Value Billing: Too Nebulous to be Effective?
This is the second in a series of posts about fees, prompted by two posts authored by Carolyn Elefant on two different blogs. The post I want to discuss today was a post from the law.com legal blog network entitled, How Can Lawyers See The Value in Value Billing If No One Will Tell Us What It Is?
Elefant says she can understand contingency fee billing, because it aligns the interests of lawyers and their clients, but she doesn’t understand ‘value billing.’ She laments the fact that although there seems to be a lot of talk about value billing, no one has been able to provide her with a tangible example of value billing.
Part of the problem may be that the term ‘value billing’ is being used by lots of people to describe lots of different billing arrangements. Some seem to be using the term to describe any billing arrangement that isn’t hourly billing.
As I understand it, value billing (as discussed by proponents like Ron Baker) is a system of determining the fee for a particular matter based not on the inputs involved (i.e. time, expenses, etc.), but rather based upon the outcome and/or the type of service the client prefers, and the significance of that outcome to the client. Sometimes the outcome or value isn’t a financial result, but is some other intangible result, such as peace of mind, etc. (or a combination of factors). The fee is then set based upon what the client wants or thinks is significant.
Elefant’s frustration with the lack of concrete examples of value billing is understandable. Unlike an hourly billing system, which charges clients a particular rate across the board, value billing, by its very nature, makes explanation in a vacuum impossible. That’s because the fee will be different for every client and every matter. It is only after ascertaining the client’s desires and priorities that the fee can be determined. And the lawyer’s job in determining that fee will not necessarily be an easy one. Then again, neither is setting an hourly rate.
Under the hourly system, if a lawyer charges $300 an hour for their services, is there ever a concrete explanation of the reason for the lawyer’s fee? Some lawyers charge $150 an hour. Some charge $600 an hour. Why? Is there any ‘real’ correlation between the lawyer’s expertise and experience and the dollar amount charged per hour? What is a year of experience worth per hour? What are 100 verdicts worth per hour? Why is the focus on the effort that is put into the project, rather than the outcome? Is a work of art valuable only if it took the artist years to create? Is one work of art more valueable than another because it took longer to create?
In order for value billing to work, the key is to have a detailed conversation with the client about expectations and the manner in which success and fees are measured. That may include advising the client that representation can be had for a lesser price elsewhere – if that can be determined. (Although the service would not necessarily be ‘the same’ elsewhere, as every firm has its own strengths, weaknesses, personalities and style.) Clients are still free to seek a second opinion or to compare prices.But lawyers who have done their homework and established the client’s priorities shouldn’t fear the lower priced options. In fact, telling clients that you charge differently and your prices may be higher than others’ and telling them exactly why may be what closes the deal for you.
Some important aspects of value billing seem to be frequently overlooked, especially by those that are skeptical (or downright hostile) about whether value billing can work for the legal profession. One of the main components of the value based fee system is that the fee is set forth for the client at the beginning of the arrangement. Unlike an hourly fee arrangement, the client knows in advance, based on the specific criteria outlined with the lawyer, what the total fee will be for the entire matter. Should the client’s objectives or the scope of the matter change or deviate from what was originally agreed, the value fee system contemplates a system of ‘change orders’ which would adjust the fee accordingly.
Of course, the lawyer must also determine whether this client or matter is worth undertaking. The client’s desired outcome, budget, system of measurement, expectations, etc. may be unrealistic. The value of the representation to the client may be low, and may not be able to support the fee. But these situations arise under all billing arrangements. If the lawyer believes that she cannot represent the client for a fee that would be acceptable to both lawyer and client, or the client believes the fee is unacceptable, or if there are other areas of conflict, either can decline to enter into the relationship.
Detractors, such as David Giacalone (mentioned in Elefant’s post, and author of the blog formerly known as f/k/a), are concerned that value billing is just a way for lawyers to drive up fees, or that value billing cannot be done ethically. Giacalone posits that asking a client to discuss the value of the legal services to the client puts the client in a position of ‘bidding’ for the lawyer’s services. He further speculates that the client would then question whether they ‘bid’ too high. But it appears that Giacalone confuses the process of determining the value to the client with the setting of the actual fee. The value to the client determines the fee but it is not the fee itself. As in any other billing arrangement, the lawyer quotes the fee to the client.
Another objection Giacalone makes is that clients won’t understand what ‘value billing’ means, and therefore it’s just another way of confusing the client in an attempt to ‘trick’ them into paying a higher fee. Although the term ‘value billing’ may be ambiguous, lawyers don’t need to use that term when discussing fees with their clients. And ‘tricking’ the client under a value based system is impossible, since the essence of the system is the up-front, in-depth conversation with the client that establishes the client’s perspective of outcome, definition of success, and criteria to measure success.
Although detractors complain that clients will have no way to ascertain whether a value-based fee is reasonable, the opposite is true. Using a value based system puts the legal fee in the proper context – what is important to the client. By contrast, the hourly fees charged by lawyers are in no way standardized, and there’s no way for clients to tell whether a particular hourly fee is reasonable or not, other than in comparison to other lawyers. The value based fee system lets clients compare the legal fee to what the client thinks is significant. The client can then determine whether the fee is reasonable. And they can still compare the fee to fees charged by other lawyers.
Finally, Ron Baker’s version of value billing includes a guarantee of satisfaction – a written part of the fee agreement that gives the client the right to ask for their money back. Although other billing arrangements certainly leave room for negotiation of fees and lawyers often have conversations with clients about adjustments to those fees, I don’t know of too many lawyers that provide a written money back guarantee as part of their fee agreement.
Lawyers regularly complain that clients don’t understand the value of the services they provide. Asking the client what the service is worth to them – in both tangible and intangible terms – helps clients see that value, and is a logical starting place for discussing fees. It is certainly more logical than ‘how much work’ went into it. That mentality returns to a model which rewards inefficiency and ineffectiveness.
If the client chooses the lawyer because of a level of trust that has been established, and the client is happy with the fees, why can’t the lawyers make a substantial profit? If the client is willing to pay a premium for a certain outcome or service (like turning the contract around in days rather than weeks), where’s the problem?
Among other problems, the hourly system encourages inefficiency, gives lawyers an incentive to overcharge and causes frustration for clients who are concerned about the clock ticking for every task the lawyer performs, regardless of how meaningful it is. The hourly billing system also discourages clients from spending time talking to their lawyers. In short, the hourly billing system puts clients and their lawyers in conflict.
Since the most widely used system for setting fees is flawed, exploring new ways of working makes sense. Will it work? I don’t know. Maybe it will work well for some practice areas and not for others. Maybe it will work across the board, once lawyers get used to having these kinds of conversations with clients and basing their fees on a new standard. Maybe it will be a flop. But it seems to me that it’s definitely worth discussing.