It’s great to finally see some straighttalk today in the legal press about alternative billing. In the blawgiverse, you will search in vain (except here at f/k/a, and an occasional word from Carolyn Elefant) for any acknowledgment by those who sell legal services, or their consultants, that alternatives to hourly billing come loaded with their own difficulties and anti-client incentives. So, I urge both sellers and buyers of legal services to read “Firms Learn to Cope With Alternative Billing Plans: Clients see corner-cutting, slowdowns” (The National Law Journal/Law.com, by Leigh Jones, September 11, 2007).
The NLJ article begins: “As more corporate clients are getting the alternative billing arrangements they want, they are claiming some pushback from law firms trying to make the best of the new deals.”
“A mix of sky-high billing rates, ballooning associate salaries and pressure from company executives has heightened corporate counsel’s demand for different ways to pay their outside law firms.
“And while they report that more of those firms are answering the call, in-house lawyers say that these new payment methods create their own sets of challenges in dealing with outside counsel.”
. . . “The arrangements include fixed fees, contingency/results-based fees, retrospective-based compensation, blended rate deals, discounts and more.”
Hourly billing indeed has incentives that cut against lawyer efficiency, but “But alternative arrangements take longer to devise, say lawyers from both camps, and they are far from foolproof.” (The foremost problem — how to get people on a fixed fee to work hard enough — is an obvious issue far too often concealed by the lynch mob that is trying to kill the billable hour and ignored by the customer looking for other options.) Here are some of the important points made in the article (emphases added):
- “One of the primary problems in-house counsel say they encounter is a slowdown in work performed under a fixed-fee arrangement. “There is a grave concern that outside counsel will take their eye off the ball,” said Steven Lauer, general counsel for Global Compliance Services Inc., a provider of corporate compliance services and products.
“If the parties miscalculate how long they expected a matter to take, and if they do not make contingency plans for extensions, law firms may be tempted to start pulling lawyers off the file. “Once they blow through the fixed number, there’s less work [completed],” [James] Potter [general counsel of Del Monte Corp.] said.”
- “Arrangements that are some derivation of hourly billing, whether it is a discount or a “rate tiered to volume,” are the easiest to negotiate, he said. The further the attorneys get from the traditional form of payment, the greater the unknowns become.”
- “Particularly irksome for Potter, at Del Monte, is the bait and switch that he says starts at the proposal stage.” Many law firms in recent years have improved the pitch to win bids from in-house counsel. The problem, he said, is in the delivery of services. He sees a mismatch between the assurances made by the team that sells the deal and the resources available to actually do the work. He attributes the disconnect, in part, to poor internal structures at firms.
- Bonuses tied to outcomes are also problematic, [Potter] said. At the conclusion of a matter, in-house counsel may consider the result merely adequate, while outside counsel may view the outcome as extraordinarily positive — and seek additional compensation for it accordingly. [Editor’s Note: As Rees Morrison recently advised: “[D]on’t promise a bonus for the inevitable; reward outcomes that on the probabilities known at the start are exceptional.”]
- If difficulties do arise, they usually are an indication of a larger problem between in-house counsel and the law firm it hires, said Andrew Shipley, assistant general counsel of Northrop Grumman Corp. . . . The defense contractor giant utilizes a variety of alternative billing methods, depending on the matter, but central to any arrangement, Shipley said, is the quality and efficiency of the lawyers and their written product.
- For lawyers inexperienced at creating alternative arrangements, there is a learning curve, . . . although legal departments are calling for more billing options, they, too, are often inexperienced in negotiating the arrangements. . . . Because alternative methods may be new territory for both groups of lawyers, drawing up solid agreements can be time-consuming. . . . During those meetings [to draw up alternative fee contracts], one group should try viewing the situation from the other’s vantage point to help align interests.
- “Very often, in-house and outside attorneys don’t mean the same thing when they use the same words,” he said. The word “productivity,” from the law firm’s perspective, means the hours associates can bill a matter. To in-house lawyers, it means “efficiency,” he said.
Rees Morrison [of the Law Department Management weblog], told NLJ that “Lawyers can avoid most alternative billing headaches through careful planning . . . Well-crafted agreements need to have buffers in place if matters get sticky.” I hope buyers of legal services will be vigilant when setting up arrangements for treating unexpected (or expected but nonetheless surprisingly resource-needy) problems that arise during a matter. You especially need to be wary of law firms that will try to exploit such events.
Value Billing is Not Always a Great Value: On April 21, 2005, in our posts ron baker: sensitive guy? and ron baker & price sensitivity, we tried to help the buyer of legal or other professional services understand some of the traps that underlie concepts like alternative billing or value billing, as they consider pricing methods other than hourly billing. (and see “still sensitive over value billing” May 6, 2005) We focused on Ron Baker, because he is repeatedly said by alternative billing cheerleaders at law firms to be the great theorist, practitioner and teacher of value billing and similar concepts. In his writing, however, Baker consistently makes the point — listen up clients! — that the goal of escaping the billable hour is to increase profits and charge super-premium prices, by getting the client to agree on price when the client is least sensitive to increases and the professional has the most leverage.
Thus, in the article, “Change Orders: What a Concept!” Baker tells his audience: (emphasis in original)
“The moral: Always set your price when you possess the leverage.”
Baker then suggests ways in which the client can be maneuvered so that “a premium price” can be charged. He stresses, as do I:
“A favorite way to make the client insensitive to premium fees is the use of Change Orders when services are needed beyond those covered in the initial fixed-price arrangement [no kiddies, pricing can’t really all be done up front].”
In a subsection titled “Change Orders Indicate a Climb up the Value Curve,” Ron gleefully points out that: “One of the greatest advantages in using a change-order policy for all scope changes is that they point out value pricing opportunities.”
Baker’s parting wisdom: “change orders have ‘value pricing’ written all over them and should be priced accordingly.”
If you are not yet convinced to be wary of Change Orders and similar tactics, please read Baker’s “Change Orders and Innovative Pricing Methods,” (SmartPros, Jan 24, 2000). Here’s how our prior post summarized the article:
Finally, if you’d like to see some of the results Ron suggests can be had using his value pricing techniques, strategies, and psychology, see “Change Orders and Innovative Pricing Methods,” (SmartPros, Jan 24, 2000). It seems that clients, properly “leveraged,” will offer to pay two or three times as much (sometimes ten times as much) as a professional’s regular fees, and the professional can sit back and rake it in, righteously smoting the evil hourly billing system and increasing the client’s perceived value. (The shrewd professional will even give the client a discount off the 200% or 300% premium fee the client has offered to pay — earning both merits points in ethical-code heaven and the client’s trust and loyalty.)
Of course, as always, I worry about the unsophisticated consumer of legal services who does not have the information, experience or leverage to venture safely into alternative billing arrangements — especially when those who tout them the most often have the smoothest, most-soothing patter about the advantages that switching from billing by the hour can bring. The Big Boy Buyers of legal services might have a learning curve, but they have plenty of time and opportunity to travel on the curve and get it right. Most “Main Street” clients do not.
You can read much more about the issues raised when considering alternative bill methods in our recent post, “broadening the hourly-billing debate — consider yourself, your clients and your ethics” (Aug. 18, 2007), which collects links to other postings on the topic, and has lengthy excerpts from many of them.
for the fat green frog
crouched on the log
time is flies
……………………………….. by George Swede – from Almost Unseen
the bill collector
with shoes on steps inside
to the hearth
a nightingale singing
included in the price…
on a night of fireworks
still selling fireworks
the peddler selling
eight cent sake
they even sell tea
not worth a fart!
wet with morning dew…
a tough character