Value Pricing at the Right Time

"Always and never are two words you should always remember never to use." Wendell Johnson A recent 'debate' on Ron Baker's Verasage site got me thinking about hourly versus value or fixed fee pricing. The substance of the debate between Ron and Colin Jasper focuses on whether hourly billing is ever justifiable. As reflected by the above quote, I am skeptical when someone claims you can "always" do one thing, or "never" do another. So I respectfully disagree with Ron on this one, noting that it is not the law firm who will decide if hourly billing is the right option, but the client. Where I agree with Ron generally is that fixed fee pricing isn't rocket science. Engineers, architects, construction companies, even plumbers are service providers who have been doing this for years. As a provider, you develop a scope of work and then give the client a price for it. From my growing experience in dealing with alternative fees, I can tell you the scope of work effort is the part outside and in-house counsel struggle with the most (alluded to in Colin's reply to Ron). For years both sides have used this problem/challenge as an excuse for not having fixed fees. The common reason was that "there are too many variables" to possibly develop a scope of work for a matter. Although lawyers don't use the term 'scope of work' they are referring to their inability to define the parameters of a legal matter due to outside influences. This reasoning applies to both litigation and transactional matters. But let's take a pragmatic look at this approach. At the outset of a case it may be very difficult to develop a useful scope of work. At that point, many critical unknowns may exist, like opposing counsel, jurisdiction, judge and most of all, the complete facts of the matter. In contrast, at the end of a matter all of this is known. So the question becomes: At which point in a representation do we know enough about the matter to develop a useful scope of work? Even the well-known ACES model from Jeff Carr provides for a period of time for lawyers to gather the relevant information before they give a hard budget for a matter. So based on numerous alternative fee deals, I predict something in the future along these lines for value pricing legal services:
  1. Matter comes to law firm
  2. Law firm and client agree to an investigation stage. The fee for this stage may be fixed or hourly, based on the clients' needs and the complexity of the case. On some matters this may be done for free.
  3. At the completion of that stage, the law firm provides a scope of work and fixed fee for the matter. There may be phases priced out separately (e.g. trial).
  4. If events drive work outside the scope: a) The scope is redefined and the price re-set, or b) A fee is set for the out-of-scope work (hourly or fixed as preferred by the client)
The more routine the work, the more likely all aspects can be fixed fee (but not necessarily). The more complex and 'bespoked' the work, the more likely hourly billed components will be utilized. If something has changed in the legal market (and I believe it has) it's that the excuses for developing useful scopes of work will no longer be tolerated. What will (and should) be tolerated are efforts to bring focus to a legal matter to properly develop the scope. These new efforts will bring a high value proposition to clients and lead law firms to more profitable structures. To reiterate, the hard part of value pricing and alternative fees will be developing useful and effective scopes of work. This is a new thing for law firms, and it will lead to more and deeper changes in the profession.

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Julie said...

Great post, as usual!

I couldn't agree more with your analysis of what the process should look like. It is a typical model for all kinds of folks who provide professional services.

The main problem (IMO) lies in the psyche of lawyers (sorry to over-generalize, here!) - they are risk-averse people by nature, and are reluctant to adopt (or at least skeptical of) change until the scariness of the innovation has been borne out by others. And I'm talking as much about outside counsel as I am inside counsel.

A couple of other obstacles are:
1) the concern that approaching compensation from this angle will somehow devalue their worth - if I can't say "I bill $400 an hour", how can I show that I am an accomplished and successful lawyer?? (same argument when firms began to dismantle their gilded, prominent libraries in favor of the more practical approach of utilizing online resources and ditiching the print versions - but how will everyone who visits know we're smart?!).

2) lawyers are often not skilled business people so the skills necessary to properly scope work and manage a project from a business perspective are foreign and uncomfortable.

The good news is, there are more and more examples of lawyers and firms forging ahead, bearing the brunt of the unknown for the benefit of the rest.

Toby Brown said...

Excellent additions from Julie. And since I can't help but reply:

1 - Lawyers actually take 'risk-averse' to a new level: Risk-riddance.

2 - Hadn't thought about the rate bragging rights, however re: the libraries they can order those fake book-shelf deals you see in some furniture stores (like the fake TVs and computers).

3 - Re: scoping skills - necessity will be the mother of ...

Thanks Julie!

Kristin said...

This is a fascinating discussion for someone like me on the information side. All the common wisdom I encounter is that online vendors have to offer a pay-as-you-go pricing system so that they can bill back the online charges per project. Perhaps as lawyers become more comfortable quoting fixed fee prices to their customers they will begin to rely on fixed fee online subscriptions, to prevent having to estimate what online information costs will be for each project. Instead they could build in a consistent fee.

Julie said...

Thanks Toby :)

Kristen, I think you've hit on an area where the law librarians of the world can assist our lawyers and firms in their alternative fee endeavors.

You make an excellent point about pay-as-you-go being the norm/desired, however there is analysis that can (and should, IMO) be done that can yield trends, if not hard data, on how a firm can commoditize research. It's got to be broken down to a formula, and driven by producing consistent results on similar items.

For example, if you analyze your usage for a sampling of cases in which the scope of the engagement were similar, you should be able to find an average from which to base future use expectations (hence the minimum number you'd want to include in your AFA - your research overhead number).

I think the bigger issue with regard to pay-as-you-go pricing and online research is inconsistency with efficiency. Not all researchers are equal! Firms are notorius for putting inexperienced staff on research. So, in order to generate efficiency, and then achieve commodity level with research, what may have to happen is a series of things:

1. do your initial trend analysis and come up with an expectation of time for research for a particular case type/scope

2. communicate that expectation to your folks who are doing that kind of research (a "time cap" of sorts)

3. keep a keen eye on what is produced after that to make sure quality isn't suffering with the new "time cap" in place

4. invest in research training for those who clearly can't hack it (or cut 'em loose, whatever)

5. re-check your assumptions based on the data and finalize your price.

Of course this won't be the silver bullet, and won't apply to every case. BUT, with some elbow grease, you can realistically come up with flat pricing as a starting point number to get your matters kicked off, and as the facts develop, make adjustments based on the unique qualities of the engagement.

Really, this just comes down, again, to lawyers not being good business people in general. Closely managing staff isn't something they like and aren't particularly good at and so rather than do something they don't like and aren't good at, they ask for the pay-as-you-go option. By doing that, they can generally avoid having to manage to tight expectations and have to have the tough conversations.

Boy, I'm pretty sure I'm not making any new lawyer friends with these comments. Please, lawyers, know that I am SURE there are lots of you who don't fit the sterotypes I've drawn here!

Ron Baker said...

Hi Toby,

Scoping is not that difficult. Chris Marston uses his Concentric circles, and there are other models.

Here's my problem with Colin's (and yours, it seems) idea that hourly billing is still useful for complex matters.

It's precisely these "complex matters" that are near or at the top of the Value Curve. Utilizing hourly billing in these matters means you will leave a ton of value on the table. All because we think we can't scope the work?

The fact is, there are thousands of firms that never hourly bill, period. Clients will not drive this change, law firms will.

Andrea Goldman said...

I am a huge believer in value billing. The clients love it because they can budget for their legal costs and do not get his with unexpected bills. Not having to keep track of time enables me to be super-efficient. I also don't suffer from the huge gap between the amount billed and the realized income.


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