Value-Based Billing Model
by Andrew C. Hall on Categories: business of law
The lasting impact of the economic crisis over the past several years has left some of its effects on the tolerance for fees charged by our profession. When mergers and acquisitions became less frequent, demand for transactional lawyers declined. As real estate transactions all but stopped, many clients bypassed litigation, citing its discretionary nature and forced many attorneys to work outside their specialty area. As a consequence of that upheaval, our profession adapted the way we did business and marketed our services to remain competitive and profitable.
The hourly rate had been historically the most widely used and straightforward method for legal billing. Over time, a “cycle of the willing” had taken shape. The major law firms increased their standard hourly rates, in turn setting an acceptable threshold for lawyers across the country. That trend produced a price model that resulted in exorbitant fees. This model ran counterintuitive to the client’s desire for a swift resolution. A number of firms adopted a value-based billing model that provided incentives for efficiency and results, and at the same time incorporated a certain level of risk if expectations were not met.
The practice of hourly billing had been the subject of scrutiny by clients and those within the profession for decades. Yet the economic crisis brought a new sense of urgency to the topic, leading some attorneys to devise acceptable alternatives. Client dissatisfaction with hourly billing still often results in uncertainty because the client is expected to pay for as many hours of lawyer’s time as necessary to complete the task.
Efficiency is assumed, but seldom provided. As a matter progressed and grew more complex, more lawyers were assigned to a case and fees began to spiral out of control. When the matter was resolved, clients often viewed their ultimate fee as incongruent with the services provided.
When a client challenges fees, a standard response is that there is no way to predict how much time is required before a case takes shape. Another method for justifying fees is pointing to outputs created, such as memos that address legal issues relevant to the case. Because an attorney has limited tools available to quantify his/her work, these explanations may appear to be reasonable and appropriate measurements for fee determination. However, clients often find them convoluted and irrelevant.
In the hourly rate billing process, our profession has overlooked a key ingredient in delivering professional services: value. We do so because we are afraid to (1) accept the risks involved in estimating fees at the inception of a client relationship; (2) seek appropriate incentives for results and efficiency; and (3) hold to the estimate even if the fee estimate was understated. To change course, the legal profession needs to review the billing process and adopt a new approach that addresses client expectations and ensures sufficient compensation.
First and foremost, we must identify how much capital a firm would need to acquire if billing is structured on the basis of value. Any new lawyer thinking about starting his or her practice is sensitive to the amount of money that must be invested in a law firm before the cash flow cycle can support the firm. Personal injury lawyers understand this concept in the clearest terms. They must advance sufficient costs and funds to carry their case from the initial client interview through settlement or trial, and perhaps through the appeal process. This would exceed a sum equal to 12 months of operating expenses or more. A similar reserve must also be created for cost advances. This capitalization is greater than the capital required to carry the traditional hourly rate practice, which operates on a 120-day cycle from the time that legal services are provided until billing and collection.
There are a variety of value-based billing options available. Arguably, the simplest model has always been the contingent fee.
However, that fee cannot be used in every situation. An alternate method is the flat fee, paid in advance. This has been the traditional method of payment in a criminal case. It applies equally well to real estate transactions, or any other matter where the lawyer has sufficient experience to predict what level of service will be required. Advance payment alleviates the cash flow problems associated with other forms of billing, but it also exposes the firm to risk if unforeseen problems arise. This risk can be mitigated by providing for adjustments for unforeseeable contingencies.
In instances where the client is unable to pay the entire fee in advance, a flat fee can be paid in installments with additional premiums for an early resolution or pre-defined results that surpass base expectations. Similarly, the parties can and should consider termination premiums in the event that a client abandons the project midstream or, having learned their lawyer’s strategy, opts to engage less-expensive counsel.
Another value alternative is a non-refundable retainer paid in advance, with additional payments due at agreed upon steps in the matter. For example, a complex real estate transaction could be broken into smaller component parts with incremental payments. One fee would be charged for the first draft of the contract and additional fees would be paid for revisions, negotiations, and other tasks on an as-needed basis. A final fee would be charged for closing, and a result-oriented premium fee would be added if the closing is advanced.
The “bottom line” should be clear. In other areas, whenever we contract for services, we always expect the provider to set a price and stick to it. Even in litigation, we can set agreed upon fees by event pricing that can be added together and reviewed for value. For example, a memorandum in support of a motion to dismiss should be predictable. That same memorandum can be “reused” to some degree at summary judgment, for jury instructions and for a motion for a directed verdict. Obviously, new information will be available and require extra effort. While charges for this extra work should be included, the end price should reflect the fact that the initial effort was already paid for. Consequently, there is no reason why we cannot – or should not – charge for litigation in phases, with enhancements for moving the case faster or for delivering a better-than-expected result.
A shift to billing based on true value to the client will be well received by the client and, when done correctly, can actually function to increase our fees. There will always be room for the hourly rate, but the time is at hand for alternatives that are creative and attractive to both lawyer and client alike. By tying payment to outcomes, rather than outputs, we can put ourselves in the best position to better service our clients and strengthen our own profitability.
Andrew C. Hall is the founder and managing partner of Hall, Lamb and Hall, P.A., a Miami-based law firm specializing in complex corporate, business and securities litigation. Hall can be reached at 2665 S. Bayshore Dr., PH 1 Miami, FL 33133 (305) 374-5030 www.hlhlawfirm.com
South Florida Legal Guide 2015 Financial Edition