Value Billing: Too Nebulous to be Effective?

This is the second in a series of articles 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 valuable 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.

Back to Main Article page…

If you liked these articles, subscribe to my e-newsletter, and you’ll receive new articles in your in-box. The articles in the newsletter are not available to the public – the only way to see those articles is to receive the newsletter.

Already a subscriber? Want to learn how I can help you? Learn more about the products and services I offer by clicking here.

Allison

Allison C. Shields
Legal Ease Consulting, Inc
Creating Productive, Profitable and Enjoyable Law Practices

P.S. Found a mistake or a bug? If there’s anything that bothers you about this site, I want to know! Send me an email at Allison@LegalEaseConsulting.com. I want this site to be not just a resource, but a refuge for lawyers. I want you to be comfortable here.  So if there’s something that bothers you, please tell me!

 

Comments

  1. Since I’m in the initial stages of suing my previous divorce “lawyer” over HIS “value billing,” (and his, uh, ‘interpretation’ of this ‘great new billing method’), I’d better refer to him anonymously – (“Anonymous and Associates” Law Firm) – in Jackson, MS.

    Step One in the “Value Billing” process begins a little differently – it begins with the “billing” part. I was billed a fortune (up front, and with a VERY misleading explanation – and contract – describing this new, cutting-edge “value billing,” and what it would entail).

    *[By the way – in which scenario would you expect your 14 yr. old son to do a sooner, more carefully-detailed, outcome-oriented, “VALUE-for-you,” grass-cutting job – if you paid him before, or after? (Yeah – it’s about the same with lawyers, I found out).]

    I then proceeded to allow this cheap-suit-wearing, obnoxious egomaniac to convince me to pay him – up-front, of course, almost $10,000 to “represent” me in a “One-Day-Mediation” with my spouse.

    A “95% personal success rate” he boasted to me over and over – that he “currently held” in these ‘One-Day-Mediations.’ He pretty much guaranteed me that I would come out of this “value-billed” Mediation smelling like a rose, and with pretty much WHATEVER I wanted out of this divorce.

    I was in a vulnerable, spaced-out, emotional state that most of his victims are likely in as well, at this time in their life, when he pitches his sleazy, used-car-salesman-like, “Value-Billing” spill, and how “lucky” the client should consider him/herself in being led to such a progressive law firm.

    He and his firm did nothing (literally) to prepare me beforehand (as the contract had promised), for this “mediation.” I had to find a phone number to this old, former used-carpet-sales building, in a not-great part of town – to ask THEM how to even GET there.

    When I got there that morning, I met this little old confused man – the “Mediator” – whom my lawyer (my “representative,” actually) obviously has an under-the-table…I mean, uh, who my legal-guy “uses” for these miraculous “value-billed,” One-Day-Mediations. This ‘Mediator’ rents out a few rooms, I guess, in this old building.

    My “representative” (you’ll find out the hard way, he/she oftentimes won’t even really BE your “attorney” in these “Value-Billing-deals”) showed up late and EXTREMELY unprepared (as in, “calling-me-the-wrong-name-everytime-unprepared”).

    He played his most recent, fancy vacation videos on his iPhone for all of us interested folks (we had nothing else to worry about), talked about the pig that he was buying his daughter for her birthday, made and took numerous loud, personal calls, and then, soon after the 2-hour lunch-break that he (and not the “Mediator”) had so kindly granted us, he “took off early, to pack for a trip that he was taking the next day.” And that was it. It was over. I had experienced “Value-Billing.”

    I had not even laid eyes on my spouse, who has been assigned another room (a fact which was never told to me beforehand). If all of this sounds fishy, bizarre, not real, etc. to you, that’s not even close to how I felt, when I actually lived it. Honestly, it was TEN times worse than it sounds.

    I was left with my mouth hanging open, $10K in the hole, in a now MUCH worse-off legal position, and with the feelings of shame and disbelief that I HAD foolishly and naively once believed that the “Value” in “Value Billing” was “VALUE” for the “CLIENT,” and NOT for the attorney!! Silly, sorry me.

    How wrong I was. The next time that an attorney offers YOU “Value Billing,” just remember my case, and ask yourself how sure YOU are who will end up with the “Value” in YOUR case.

    (I don’t THINK that these various law firms suddenly decided, “You know, we’re just taking way too much of our clients’ money, and not doing enough for them in return. We’ll start working harder for them, while taking less of their hard-earned money. We’ll call it ‘Value-Billing.’ It’s the RIGHT THING TO DO.”)

    Too bad we can’t say, “No, that good-ol’ honest, bullet-proof ‘hourly-billing’ is what I always like to go with. You won’t get ripped-off, THAT way!”

    • Lawrence,

      I’m sorry that you had such a bad experience, but if the situation is as you describe, the lawyer was NOT value billing. But many of the problems you describe above have nothing to do with the manner or type of billing – they are failures in the way the lawyer provided you with the service, and/or failure to communicate exactly what services were being provided,by whom, and how. In any situation in which a client is hiring lawyer, they should carefully review the fee agreement and be sure they understand exactly what they are being charged for, what is involved,and how much it will cost.

      Contrary to your belief, hourly billing is not any better for clients than it is for lawyers – it puts emphasis on time, rather than on the value and service provided to the client. Under an hourly billing system, there is temptation to draw things out unnecessarily and to waste time on tasks that have little value for the client because they are billable. There is little incentive to resolve a case early.

      Best of luck in resolving your legal issue.

      Allison

Speak Your Mind

*