Daily Dispatch

Clients Want Value

How Hourly Billing Kills Law Firms

By | Sep.25.12 | Billing, Client Service, Daily Dispatch, Fees, Innovation

Lawyers have been talking about and wrestling with “alternative billing methods” or alternative fee agreements” for a decade or more. Recently, however, the conversation has shifted to “value billing.” Well, that’s a concept we can get behind. Once we understand what we all mean by value, of course. Enter Antigone Peyton. She has wrapped her practice, Cloudigy Law, around the concept. Over the next few months, she’ll lay it all out in our series on “Value 101.”

When was the last time you asked someone to spend six minutes mowing your lawn or putting up part of your company’s website? You wouldn’t do it. You would expect them to evaluate the work that was desired and set a fair price for services they regularly perform. For some reason, lawyers, as a breed, forget this kind of commonsense thinking when it comes to pricing their own services.

Clients Don’t Pay for a Chunk of Hours, They Pay for Results

Most lawyers in private practice seem to be strongly committed to avoiding changes in billing and firm compensation practices. This is true even when a firm is flirting with bankruptcy. How many grand dames in the private law firm guild have fallen during the last five years, after the market for legal services and the U.S. economy changed but their pricing and compensation structure didn’t? I’ve lost count.

One reason the conversion from hourly to value billing hasn’t happened en masse is that law firms are generally late-adopters of technology and business innovation practices. Another is an aversion to taking on risk associated with pricing and delivery of legal services.

So, many firms “get paid” using this revenue-generation model:

  1. Bring the client in.
  2. Give the client an unrealistic budget with a number of assumptions (which may not be communicated to the client along with the budget).
  3. Start working on the matter, invoice the client.
  4. Receive an angry call about the bills.

In this very common scenario, the lawyer doesn’t discuss the value a potential client places on particular legal services before agreeing to take the work. It could be that the potential client places a low value on contract work, for instance, and cares more about the price than the quality and the strategic advice of the firm. That client is less likely to be satisfied, pay the bill, and refer potential clients to the firm.

You just don’t know whether firm cost and client value are aligned until you ask.

Value-based billing structures can change existing client relationships and impress potential clients. Why? Because they align the lawyers’ incentives with the clients’ interests, so both are focused on achieving the desired results, not how many hours it takes to get there.

Value billing can also lead to greater profitability. For instance, if yout firm increases efficiency through productivity tools, improved workflow  or good old experience, you can set a fixed fee for services that allows you to capture the benefit of those improvements and outcompete an hourly firm. Imagine you are a client and you have two choices—pay an experienced attorney $1,000 for a contract for sale of a particular product to another company, which is valued at $25,000, or pay some unknown amount of money to someone who may or may not prepare a contract in a couple of hours. Which would you choose?

Establishing Value—How Does That Work?

Here’s how firms “get paid” in a value-billing model:

  1. Talk with potential clients about value they place on the work.
  2. Determine whether the firm can provide services for a fee consistent with that value.
  3. Set the fee for the work and discuss the project scope.
  4. Request a retainer that is either a portion or the full cost of the project.
  5. Bring the client in.
  6. Focus on delivering high-quality services.

If you understand the client’s expectations and clearly define the product you will provide, there will be fewer conversations about bills. That’s because you will have established an appropriate value for legal services that the client already agrees with. It’s a revolutionary idea.

After working in Big Law for many years, Antigone Peyton discovered her inner entrepreneur and founded Cloudigy Law, an intellectual property and technology law firm in “the cloud.” Now she muses about positive disruption in the legal services marketplace. Antigone’s an unabashed technophile and blogs about IP, elawyering, emerging tech and e-discovery issues on the Decoding IP blog. Before law, she worked as a scientist, conducting clinical and pre-clinical studies at a large medical institution. Antigone tweets at @antigonepeyton.

Illustration ©ImageZoo.

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10 Responses to “How Hourly Billing Kills Law Firms”

  1. Daniel M. Mills
    26 September 2012 at 9:46 am #

    Excellent points are made here and it is also important for the lawyer/firm engaging in value billing to know their cost in producing problem solving value. Without knowing cost, or the value of productive time/work product, one cannot incorporate profit in the price.

