“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:
- Matter comes to law firm
- 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.
- 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).
- 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.