obsolete?
On his new weblog the [non]billable hour, Matthew Homann has raised some important issues concerning “value billing” and lawyer ethics, which I believe are by no means as clearcut as Matthew presumes. In “One good reason for value billing” (Jan. 28, 2004), he discusses a case where a firm “got in trouble by billing two clients tens of thousands of dollars (in hourly billing) for the same product.”
Matthew (who is trying to remove hourly billing from his practice) agrees that the particular conduct was dishonest, but asks, “should the second client have been charged significantly less because the documents were already ‘in the system’ and just needed to be revised?” He continues (emphasis added):
This is the dilemma many lawyers face when trying to bill hourly when they have become proficient at any given task. If my technology investment allows me to complete a task in one-third the time it took me last year, does that task become two-thirds less valuable to my client? Staying away from hourly billing should allow lawyers to maximize their revenue, capitalize upon their efficiencies, and keep their law licenses.
If I understand this approach correctly, there’s more than “one good reason for value billing” by the purely profit-seeking lawyer. Athough I’m sure Matthew has no intention of charging excessive fees himself, his position is basically saying that a lawyer, by avoiding hourly billing:
- doesn’t have to pass on to the client efficiency benefits from expertise and proficiency in an area, or from technological advances and investment
- can price-discriminate by extracting from each client the “value” of the services to the client
- can, therefore, potentially bring in more total fees while working less, and
- will avoid charges of charging excessive fees, because the client by definition never pays more than the value of the services to the client
I can see why this scenario might sound good to a lawyer, but I’m far from certain that it serves the client’s best interests or avoids ethics violations. First, the sophisticated business client may be able to put a “value” on a particular lawyer’s service, but it’s difficult to see how we can expect the everyday consumer of legal services to do so. What’s it worth to have the peace of mind of an estate plan, a clear property deed, a favorable plea bargain? What’s the value of being divorced to escape an ugly marriage? Like Matthew, I was a divorce mediator. How could a divorcing couple put a value on reaching an out-of-court, as-amicable-as-possible divorce agreement? What’s it “worth” to the spouse who most wants out of the marriage?
These are not questions we normally ask buyers of important or necessary services to make, except in the gross sense that they choose to totally forgo the service if the price being offered by the provider is utterly unaffordable or outrageous.
Medical Analogy: Should society permit a medical doctor to charge a fee based on the value of the cure or treatment to each patient (pity the professional soccer player with a foot injury), rather than on a combination of the physician’s skills and the difficulty and time needed to perform the treatment, tempered by some market discipline? A lot of patients would probably die while attempting to determine just what a cure is worth.
In our economy, we expect suppliers to produce additional output until price equals marginal cost (see Arnold Klingman). We also expect that competition will motivate suppliers to innovate in order to become more efficient, and thus reduce costs and price. Matthew appears to want to avoid the attorney’s marginal cost in the pricing process, and to avoid passing on the benefits of efficiency and competition to the consumer. The “special protection” offered the client in the attorney-client relationship would be protection from the forces of competition and innovation within the legal profession.
I don’t see how we can divorce the billing process from the ingrained historical notion that the reasonableness of a fee depends upon the amount of time spent performing a service and the expertise and skill of the lawyer and staff. Now, when a lawyer uses a fixed fee, that fee is presumed to mimic the total fee resulting from multiplying a fair hourly rate by the time the lawyer expects to take to perform the function, after assessing the overall complexity of the client’s situation. The reasonableness of that hourly fee takes into account the lawyer’s skill, human capital investment, overhead, and technological investment, etc. — tempered by comparison to what other’s are charging for similar services.
If you say, “but that means technology may make many lawyer services very cheap to perform or even obsolete,” I say — from the consumer perspective, “ain’t that grand! let the competition begin!” The Good Olde Scriveners Guild didn’t much like the printing press, either. I’m sure some scriveners found niche markets for scribe services, some became farmers, and others bought presses and started producing quicker and cheaper newspapers and books. Once competition began in earnest among publishers (who by the way owed no professional nor fiduciary duties to their customers), they surely did not get away with saying to each consumer, “Tell me, what’s the value of this Bible to you?” The basic price depended on the costs of the inputs and quality of the product.- Traditionally, “value” has meant “a good product at a good price,” and has always taken into account competitive market forces that tend to bring price down to the seller’s cost. That’s why computers cost less today than a decade ago, although buyers “need” or “value” them more now, as they have become central in our business and personal lives. We need to be suspicious of a new definition of value that is based on a buyer guessing in advance just how much a product is worth, without knowing the quality or quantity of the services to be performed or the actual results, and with no connection to what the service costs the seller to produce.
