Clients Define Value Billing - But Will They Accept It?

Reprinted from:
Published 6/13

The price for legal services is typically an hourly rate that is used to define the engagement and get the business. The bill for legal services is generally a features list, showing what the lawyer did and how many hours it took to do it. Pricing is thus a marketing strategy; billing is an accounting record. However, a third element is more important than either of these: value, the worth, as opposed to the cost, of the legal service. Value is determined by the client, not the lawyer. But the lawyer must educate the client about value. Otherwise, "value billing" may not be understood by clients who may only be sophisticated in their own business matters, and find it difficult to measure value in a transactional matter or in litigation.

This is the fundamental disconnect with the Association of Corporate Counsel (ACC) Value Challenge and its Value Index, which ranks such law firm performance measurements as responsiveness, adherence to budget, staffing ratios, frequency and thoroughness of communication, expertise and results. Corporate counsel essentially are looking back 50-plus years, before hourly billing dominated, to a time when legal fees were based not only on time spent, but also the nature of the service, the result achieved and the amount at stake. This is disingenuous, because it was these same corporate clients who began demanding detailed hourly billing statements, and lawyers turned to time records as a management tool to seek greater efficiencies (and also to protect themselves against criticism of "vague" bills).

Reasonable Fees

Today the concept of value billing, as a reaction against hourly rates, seems to center on keeping legal service costs low. This in part reflects Rule of Professional Conduct 1.5, which states that "a lawyer shall not make an agreement for, charge, or collect an unreasonable fee." Deciding a reasonable fee generally involves ethical questions of professional conduct. Is the amount of the fee proportional to the value of the services performed? Do the lawyer's skill and experience justify the fee? Does the client understand the amount and nature of the fee and consent to it? These elements mitigate against saying that the lawyer's fee should always be low.

Are lawyers who charge $1,000 per hour "reasonable?" How about $100 an hour? This places the entire dynamic on a slippery slope. If the fee should be low, then is $200 per hour, for example, too high? If so, is $150 per hour too high? Ultimately, the lawyer's true obligation is not to be cheap, but to be fully committed to a collaborative client relationship that builds trust over the long term. That way, clients will see the lawyer as valuable, not expensive.

Client Expectations

Technology increasingly is driving this value versus expense dynamic. The time savings, efficiency and commoditization of routine tasks and services afforded by computers and other electronic technology have freed the great majority of lawyers to focus on the creative, problem-solving aspects of their law practice. But technology has also made clients more sophisticated and demanding, and less accepting of lawyers who tell clients what they must do rather than consult with clients on what they want to do — and who continue to charge top dollar for the privilege. Electronic and computer technology enable lawyers to do more and better work in less time, but this defines a new service dynamic where clients continually demand to pay less for what they see as a commoditized service.

Law firms fear that such increased efficiency results in lower revenue without promising greater volume of work. The use of e-discovery software, which does the document analysis previously handled by dozens of lawyers, epitomizes such a concern. Will lawyers be able to overcome this phenomenon, or will more become technologically unemployed as clients demand value?

Efficiency Momentum

With business and individual clients alike becoming more resistant to or unable to pay for legal services charged according to standard billable hours, the billable hour may be facing its last hurrah. Doing more work faster will reduce revenue when billing is done by time. But without momentum from technology, it is quite unlikely that either general counsel, individual clients or attorneys will push to change the current time-focused system.

Change, however, does not have to be a negative for the legal profession. Instead, lawyers will have to alter their fee and cost structures to fit the new world created by technology change. Law firms that partner with their clients to use technology to achieve greater efficiencies can reduce costs while maintaining or increasing the law firm revenue. A new fee dynamic can create an environment of sharing the efficiencies offered by technology. Both lawyer and client can benefit.

Model Application

The model for how such a dynamic can work already exists. Industrialization demonstrated that that the more equipment used to make a product, less labor was required, and the lower the price. With a lower price, volume increased, and profits likewise could rise. When the basis of production shifted to automation, it produced the same result but with a different name. The more product or service a machine could produce, the less expensive the product might be. The result would be a lower price with higher volume, all of which tended to produce higher profits.

This dynamic works the same in a law firm. Consider the example of knowledge management (KM) databases. KM systems combine the work product of all lawyers into a single unified database that can be accessed by each lawyer to the benefit of all clients. Clients no longer want their lawyer to reinvent the wheel: once the research is done or the form is created, clients do not want to pay for others in the firm or for their own lawyer to re-create it (and charge for doing so) in another matter. But the focus on shared knowledge indicates where the secret weapon lies: the efficiencies from computer technology. Online database management has the potential to turn a lawyer's or law firm's knowledge into a high volume commodity. With a lower price through fixed fees, client demand could increase volume and profits likewise could rise.

Traditionally, getting more work done by less-expensive labor has been the law firm's profitability strategy. In the future, clients will be demanding leverage by seeking to direct the staffing/technology mix so that databases — not paralegals or associates — provide the cost efficiency. Firms must learn to staff accordingly, or have far more lawyers than they can support.

Billing Transformation

The question becomes, then, are clients ready for the kind of billing arrangements that would allow the lawyer to make more money while being more efficient? The ACC Value Challenge suggests that they are. Undeniably, the trend among corporate clients is to view certain legal services as a commodity, and to apply standardized rates or flat fees where appropriate. However, most clients recognize the importance of and are willing to pay a fair fee for value. What they do not want is to pay too much — to pay for inefficiencies, duplications or unnecessary services. And this is where the leverage from technology is the lawyer's advantage.

Equally important is the change that must occur on the law firm side. Being able to maintain billings while becoming more efficient requires changing the billing system to embrace alternative fee arrangements (AFA). Using contingent, fixed, capped, and other value fee approaches where time does not determine the fee is essential to make the most of the leverage from technology. The premise of any such billing system is that the fee is not time-based. As a result, the rules of professional conduct must be altered to permit billings without reference to time, particularly in determining appropriateness of fees if a dispute occurs. The simple fact is that no matter how much clients may endorse the concept of value billing, any lawyer is safer, whatever the billing methodology employed, when keeping track of time spent on behalf of a client. Where billings may come into question, either by a judge needing to approve the fee, or because of a fee dispute needing to go before an arbitration panel, the tried and true method of demonstrating what was done and the reasonableness of the fee usually comes back to hourly metrics.

Collaborative Value

However, no lawyer should ever let it come to that. Value billing can only work through the kind of interaction that is best described as true lawyer-client collaboration. In such a relationship, client and lawyer work together to assess needs and develop a proactive, interactive law approach, making recommendations to each other about actions and decisions that are mutually beneficial. Collaboration in the context of providing greater value in legal services produces more effective representation at a lower cost to the client without discounting either the value or the per hour fee of the lawyer. "Value" should not be a vague concept. All lawyers can structure what they do to consistently encourage a high client perception of value by knowing their clients' business, understanding their concerns and providing solutions that meet client needs.

Law firms that can partner with their clients, and can show their clients how they can reduce their legal costs (without reducing the lawyers' per unit fees) will have a strategic advantage in the marketplace as true value-added service providers. And the law firms that can do that are the law firms with a future in tomorrow's value-driven world.

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