Even More Talk About Pricing

Last week, JD Hull at What About Clients also brought up the topic of hourly vs. 'value' billing, and his post sparked a conversation with (among others) Ron Baker of VeraSage Institute, a huge proponent of doing away with hourly billing for professionals. As I was still in post-holiday mode, I missed most of the conversation. But it's worth pointing out in light of my earlier posts this week. Hull contends, in his original post, entitled Value Price This, that their firm likes billing by the hour, and their clients like it. The 'evidence' of this is that the client hasn't asked for an alternative billing strategy.

Hold it. Just because a client doesn't directly ask for something doesn't mean that it wouldn't be beneficial to the client. Nor does it meant that you shouldn't provide it. Hull goes on to say that he needs a 'value pricers manual' from someone who can both provide detail and who has had actual experiences in the trenches of a law practice. More evidence that, as I noted in my first post this week, many of the same lawyers that claim that value pricing can't work and that the billable hour model is the only one for them and their clients are secretly wishing for a 'how to,' step by step guide to getting rid of the billable hour system and using value billing in their practice.

One commenter on the post said,

Flat fees on 'one shot' litigation is something I do not understand. Any experienced trial lawyer knows that there is a large number of unpredictable factors in litigation,not the least of which is that your own client may not be forthcoming with the truth.

Would I work for a flat fee in a "one-shot" case? Yes. After due diligence I would quote a fee based on the number of hours that I thought the case would take times my hourly rate - and then I would double it.

The same commenter goes on to say that, "A client who is fortunate enough to find an experienced lawyer who understands the litigation process and puts the clients interests first is well-served by paying an hourly fee." I disagree - because I still think the hourly system isn't the best system for either lawyers OR clients.

Ron Baker responded to Hull's call for help. Although Ron isn't a lawyer and therefore has never practiced law, he is a CPA who has dealt with similar 'in the trenches' issues with clients. He lays out the "how to" this way:

Utilize price-led costing;
Utilize Change Orders;
Utilize project management;
Utilize Key Predictive Indicators;
Utilize After Action (and Before Action) Reviews;
Engage in value conversations with each and every customer.

Obviously, in a comment on a post, this is only the steps - it isn't a real 'how to' or a complete explanation by far - but then again, Ron has written (as have others) many books on the subject that provide more detail, including examples and sample agreements.

As Ron also points out, the way to use value or fixed fee pricing in complex litigation matters is by using change orders (what lawyer Michael Sherman calls Supplemental Services Agreements) and phasing. But those concepts take time to grasp and to apply well (not to mention the education of clients along those lines, discussed in my previous post). And many lawyers just don't want to take the time and effort that's required to fully investigate these possibilities.

One of Hull's 'objections' to using change orders is, "In defense litigation, where you are both reacting and making people react, and monthly invoices can range between $75,000 and $100,000 or more a month for months and even years running, no smart client wants his lawyer backed into a wall on what he can charge. Or have to ask for a change order. That almost sounds adversarial." But the use of change orders eliminates the lawyer being 'backed into a wall' on what the lawyer can charge. And certainly, if the client thinks the lawyer can charge more, there's no issue with charging for that work. And although lawyers may not be used to the idea of 'asking for a change order,' it certainly isn't an adversarial process - particularly since the client is aware of the possibility that such change orders might be needed.

Even if you're billing by the hour, you have to be in touch with your clients about the work that's being performed on the client's behalf. No client wants to be surprised with a $75,000 bill at the end of the month. I'm certain that Hull's clients are aware of the steps being taken in their defense, and that some strategy conferences are taking place - should we make this motion or not, etc. That was my experience as a defense lawyer. And certainly, the client is factoring fees into the equation. The same thing happens with change orders under an hourly billing system.

One other point that Ron makes is the one I like the best:

"Oh, and you have to think--hard. Which is why most firms aren't doing it."

As I said in a previous post, not changing is easy. Changing is hard. And changing to a new pricing system takes work. The billable hour, for all of its pitfalls, is 'easy' for most lawyers and law firms because they're used to it. It doesn't require creative thinking, innovation or change.