Value Based Fees and the Law
Here is an excerpt from a letter being sent out by the attorney who handles my litigation (this is used with his permission). I think you’ll find it fascinating and, let us say, ahead of the profession’s curve. While it’s not purely value based, it’s a huge step in that direction. (Tony is a great attorney, if any of you need such services.)
To: Our Clients
Re: Alternative Billing Program
Beginning on September 1, 2009, we will offer our clients an alternative billing program based on fixed charges for designated services, projects and cases within our areas of professional competence. At the same time, we will continue to offer conventional hourly billing where it may be preferable. The purpose of this memorandum is to discuss the new program.
While there are many criticisms of the widespread practice of hourly billing by lawyers, perhaps the most troubling one suggests that the practice tends to reward inefficiency. Lawyers, this criticism contends, are encouraged by the hourly billing system to take more time than is required to complete a task and to extend the duration of a case or project longer than circumstances warrant. Even in those instances where the client is confident that his or her lawyer is using time prudently and efficiently, there is nevertheless the concern that hourly billing places the cost of legal services beyond the client’s control and prediction.
Hourly billing can be unsatisfactory from the lawyer’s perspective as well. To the extent that it provides early, favorable resolution to the client’s problem, hourly billing offers no financial reward for doing so.
Of course, no billing method is perfect. Alternative billing, for example, is likely to engage both client and lawyer in more frequent discussion of fees—indeed, in the uncomfortable and time-consuming business of negotiating fees. In addition, since alternative billing is based on a prediction about the fair charge for the work yet to be undertaken, it will sometimes miss the mark and charge more or less than it should. Despite these and other shortcomings, however, we think it best to make non-hourly billing available to those of our clients who wish to use it for some or all of their work. In the end, we believe that alternative billing will find its way to its most appropriate uses.
Anthony F. Muri
MURI ASSOCIATES LLC
10 Weybosset Street
Providence, RI 02903
401-421-7300 (Voice)
401-421-7352 (Fax)
Steven Levy
Thanks for sharing. Interesting to see alternative/flat-fee (“value”) billing initiated for individuals and SOHO (small office/home office) professionals. It’s a slow trend — but a trend nonetheless — in the big-corporate world, where corporations are pushing their firms to move in this direction: more predictable, clearer linkage of value to cost, plus the reasons attorney Muri lists.
Nerio
Makes sense to let the clients decide on the billing.It’s a trend which will pick up momentum when customers want predetermined and mutually acceptable results for what they pay.
And Happy Anniversary to Maria and you. May your tribe increase.
Alan Weiss
Thanks, Nerio!
What’s a successful legal resolution worth? Isn’t it important to give clients responsive, courteous service? These are issues that will enable higher fees and less hours.
Shannon
Thanks for sharing! As an attorney that works with a firm that has completely eliminated hourly billing, I can tell you first hand how much customers appreciate this system. It creates an open candid relationship that actually encourages you to find out as much about your customer’s business as possible; something that customers themselves must discourage in an hourly billing system. With regard to price negotiations, why should that intimidate lawyers? We do that every day on behalf of our customers – isn’t it time we step up to the plate and put our money where our mouth is?
Alan Weiss
A voice from the wilderness!!
John Shaver
Shannon, I completely agree. You can’t dip your toe in the water when it comes to eliminating billable time. It’s all or nothing.
And yes, I actually enjoy price conversations with customers. I learn a tremendous amount about the art of pricing and about what is truly valuable to the customer every time I engage them in that conversation. And the customers enjoy it because they now have an influence on the price (and it’s rarely about lowering the price). What a concept! And neither of us feels uncomfortable at all.
I respectfully disagree with Attorney Muri and Nerio about giving the customer a choice about whether to go with fixed prices or billable time. The customer/client does not drive changes in pricing methods. The attorney/consultant/CPA is responsible for that change and for educating the customer as to the positive value to them that is brought about by making the change.