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, in a world where there are so many capable lawyers, 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.
Illinois, where Matthew practices, has adopted Model Rule 1.5 on fees, which clearly continues to focus on the amount of time spent and skill needed, along with the expertise of the lawyer and the fees charges by other lawyer’s in the community, when determining reasonableness. In its brochure on Fee Disputes Between Lawyers and Clients, the Illinois State Bar has this to say about the basis of a reasonable fee (emphasis added):
“Abraham Lincoln, himself a lawyer, once said, ‘A lawyer’s time and advice are his stock in trade.’ The basic ingredient is the amount of time spent.”
Fitting value billing into the reasonable fee rubric seems far more difficult than Matthew admits. Lawyers need to keep in mind that esquires were shield-carriers and horse-tenders, and not the knight on the steed, much less the lord of the manor. Lawyers are servants of their clients (and not their partners). They are, of course, presumed to be skilled servants, and that’s why they make a lot more than minimum wage for their services.
However, value billing in many ways turns the lawyer into a partner in the client’s venture. No wise entrepreneur takes in a partner without asking what contribution he or she brings to the enterprise. The “value” of that contribution to the entrepreneur depends greatly on how many others are capable and willing to provide the same investment, and not merely whether the project needs someone to provide the service or product.
I’m all for giving clients the benefits of many pricing options. However, clients must be given full information along with options (especially novel options like value billing) — information that includes the likely amount of attorney time involved to perform the service, along with a description of advantages the firm can offer due to expertise and technology. If the client is not allowed to make fully informed choices, the law firm is not fulfilling its ethical and fiduciary obligations. I plan to learn more about value billing as it might be applied by lawyers. Right now, call me skepticalEsq.
- As for Matthew’s original question — “should the second client have been charged significantly less because the documents were already ‘in the system'” — the answer is clearly less. However, it’s possible that the first client should also have been charged less, too — especially if the firm knew it had a very similar case in the pipeline, so that the hours could be split between the clients, rather than charged to each client.
further reading at this weblog: In our post “ethics aside” (April 8, 2005), we noted that f/k/a‘s editor emeritus ethicalEsq: is getting a little annoyed by the “ethics aside” approach of the gurus and evangelists of law firm branding, marketing and alternative or value pricing. They offer the easily-tempted lawyer a paradise of premium clients and fees, with increased profits, while never probing the ethical and fiduciary duties of the lawyer to insure that the client is fully informed, treated fairly (and without manipulation) and, in the end, charged a fee that is reasonable for competent and diligent services.
. . . . Those who are advocates of “modern” marketing and pricing methods for attorneys have a duty to put the ethical issues front and center. If they, and those who are so eager to follow them to higher profits, need a place to start, they might take a look at some of our prior posts — or read them again with our ethical duties in mind. For example:
– LexThink about higher fees (er, value billing)
– brand Lex (branding to permit premium pricing and reduce price elasticity)
– chronomentrophobia (hourly billing is not the problem)
– value billing or venal bilking? (what is value billing? what should it be?)
– fees and the lawyer-fiduciary
– jackal sequel (image-making rather than quality as the basis for higher fees)
– fee fie foe and fum (change values first)
– ron baker: sensitive guy? and Ron Baker and Price Sensitivity (a look at the goal of leveraging premium fees from the client, especially the Change Order)
It’s worth repeating what I said two days ago, after LexThink: “I am all for modernizing the law firm and the lawyer-client relationship — so long as it is a tool for better serving the client’s interests, rather than one that merely uses modern selling techniques and technology to artificially increase lawyer fees and profits and to stave off the democratizing effects in the legal services marketplace of the digital revolution.” [Ron Baker disagreed with our assessment of ethics and value billing, see our response and find the thread here.].
– updates: See our comprehensive post “broadening the hourly-billing debate” (Aug. 18, 2007) and linked materials; and commentary in smart clients care about . . . marketplace “value” (Nov.25, 2008).
And, for a list of the Red Flags that have caused us to worry about the ethical and fiduciary soundness of value billing, see “value billing by lawyers raises many ethical red flags” (Dec. 4, 2008).