  2. Antigone Peyton
    27 September 2012 at 4:43 pm #

    Dan,

    Great point. As a first step, a firm needs to understand its cost of production for a particular type of project. I’m going to cover cost analysis and pricing practices in the second post in this series. You read my mind . . .

  3. Adam Whitney
    28 September 2012 at 9:00 am #

    I love the idea of value billing. But many engagements are not as simple as drafting a contract. And while I wouldn’t want to pay someone hourly to mow my lawn, I might pay someone hourly to do all the landscaping and yardwork that I might need throughout the year, especially if I have built up trust with that person over a period of time, and especially if I have control over what I want done on a weekly basis and the worker is keeping me informed of the bill, and gives me a fair range of estimates before doing the work. I would also trust that person’s judgment to fairly cut down the bill when something took longer than expected, knowing that the value I receive for the dollars I spend is important, because he values me as a repeat client. I think my point is obvious. If you treat your clients honestly and fairly, you can accomplish the same result as value billing, and they will keep coming back.

  4. Bob
    28 September 2012 at 11:15 am #

    Well, the client doesn’t care about your cost. So while you need to understand your cost, it may not work simply to divide the hours you want to work by the revenue you want to produce. I know I find it hard to understand approaches to cost that are divorced from time and rates, especially in connection with the cost attributable to non-owners.

  5. JurisImprudence
    1 October 2012 at 12:31 pm #

    Law firms are “late adopters” when it comes to flat-fee billing (which is what “value billing” actually is) because it often doesn’t work well. For centuries, we have been aware that there is such a thing as a flat fee, and you can bet we’d rather charge it, streamline our operations, and take a higher profit as a result.

    But we often can’t.

    Clients often come to me with a problem such as this: “I have to recover a $500,000 life insurance policy from my brother, who tricked my parents into signing it over to him only weeks before they died.”

    What should the “value” bill for this service be? Bear in mind my time is all that I have to sell: I don’t push out any other product. Should I ask for a third of the recovery? What, then, if I solve the matter with one phone call? Should it be $10,000? What, then, if the matter is appealed to the U.S. Supreme Court and takes hundreds of hours of work to resolve?

    What about bill-for-service, then? Should I develop a “punch list” of a price for every motion I file, every time I stand up in oral argument, every conference call?

    The answer is usually “none of these.” If I employ a flat-fee approach, I’ll typically vastly under- or over-bill my client. As to a price-by-service punch list, it’s really impossible to conceive from the outset of all the contingencies involved in litigation.

    The easier, fairer, more understandable method is to simply bill by the hour. That way, the price for a task is matched to its complexity. A good law firm will provide regular updates to the client as to how high the bill is getting and remain available to discuss the bill. Naturally, an honest up-front estimate or range of costs is also simply good client service.

    As for the client who places a “low value on contract work, for instance, and cares more about the price than the quality,” the lawyer has the pesky problem of possibly getting sued for lobbing a bad contract out there into the legal world. It won’t do to tell the court “but the client only paid me $125 for this contract, so I got most of it off the internet.” When I draft a contract, 1/3 of my time is spent actually putting fingers to keyboard, and 2/3 is spent “making darn sure” that the contract covers all possible contingencies. As stated, my client can sue me if I fail to do that.

  6. Merrianne Dean
    25 November 2012 at 5:46 pm #

    We are in the process of a major change in my firm since one of my partners is leaving for the bench. Part of the planning for change is a re-evaluation of our business model, including the preparation of simple tables defining the average time required to accomplish transactional work, the staff needed to accomplish the work and the total hourly cost to the firm for each staff member, lawyers included. We are looking at ALL

  7. Merrianne Dean
    25 November 2012 at 5:50 pm #

    Whoops, accidently hit enter….
    We are looking at ALL the costs related to each staff member including salary, benefits and overhead which ultimately yields an hourly cost. Multiplying the cost by the time needed for each task yields the gross cost to produce the “product”, which in turn allows us to set a flat rate for our transactional work that generates a profit for the firm above the hourly cost for all staff/team members working on the “product”.


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