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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6 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.


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