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Not too long ago, deciding what to charge was a matter for a lawyer's professional judgment. By the mid-1960s, when clients began demanding detailed billing statements, lawyers turned to time records as a management tool. The result has hardly been satisfying to either clients or lawyers and has created a need for alternatives to the billable hour.
Billable Hour Drawbacks
Studies and surveys have demonstrated that clients, especially business clients, fundamentally dislike hourly rates as a billing gauge for legal services. Their perception is that hourly billing by lawyers discourages efficiency (in everything from time to technology), predictability and consistency. The sum of these objections is that hourly rates reflect neither the costs that go into the provision of legal services, nor the value that clients perceive from them. One American law firm, McGuireWoods, recently confronted these objections in a series of unusually frank advertisements. "The longer lawyers take, the more they make," one of the ads says. "Does that align their interest with yours?"
Let it be said that many lawyers also dislike hourly billing. Often, when I coach lawyers who are dissatisfied in their practice, it's soon apparent that their real dissatisfaction is with measuring their days in six or ten-minute increments and losing focus on the essence of their skills.
Client Perspective
Recognizing the problem with hourly rates is not the same as knowing how to replace them. Clients want change but most are unable to truly initiate it themselves. The closest most clients come is the RFP "beauty contest," which often has a checklist of specific items that supposedly will be evaluated on a weighted basis, but which frequently comes down to who has the lowest hourly rate.
Despite this growing trend to view legal services as a commodity, 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 or to pay for inefficiencies, duplications, or unnecessary services. The skills of a lawyer and the way in which services are delivered to the client must coincide with what the client wants and needs to have.
Budget Importance
The best way for these interests to come together is by developing a budget at the start of an engagement. We've written in past columns about the importance of getting fees and budgets in writing at the start of every matter. This is at the heart of an engagement letter, and it bears repeating. Some lawyers resist budgeting a matter because they believe it's merely an attempt to reduce the fees they receive by constraining their actions beforehand. Actually, preparing a budget at the start ensures greater productivity and cost effectiveness for both sides.
Budgeting begins by getting as much information as possible from the client about goals and expectations. Information should cover parties, claims, anticipated strategies and desired outcomes. The key here is not just preparing the budget, but involving the client in the preparation. Without client buy-in, the process is meaningless. Secure that buy-in by defining billing alternatives before the engagement even begins.
Billing Alternatives
There is nothing magical about hourly rate alternatives—they all seek to achieve the same thing: rather than setting price by a standard unit or result, billing alternatives focus on actions taken to benefit the client, beyond the time of how that value is applied.
Choosing the right alternative is ultimately a business matter for both the firm and the client. There is no universal best billing alternative. Client preferences and each firm's operations differ, and each project or case has a multitude of factors that could accommodate billing options such as these:
- Blended Hourly Rate. The client is charged one fee per hour regardless of who in the firm works on the matter - a senior partner with a high rate or a junior lawyer with a lower one. The right balance gives clients a better price, and firms the financial incentive to delegate work.
- Fixed or Flat Fee. The fee is determined and stipulated in the engagement letter, before the assignment even begins. It will not vary no matter how much time the lawyer expends or the result. Flat fees are especially useful for routine legal services, and encourage the use of technology to streamline the delivery of those services.
- Contingent or Percentage Fee. Frequently used in personal injury and collection matters, this fee is a percentage of the value recovered for the client. It is particularly useful for the lawyer skilled at analyzing cases and accepting those with a high likelihood of success.
- Premium Pricing. An hourly rate or some other billing method is used as the base, and the lawyer is able to add on an additional premium if the result exceeds client expectations. Of course, there is no premium if the outcome is not successful. Premium pricing gives the lawyer a stake in the outcome and the assurance of a minimum fee even for a "bad" result.
- Retainer. This method sets up a fixed fee for a fixed time cycle (often monthly) during a designated period (often one year). It is sometimes used as a one-time payment to guarantee the availability of the lawyer or firm at a future date.
- Value Billing. Rather than setting price by a standard unit or result, value billing lists actions taken to benefit the client, beyond the time of how that value is applied. Rapid return of phone calls, personalized service, unexpectedly good results - these are all examples of value-added actions that the lawyer can demonstrate and charge for.
Maintaining Control
These billing alternatives reflect a highly interactive process: The lawyer takes a direct financial stake in achieving the desired results, and the client plays an active role in deciding whether those results have been met. No lawyer wants to lose control and direction of an assignment, but absorbing a degree of risk and accepting informed client judgment are often essential elements of a strong and growing lawyer-client relationship.
There are firms that have affirmatively embraced this changed dynamic. Chicago's Ungaretti & Harris has for a decade offered "guaranteed" satisfaction to its clients. Here is the firm's definition of this concept: "We guarantee that as our client you will receive cost-effective legal services delivered in a timely manner. We promise to involve you and communicate with you regularly. We cannot guarantee outcomes; we do guarantee your satisfaction with our service. If we do not perform to your satisfaction, inform us promptly. We will resolve the issue to your satisfaction, even if it means reducing your legal fees."
If this seems extreme, remember that without our clients we have no reason to exist as lawyers. We must find out not only what our clients need, but also what they want - and then provide it to them in a way they can appreciate. When that happens, fees are not an issue and client complaints about billing are not a problem.
Edward Poll (edpoll@lawbiz.com) is a certified management consultant and coach in Los Angeles who coaches attorneys and law firms on how to deliver their services more profitably. He is the author of Attorney and Law Firm Guide to the Business of Law: Planning and Operating for Survival and Growth, 2nd ed. (ABA, 2002), Collecting Your Fee: Getting Paid from Intake to Invoice (ABA, 2003) and, most recently, Selling Your Law Practice: The Profitable Exit Strategy (LawBiz, 2005).