Value Billing vs Hourly Billing: Which Way is Best For You?
I promised David at EthicalEsq that I would respond to this post of his today. In a response to my previous post on value billing, David argues:
There are a lot of problems with the billable hours system, but most of them are the result of abuses rather than of the inherent nature of using hourly billing. In determining the reasonableness of a fee, therefore, the legal profession has attempted to avoid the worse distortions from hourly billing by not fully charging for hours spent “getting up to speed” in an unfamiliar area of law. The client rightfully expects expertise and needs to be informed by the ethical lawyer when he or she is not yet fully competent in a particular legal subject.
The client also rightfully expects to pay a fee that corresponds — at least roughly — to the amount of time spent by the lawyer. And, the honest fiduciary should let the client know approximately how much work is involved. Some sophisticated clients might want to experiment with or negotiate for some kind of value-related fee. But no sophisticate would say “I know you’ll only spend a few minutes on this, but it’s worth millions to me, so here’s a seven-figure check.” Instead, the savvy client would negotiate for, or shop around for, a more competitive fee, no matter the “value” of the result.
David and I both agree on quite a few things, the primary one being that a lawyer should educate his or her client up front about the basis for the fee and give them an estimate of the range of costs and outcomes. However, I feel (unlike David) that the billable hour system is the problem, for both lawyers and clients. The best indictment of the billable hour that I’ve found on the web is in this article where the author writes:
The billable hour, a practice used only since the early 1960s, has become an artificial device that ill serves both professionals and clients. It divides the time of the accountant and lawyer and consultant into parts, turns each professional into a bookkeeper, and creates such profound guilt for every working hour that’s not billable that important non-billable firm needs are inadequately addressed. It affords the opportunity for the worst kinds of excess, such as padding hours, thereby increasing revenue without supplying value – a short-sighted practice bound to backfire. It makes no distinction between the hour spent on trivial activities and the hour spent on substantive matters. Moreover, if the client perceives that there is no added value in the hourly bill, the general practice is to renegotiate the fee, which is becoming a common practice in today’s competitive environment – and makes a mockery of hourly billing. It’s such an anachronism, and so entrenched, that it precludes such rational billing approaches as value added and enhanced worth or contribution to a client’s business, neither of which is best calculated by the hour. As one sage put it, it’s a virtual cartel in which every firm seems to arrive at the same billing rate, even though quality of service is not consistent from one firm to another. Or even from one partner to another in the same firm.
How many other products are bought this way? My wife and I are going to be building a new home this year. We were given a choice by our contractor to pay a set price or be charged on a “time and materials” basis. We chose the former. I don’t care how much my contractor profits on the job so long as I get a quality home for a price I’m willing to pay. To use another example, should I agree to buy a car at $200.00 per hour multiplied by the time taken to build it? If I get a lazy shift the day my car rolls down the line, should I expect pay more than my neighbor who bought the same car built by a more efficient crew for thousands less?
The Illinois Supreme Court requires lawyers to adhere to the code of ethics. Rules of Professional Conduct, Rule 1.5 (which David quotes in part in his post) states:
Factors to be considered as guides in determining the reasonableness of a fee include the following:
- The time and labor required, the novelty and difficulty of the questions involved and the skill requisite to perform the legal services properly.
- The likelihood that the acceptance of the particular employment would preclude other employment by the lawyer.
- The fee customarily charged in the locality for similar legal services.
- The amount involved and results obtained.
- The time limitations imposed by the client or by circumstances.
- The nature and length of the professional relationship with the client.
- The experience, reputation and ability of the lawyer or lawyers performing the services.
- Whether the fee is fixed or contingent.
Only one of the thirteen underlined factors speak to the time spent on the task. I argue that many of the other factors speak to the value received by the client. In the end, I think David and I both agree that a lawyer should charge a fair fee. In value billing, what is “fair” is in the eyes of the client. In hourly billing, what is “fair” is in the eyes of the lawyer. Which is a better way to serve your clients?
I do know this, I will not be offering my clients the option to choose between hourly and value billing. I refuse to perpetuate a system that allows me to charge more to a given client the less efficient I am. My prospective customers will have the choice to use me and my value billing system – or they can go to a “traditional” lawyer who bills by the hour. As my site says: “No more stinkin’ timesheets.”