Instead of giving the customer the choice between fixed price and billable time, I offer options on level of service and provide low/medium/premium pricing according to that level. For example, do you want my response time to return your call to be less than an hour, 4 hours, next business day, etc. Or do you want to always have direct access to me or are you willing to work with an assistant (in the case of a law firm). The idea is to be creative.
Alan Weiss
I understand your points, but I don’t think it’s wise to differential in terms of good service and discipline. Your service standard should be constant, e.g., call back within 3 hours or whatever, not based on one’s fee.
Shannon
John, we employ the same method with our clients. It promotes transparency and accountability to the customer; THEY are choosing their own priorities. The quality of work should be top notch from any lawyer you hire – it’s the service that makes the difference. I love my customers and I care about their businesses, and I only know about those priorities because I was able to take the time to listen to what they had to say. If you’re upfront about pricing and what is and isn’t included in scope, customers rarely have any issue and are more than willing to pay for additional services when the time comes.
John Shaver
Alan,
The quality of the service does not change with the level of service. I agree that all customers deserve the highest quality no matter if they are big or small.
However, I’m looking at service level from the Amex perspective. Not all customers want or need a Black Card. Many are perfectly happy with a Green Card. I would doubt that even Amex has the capacity to give Black Cards to 100% of their customers. Plus that Black Card wouldn’t be very special anymore and I think that’s part of the point.
Our pricing model is very similar to the one that he uses. His proposal to redesign our website gave us three options (good/better/best). Included in the Best option is unlimited access to him to talk about any business subject.
You’re basically allowing the customer to self-select their needed or wanted level of service.
Alan Weiss
No argument, but both green and black card customers would expect rapid and courteous phone service, no?
John Shaver
Alan,
Yes, I see your point. Since I work primarily as a technology consultant, I’ll use Dell as an example.
If I buy a server from Dell, I can select a service level based on how quickly I need for them to repair that server. If I select the Next Business Day option and call in to their technical support office, they tell me to expect a call from a technician sometime tomorrow. So, they have quickly and courteously recognized my request but since I elected to buy a less expensive service plan (maybe that server is not mission critical to my business) I will not get to the technician as quickly as someone who pays for a better plan.
I could easily see that model working for my attorney. If there is legal action that is mission critical to my business, I would be willing to pay him a higher fixed fee to know that he will put me in first class. However, if it is not critical then I really don’t mind if it takes him a few days to respond. Of course, I would expect to pay less for that.
Scott Allan
Alan,
I used a fixed fee system for a few clients and it backfired. I negotiate labor contracts and charged a flat fee for the negotiations. The fee was reasonable, but I concluded the negotiations so quickly that the client felt ripped off. How do you handle a flat fee system when the delivery of your services is not totally in your control? In my work, the union representative can make the process short or long, regardless of my efforts.
-Scott
The Allan Labor Group
Alan Weiss
The client felt “ripped off” because you weren’t working on the basis of a good relationship with clear and agreed upon objectives. Most rational clients would feel “the quicker, the better.” There’s value in saving time. No true partner feels ripped off when you gain his or her results earlier than anticipated. Would they have rather had months of unsuccessful negotiations?
Either you didn’t set proper expectations, or you had a lousy relationship, or both.
Steven Levy
@13 To add to what Alan suggests, I think many clients will have a hard time transitioning from an ingrained mental evaluation system that outcome = effort. Key to any project is defining what success looks like (and writing it down). Consulting-type services, including legal, have often resulted in hard-to-evaluate outcomes, with clients resigned to evaluation-by-effort-expended. Even with a great client relationship, I think you need to address this point explicitly.
John Shaver
Steven, you’re exactly right about educating customers about why time expended does not translate to value or to results.
Dysfunctional selling (by all of us who have or still use billable time) has created dysfunctional buying habits for the customers.
Explicitly stating the desired objectives and goals in a collaborative effort with the customer is essential.