Coca-Cola recently announced it was going to a value billing system with its professional services advertising agencies. The alternative fee topic is obviously spreading to many professional services industries, beyond legal and accounting. Doug Cornelius picked this story up from the Economist.

I attended a webinar on this topic that came to my attention via my connection with Ron Baker. His book was prominently displayed in the program and he was given credit (as it is due) for being a thought-leader on alternative fees. The Coca-Cola fee program is straight forward, going to fixed fees allowing for performance bonuses. Coca-Cola directly stated it wanted to reward value instead of activity.

Thought One:

The Coca-Cola speaker stated point-blank – This program is not about reducing costs. It’s about increasing value. I think this lesson would be well-taken by various in-house counsel looking to alternative fees as a magic bullet for controlling costs. As I have noted previously, clients and law firms will need to first understand the relationship between value and cost before they can truly impact cost. Otherwise they risk driving value down along with their costs. Coca-Cola obviously understands this.

Thought Two:

I have to chide Ron here a little bit (and know I will pay the price). It appears Coca-Cola (aka the client/buyer) is changing the pricing model. My past dialogues with Ron have touched on this issue. We have generally agreed that sellers influence pricing models and buyers influence price. Coca-Cola apparently doesn’t agree with us – defining their own pricing model. That being said, their marketing department is obviously very innovative. With some minor exceptions, I don’t see many in-house legal departments moving quite so boldly in this direction.

More movement on the alternative fee front is a good thing – even outside the legal arena. I’ll watch with interest for the experience and success of the Coca-Cola fee project.

  • Toby –

    I want a to draw a distinction between reducing costs and controlling costs. There is value to the client in having a certainty in pricing for the services.

    Particularly in transactional work, there is a line item for legal fees in the budget. That eventually plays a part in the projected ROI of the transaction and the decision to go ahead with the transaction.

    By moving away from the hourly billing model, there is an incentive for the law firm to be more efficient. Knowledge management suddenly can talk about ROI, it makes sense to keep skilled non-partners around, the library staff will be used better.

    AND the partners can make more money. Hourly billing is also a cap on profits. There are only so many hours in the day and therefore you have a limited inventory.

  • It is good to see GC’s talking about the “alternatives” they are wanting in “alternative billing”. No sooner did I read this than I saw a tweet by Adrian Dayton on how a GC was “insulted” by the concept of the billable hour. But, rarely to GC’s actually come up with a viable “alternative” method. Plus, from what I know of the history of the billable hour, the GC’s were just as guilty of making it the industry standard as the ABA and law firms were.

    Let’s face it:
    1. GC’s want to have the same type of high-level law firm works at a lower price
    2. Law Firms want to better leverage their ability to handle complex legal issues for GCs and somehow make 10% increases in profit every year.

    As long as that remains the objectives for GC and Firms…. then the billable hour will be here for a long time.

  • Toby,

    Great post. I was just briefed by Coca-Cola on Wednesday on their new model, and it's very impressive, and very straight forward.

    I also told them this could easily be applied to their outside law firms, a topic they understand very well.

    As for buyers vs. sellers changing pricing paradigms, I'm willing to believe, as Henry Ford said, "History is bunk." Chide me all you want.

    Nothing would thrill me more than if Coke's model became the industry standard, but I remain skeptical for many reasons.

    The agencies who work with Coke will price in the manner Coke dictates, no doubt about it (or they won't get the work, period).

    But the question is: will those same Coke agencies apply this model to ALL OF THEIR OTHER CLIENTS? It's never happened in the past, and we have a advertiser who's been doing alternative compensation with it's ad agencies for over a decade–Procter & Gamble.

    No P&G agency has adopted this model, or a variation of it, to ANY of it's other clients.

    I hope I'm wrong, but I still maintain that it's up to law firms to change their own pricing paradigms. Do you guys really want to be forced into it by your clients? If that's what the profession is waiting for, that's an incredibly sad commentary on how stale law firm thinking is.

    I hope Coke does do it to its law firms, just for fun and to see what happens.

    We live in interesting times.

    Just one correction to Greg Lambert's comment: the history of the billable (and timesheets) is quite clear: it was innovated from law firms, not GC's. For more on this, see:

    Ron Baker, Founder
    VeraSage Institute