David, I just finished a trial today, but will add my comment to this post tomorrow. I appreciate all the help with my weblog. Matt
Comment by Matthew Homann — January 29, 2004 @ 9:51 pm
David, my most recent post addresses your arguments in this post. I think we both agree that honesty, fairness, and client service should rule the day. Now back to work.
Comment by Matthew Homann — January 30, 2004 @ 3:02 pm
David, I respectfully disagree with your analysis of “value billing” (or flat-rate billing, or whatever you want to call it). First, your analysis assumes that the billable hour should be the base for any comparison (i.e., value billing is fair only if the charge is less than the comparable billable hour). This assumes that the billable hour is a fair method in the first place.
Lawyers are not only charging for their time, they are also charging to reimburse them for undertaking a certain amount of risk and to obtain the value of their expertise. Say that I have studied LLCs exhaustively and, due to technological efficiencies, I can set up an LLC for a client in less than an hour. What should I charge for that service? In other words, what has the client obtained from me and how should I be compensated? The client not only received 45 minutes of my time–he or she also reaped the rewards of many hours of research and preparation that enabled me to prepare an LLC in such a short amount of time. If my hourly billing rate is $200, should I charge the client $150 for my service? That amount seems to undervalue what the client received–a legal entity that I have basically warranted will be upheld if challenged at a later time. How is that only worth $150?
On another note, consider percentage billing. Many financial advisors charge their fees as a percentage of the total assets under management. Why not charge estate planning clients or transactional clients the same way? This brings a dose of reality to the situation. After all, the monetary value of an estate plan to a client with $100 million in the bank is much different than the monetary value of an estate plan to a client with $100,000 in the bank. The lawyer’s risk is greater as well. Why shouldn’t the fee reflect this difference? The same goes for a business transaction. Why shouldn’t the lawyer’s fee be a percentage of the deal?
These types of fees give certainty to clients–something which they cannot get in billable hours scenarios. The client knows in advance that it will cost, say $1500 for an LLC or 0.5 percent of the client’s total assets to obtain the value of your services.
Comment by Dave — January 31, 2004 @ 12:50 pm
Editor: Dave, Thanks for giving us your perspective. This topic is clearly going to call for a lot more thinking and writing by me. Here are some quick reactions to your points, which are also offered with respect and an open mind:
The “reality” is that technological advances and efficiencies are expected — in our economy and in basic economic theory — to bring prices down. So is an oversupply of service providers. Your approach seems to be stripping the client of both normal market benefits and fiduciary protection.
An attorney’s hourly rate is expected to take into account the attorney’s expertise and investment in human and machine capital. The attorney states his or her hourly fee, explains it if the client wonders why it is so high, and then (after some negotiation, perhaps) either enters into an agreement with the client or doesn’t.
Your estate planning example seems to me to show the perils in your approach from the clients’ perspective:
As with contingency fees, percentage billing is only fair to clients if the client is fully informed about just what the lawyer is bringing to the table to “earn” the percentage. It’s bad enough that personal injury lawyers basically demand to be made a partner in every client’s injury claim. To force this upon ever-more types of clients, without fully informing the client, seems to me to be putting the lawyer’s financial interests far above the clients’ interests.
The LLC example is also worrisome to me. If $150 seems too small a return for your time, perhaps you need to adjust your hourly rate to reflect your perceived self-evaluation. That allows the client to determine your value in a manner that the client can grasp and deal with. As a fiduciary, you need to let the client know just how much time you’ll be spending — explain to the client why less than an hour of work is “worth” $1500.
Justifying a percentage fee or a flat fee by saying “the client has certainty” can often be simply a rationalization — so does a life-without-parole sentence, rather than 25-to-life. It begs the question as to whether the amount is reasonable in the circumstances. What would a likely range in fee estimate be, if billed by the hour, for your hypothetical LLC client? One hour (likely) to maybe three hours (if there are unseen complications)? Even at $300 per hour, the fee would certainly be far below the $1500 “certain” fee. Trying to make certainty sound like a wonderful value or bargain for the client seems like lawyer-speak to me — and probably would to most clients.
A good rule of thumb for a fiduciary (or any service-provider): if you’re embarrassed to tell your client/customer how little you have to do to accomplish the task, when compared to the fee, your fee is too high. That’s why many informed consumers have rebelled against the customary real estate agent percentage when selling a home. It’s also why a lot of probate courts have questioned or put a dollar limit on probate fees based on the overall value of the estate.
