calculated in relation to time. Monthly, daily, hourly, etc. The expression of the cost of services as an hourly number is very appropriate. Now, I can see being new and inexperienced and not being willing to bill a client for learning how to do something, but I see nothing wrong with billing a fair price and providing a series of stopping points so that the client can make decisions about future expenditures. Is that not what we are talking about anyway? The "value billing" process seems manufactured and somehow removed from the actual value of the work, and therefore somehow less credible than a simple statement of minimum fees for simple procedures. Is value billing the equivalent of estimating the hours required and bidding the job accordingly? If so, why not just say so? I don't see how this would work in complex litigation, but tell me how I'm wrong. Please.

Am I wrong? I am seeing this from the perspective of a former construction professional, currently in law school.

Thanks.

P

Allison Shields responds:

Susan –

Thanks for giving me the heads-up and the opportunity to chime in and comment on this post. While I agree that clients will be a big driving force in changing the legal profession and getting more lawyers away from hourly billing, I don’t necessarily agree with Lerer’s view of the future. And while I haven’t looked into Cisco’s system, the way Lerer describes it in her post, I’d have to agree with the commenter, “P,” that forcing a firm to cut their total charge by a specific percentage each year without regard to what work is performed and how it’s performed is too simplistic an approach that’s bad for both lawyers and clients.

But lawyers and law firms have to keep in mind that the needs of clients are ultimately what control their business; the key is to choose your clients carefully. If a particular client is requesting that the firm perform work at a fee that is economically not viable for the firm, the firm has two choices – target other clients or find a way to make the work economically viable for the firm. As P notes, a client that wants to force a firm to reduce fees on a yearly basis may not be a desirable client for a particular firm (or lawyer). But remember that clients aren’t the ones responsible for ensuring that lawyers and law firms can train people, prioritize their business needs and ensure that the firm is covering inflation, etc. Those are business decisions that need to be made by the law firm. One of those decisions, as mentioned above, is the clients you choose to work with. Another one is how you structure your fees.

Many lawyers like P claim that they have ‘expenses that are best calculated in relation to time.’ Lawyers today are accustomed to making calculations in terms of time, but that doesn’t necessarily mean that’s the best method of making those calculations. What expenses are actually best calculated in terms of time? Even if the lawyer thinks that the best method of calculating their expenses is time, that doesn’t necessarily mean that’s the best way of calculating fees. The ‘cost of services’ is something a law firm needs to take into account when pricing their services, but it isn’t the only factor – the value of those services to the client is the real measure of the appropriateness of the fee.

The issue of ‘value billing’ is getting a lot of attention lately, but the definition of ‘value billing’ isn’t fixed, which causes some confusion among professionals. Value billing doesn’t mean that the client has total control over what the lawyer charges. But no matter how you structure your fees, the client must value the work performed enough to pay the fee charged.

P’s comment says, “I see nothing wrong with billing a fair price and providing a series of stopping points so that the client can make decisions about future expenditures.” That’s really the answer to P’s later question about how value billing would work in a complex litigation context. The big question is how you determine what a ‘fair price’ is. And complex litigation or not, time isn’t the sole factor that determines whether a fee is appropriate or fair.

There isn’t only one way to value bill, because every law firm is different, every client is different, every case is different, and different practice areas require different legal skills, etc. Sometimes it’s appropriate to provide a ‘flat fee’ up front for ‘simple procedures’ (as P calls them) or for predictable work. Other times, what P suggests about a series of stopping points is appropriate. By quoting a fixed fee for specific work outlined in an agreement, advising the clients of variables that would change that fee, and providing ‘stopping points’ at which the client determines whether to move forward and what additional services might be required or appropriate based on the client’s desired outcome and values (as well as the fee), alternative, value-based billing can even work in a litigation context.

Lawyers need to start thinking about the value that they provide to their clients in terms of the services that they provide, rather than the time it takes to provide those services. A lawyer’s most valuable assets are the lawyer’s intellectual capital - skill, knowledge, expertise, ability to argue, to see the issues, to creatively represent their clients’ position- and their ability to provide their client with the kind of experience the client is looking for in their legal representation. Time is NOT the lawyer’s most valuable asset. Lawyers do themselves and their clients a disservice by continuing to assert that time (a limited asset, the same amount of which is available to everyone) is what the lawyer is ‘selling’ to a client. Value billing is NOT billing based on estimated hours – it is billing based on the value provided by the lawyer to the client. Time is (or may be) a factor that the lawyer considers when calculating the lawyer’s cost to provide the service, but it shouldn’t be the sole basis for the lawyer’s fee.

The bottom line is that more and more clients are getting frustrated with hourly billing and are calling for alternatives. Lawyers that can learn to structure their fees in a different way will be more attractive to those clients – assuming that those are the clients the lawyer wants to work with. And experience has shown that that lawyers who are no longer tied to the billable hour find the law firm culture, legal work, enjoyment of the practice, employee and client relationships and profits all improve.