[thanks to aaron geller and matthew homan via cc]
How the Slumping Economy Has Hurt Law Firms
A careful analysis of the recently released National Law Journal 250 reveals some surprising trends. The NLJ reports that the nation’s largest 250 firms (by lawyer headcount) shrank by 4%. Yet, when broken down by geography (see figure below), nearly half of the losses (2,096) were concentrated in the 45 firms headquarters in New York City. And another 20% (883) fell on the 17 NLJ 250 firms headquartered in Chicago.
To put those figures in perspective, for 2008 (the baseline year), NYC- and Chicago-based firms only accounted for 24.7% and 14.7% respectively of the NLJ 250 total lawyer headcount. In contrast, DC-based firms accounted for 9.7% of the NLJ 250 universe in 2008 but only 3.8% (161) of the total contraction. The disparate geographic impact suggests that the reductions-in-force are probably due disproportionately (or overwhelmingly) to the decline in the volume of corporate transactions and woes in the banking and insurance sectors. Among major markets, San Francisco-based firms shrank the least, though this glass-half-full news is probably the result of the dissolutions of Thelen Reid and Heller Ehrman in late 2007, which were both headquartered in the Bay Area.
On comparative basis, the middle-market firms appear to be thriving. Collectively, there was a 0.6% increase in the number of lawyers in the 91 NLJ 250 firms based outside the Top 10 markets. In contrast, firms headquartered in Top 10 markets did uniformly worst. Below is a ranking based on percentage contraction:
- New York City (45 firms) -7.0%
- Dallas (7 firms) -5.9%
- Houston (4 firms) -5.4%
- Philadelphia (15 firms) -5.4%
- Atlanta (9 firms) -5.3%
- Chicago (17 firms) -4.7%
- Los Angeles (11 firms) -2.7%
- Boston (10 firms) -2.1%
- Washington DC (18 firms) -1.6%
- San Francisco (9 firms) -0.1%
Firm size appears to be a major explanatory variable, particularly for associates. Here is the breakdown of changes in lawyer headcounts by size of firm:
So what is the bottomline analysis? I think the slowdown in the economy has made the largest firms the most vulnerable to price pressure from large corporate clients. The largest firms have the highest cost structure (rents and associate pay), and there is some doubt whether there is a corresponding value-add for their higher fees. At the high end, the market is pretty crowded. An international footprint is not necessarily a competitive advantage when 20+ of firms have the same high fixed costs and similar lawyer credentials. Not surprisingly, a lot of desirable legal work that does not require a multi-office international platform is migrating to firms further down the AmLaw/NLJ 250 food chain. (These observations, by the way, track Larry Ribstein’s The Death of BigLaw analysis.) Indeed, anecdotal evidence from my informal network suggests that boutiques are booming holding their own [NOTE: after the original post, three additional members of my informal network suggested that boutiques were not booming but, instead, hurt less badly].
Folks, we are in uncharted waters. The structure of the corporate bar is changing rapidly. The giants are vulnerable.
[thanks to bill henderson via cc]
10 Rules for Law Firm Retreats: How to Maximize Productivity, Usefulness, and Fun
Whether your next law firm retreat takes place at a tropical location or in the firm’s conference room, there are several things to keep in mind to make it productive, useful and fun. Here are my Ten “Rules” for law firm retreats. Feel free to add your own in the comments. Enjoy!
1. When planning a retreat, the most important voice at the table should belong to your best clients. Ask them what you need to improve upon in the coming year, and invite them if you dare.
2. At a good retreat, firm management spends as much time listening to the lawyers as they do talking to them. At a great retreat, that ratio is closer to 3:1.
3. It is far more important for attorneys to think together at your next firm retreat than it is for them to golf together.
4. If you don’t make time for lawyers to improve your firm during the retreat, they’re less likely to take time to improve your firm when the retreat is done.
5. In big firms, the first thing you should teach lawyers is one another’s names. Familiarity builds collegiality. Lawyers won’t care what their colleagues do until they know who they are.
6. “Networking” cocktail parties don’t encourage firm-wide collaboration as much as they encourage firm-wide inebriation.
7. If the firm retreat is the only time lawyers talk about marketing, it will be the only time they think about marketing. Same goes for client service.
8. Your staff knows more about how to serve your clients well than your associates do. Bring them along, value their opinions and act on their suggestions. You’ll find that the cost of their attendance is far lower than the cost of their absence.
9. The three questions every lawyer should be able to answer after a retreat are: “What can I do better?” “Who should I know better?” and “Why should I be better?”
10. The two costliest items at any firm retreat are the the time and attention of the attendees. Use them wisely.
[thanks to wrote and matthew homann via cc]