Two final points: As discussed in this post, the special privileges that come with our professional license presume:
As agent of reality, and consumer advocate, I must often tell my colleagues two things they don’t want to hear:
(1) in general, attorney services are worth a whole lot less (add a lot less value) now that consumers can read and write and technology makes it possible to provide legal services far more quickly and efficiently (or through self-help); and
(2) there are over one million attorneys in the USA and they are all looking to make a buck.
To think that those factors can be avoided by coming up with new ways to “sell” and “price” the product or to push back market forces and the tide of history seems to me to foolish and unprofessional.
Comment by David Giacalone — January 31, 2004 @ 2:30 pm
I was just introduced to your blawg by a colleague who is also interested in the fee-oriented concepts raised in your post on value billing. Almost two years ago, I left my partner position with a relatively large intellectual property boutique largely because I believed business needed to be conducted differently. My focus on billing has always been on whether THE CLIENT perceives value in the service for the fee requested. Your post and the comments seem to me to be overly focused on the attorney’s perceptions of value and the rationale for “arguing” that the services are of the billed value. In my experience, clients know a lot more about value than we (attorneys) think. For example, every client knows the value of the dollar figure at the bottom of the bill. They also know why they hired you and what they hoped to accomplish by hiring you. Finally, they also know how much money they have to devote to attorney services. All this knowledge adds up to a pretty good barometer for “value” regardless of the billing mechanism.
As for me, I still usually bill for my services by the hour and consider the amount of time spent to be a good measure of the value. The time-is-my-only-asset rationale supports this type of billing so long as there is an efficient market force (or constraint depending on your idealogical bent) to keep me from letting the meter run too long or dragging my feet on something while the meter is running. Before you lump me in with the rest of the hourly billers consider the twist that I add. If a client ever believes that my bill is unreasonable, I ask that pay only what’s reasonable. This is an enforceable contract term in the engagement letter with every client of my firm. This term of engagement is the market force that keeps me motivated to get the job done as quickly and efficiently as possible. It also gives all the power to the client to judge value, dramatically opens lines of communication about value, planning, budgeting, and satisfaction. My clients are no longer scared to talk to me for fear of the meter spinning too fast.
I also bill some tasks at a flat rate. My rationale for my flat rate tasks and the fees charged is two-fold. First, variations in the precise amount of time spent on relatively quick, repeatable tasks are hard to collect on my end and clients tend to be irritated by numerous small time entries. I guess this first rationale essentially boils down to it being inefficient on my end to record and report the time for some tasks and inefficient on the client’s end to review and judge the value of those same hypothetical time entries. Second, there are some tasks for which I charge for my accumulated experience or my special access to certain administrative bodies (I am a registered patent attorney who practices before the USPTO on patent application matters). This rationale is akin, I supposed, to the return on my investment theory. Whenever I have had a client with a “high volume” of certain flat rate tasks, I have offered to cut the price due to a specifically applicable economy of scale for that client. In the end, however, my flat rate tasks are subject to the same term of engagement that lets clients have the ultimate say over the value of my services.
One last point. Whenever I send a bill or try to determine a price for a flat rate task, I always pretend that the client knows everything about what I did (every detail). Then I ask, would the client believe the fee on my invoice for that activity to be fair? If I answer no, I adjust the fee until the answer is yes.
I’m glad that my buddy turned me on to your site. I’ll check in periodically.
Comment by Mitch Weatherly — February 18, 2004 @ 1:02 pm
Thank you, Mitch, for taking the time to share so many great ideas with me and visitors to this site. You sound like a lawyer who really means it when he says the goal is to give the client full value. I agree that many clients know a lot more than lawyers want to admit, but I’m concerned about the ones who have no idea whether they are being snookered, and those for whom almost any payment for legal services represents a great financial strain.
Here in NYS, a lawyer recently took thousands of dollars (often $10,000 or more) each from over 10,000 clients, who were already in dire financial straits but hoping to avoid bankruptcy. The clients had no idea that virtually the only service being done for them was sending form letters to creditors suggesting the client would file for bankruptcy if debt levels were not greatly reduced. I couldn’t even get bar counsel to open an investigation. Of course, I don’t believe many lawyers are as dastardly as the one in question — but, I do believe that many clients have virtually no way to tell whether they are getting value; and they certainly don’t know in advance.
Comment by David Giacalone — February 18, 2004 @ 8:33 pm
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