Allison C. Shields, Esq.
Legal Ease Consulting, Inc.
www.LawyerMeltdown.com

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Comments

PerGynt

In this environment we typically talk about solo practice. I hope you don't mind me bringing that up because it is important to note that the solo is often working alone, and although there are differences in the value of the different parts of the provided services there is only one person in the office and his/her bills come in on schedule. Usually monthly, which is a measure of time. I could get rid of all of the clocks in my life and package all of my products and services in pre-priced form based on my needs according to how many I can sell from sunup to sundown, but that would be a measure of time as well. Darn it if we can't seem to divorce the value of our work from time.
I have no problem with selling blocks of time, even in the form of selling a particular service as a set price, because it is an expression of the time I am expected to take to do it. I am very comfortable with selling buildings by the square foot, pipeline by the linear foot, or excavations by the cubic yard. But these standards of reference do not usually exist in legal matters. An inexperienced individual can, and probably should, reduce the hourly take, but still receive the value of the service in fees. In this way I see how having an idea of the value of the service is useful in order to give the customer what she needs for what it's worth. Still, the time issue is present. Of course you could just arbitrarily decide what all legal services are worth and call it good accross the board, but that would resemble price fixing, wouldn't it?
I guess what confuses me the most is why is there a need to obscure the relationship of time to the service to the client? It seems to be another way to make the legal profession even more opaque to the clientele than it alredy is. I see no problem with informing clients that prices are based on billable hours, and I don't know if trying to fool the client with a parallel method of billing for the same service is more honest than otherwise. Can cost controls not make an honest reference to the amount of time required to accomplish certain goals? And with the inherent uncertainty of the profession, is it fair to the legal profession to insist on the inadequacy of a proven method of valuation given the possibility of "hitting rock" on any given project, on any given day?
What say you?

Chuck Newton

We are talking about capitation billing. Call it what you want. I think it is fine, and reasonably manageable in some types of low litigation and transactional work, except that it becomes a competitive tool to many that hurts the entire practice area. However, in one-shot litigation cases this is madness that will only come back to hurt the profession. Once large companies and institutional entities can make lawyers bare the risk of litigation, it could become prevalent and then there will be downward pressure on capitation fees. Lawyers will take on greater and greater risks. We have seen this in every type and every category of business. There is much written that there are ways to manage risks, but that is the point really. Lawyers are placed in the position of not just advising, but managing (in fact accepting and taking on for themselves) the risks of litigants. And, as for federal and state fee-shifting cases, which represent the largest increase in litigation, not keeping and billing time is just foolishness. All of this carp is because attorneys do not want to justify their time, want to gamble on whether they can make more by doing less, and as a marketing ploy.

Allison Shields

I have to disagree with Chuck's comment - I don't see why billing on other than an hourly basis for litigation matters is necessarily going to result in downward pressure on fees or in lawyers bearing the risk of litigation if the pricing structure is done properly. If what he is referring to is the Cisco system of cutting fees by a particular percentage every year, again, I must agree - as I did above. But that isn't the 'value pricing' scenario that I'm suggesting.

I also have to disagree that the change in attitudes toward hourly billing is a result of attorneys not wanting to justify their time. Rather, it's a reaction to the difficulties that both lawyers and clients have experienced with the hourly billing system, which have been recognized even by the ABA.

I also have to disagree with PerGynt that all pricing is a measure of the time it takes to perform a task. Just because bills go out on a monthly basis doesn't mean that the services have to be billed based on the time that was expended on a particular matter during that month. Clients can be billed monthly on many other bases - not all pricing is pure cost pricing.

The suggestion to try value pricing doesn't imply that the price should just be 'arbitrarily' determined - it needs to be determined based on a whole host of factors, some of which take into consideration the lawyers' costs, some of which take into account the individual client's needs, wants, expectations, etc., and some of which may include the complexity of the matter, the number of parties, the likely obstacles, etc. By definition, there can be no price fixing under such circumstances.

Value pricing and alternative billing are not meant to 'obscure the relationship of time to the service of the client' - they're meant to remove TIME as the measure of VALUE of the services that are provided to the client. Why should the client care how long it takes a particular lawyer to complete a particular task? The amount of time it takes to perform a task is not a measure of its value to the client - it doesn't reflect the benefit that the client receives, nor does it reflect the skill, expertise, knowledge or effort of the lawyer.

Alternative billing strategies are not meant to fool anyone or to create confusion - just the opposite - they're meant to reflect what the client values. These billing alternatives put the emphasis on the specific skills, knowledge, and insight the lawyer brings to the table and how those things inure to the client's benefit, rather than on time, which matters little (if at all) to the client.

Allison C. Shields, Esq.
Legal Ease Consulting, Inc.


PerGynt

I don't mean to joust with you, Allison, but you haven't made a very good argument for separating time from the calculation of value. Aside from the adjustment that might be made for the extra time needed by less experienced individuals, your notion of "value" to the client really cannot be separated from the reasonable amount of time that it takes to produce results. I am sure she would be delighted if all legal services were free, but the fact that the client has no interest in the time factor is irrelevant.

Susan Cartier Liebel

Per, maybe this will give you a more global perspective of value billing:

http://susancartierliebel.typepad.com/build_a_solo_practice/2007/04/picassos_argume.html

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