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Comments

Brian Day

Chuck,
I'm not sure that I want to agree with your assessment, but I'm finding it hard to discount.

I am in the process of planning my family-law solo practice, and one of the biggest decisions that I have to make is how to structure my fees.

There are some aspects of various alternative billing schemes that appeal to me. For instance, it makes financial planning a lot easier. If I know that I will get $x,000 for each divorce case, then my financial planning consists of settling on a target earning amount and doing a simple division problem to calculate the number of cases that I need to attract. I went to law school because I'm not very good at math. I like simple division problems. Additionally, flat fees require less billing, collecting, and bookkeeping time. And, to paraphrase your post, time is money. It profiteth me not to collect for every six-minute increment of legal work if I have to spend large swaths of time doing unnecessary and routine administrative work. Given the choice, I'd rather spend my time practicing law than keeping books (again, not so good at math...).

But I'm also a bit wary about flat-fee structures. It seems that the biggest advocates of "alternative billing" or "value billing" comes not from lawyers, but from consultants hocking their overpriced services. The whole thing smells like a gimmick. It seems that "value billing" is to 2007 what "branding" was to 2005. There might be something of value there, but you have to dig through a whole lot of hype.

I also don't understand why flat fees are better able to reflect value to the client than are hourly rates. I disagree with Ron Baker's statement that there is no relationship between inputs and value. What does a lawyer have to sell other than inputs? A warm and fuzzy peace of mind? With a few exceptions, lawyers sell a process not a finished product. Unlike, say, an automobile or the ever-popular widget, when it comes to legal services, the whole is not greater than the sum of its parts. A lawyer's value has two components: ability; and effort. These are the factors that must be considered regardless of whether there is a flat fee or billable hour fee structure. I see no reason why the value to the client is relected in an hourly rate to a lesser extent than a flat fee. Surely, our whiz-bang free-market system is not stymied by a simple division problem.

I enjoy your blog and have come to rely on much of the advice that you offer. Keep up the valuable work!

Ron Baker

Hi Chuck,

Once again, I have to disagree with you, and you even disagree with yourself.

First, you say lawyers only have their time to sell. This is nonsense. Nobody buys time. I don't buy my doctor's time, I buy the results he achieves for me. How can we sell something clients don't buy? This is one of the reasons lawyers and clients talk past each other. The lawyers are focused on the wrong things.

I'm really buying your experience, wisdom, judment, etc. We call that Intellectual Capital. You recognize this when you explain the "value point" for legal services: "You, the law firm, the remedy sought, the defense offered, your ideas, the outcome possible..."

Exactly right: intellectual capital, not time.

You haven't really added anything to the debate that has not already been refuted by Richard Reed's 3 seminal ABA books written between 1989 and 1996, and my 5 books from 1998-present.

I hope you read my Burying the Billable Hour book, it's free and can be downloaded here:

http://www.verasage.com/index.php/resources/C55/

Yes, value is difficult to quantify. So what? That's because it's subjective, and different for each person. I can assure you that talking about hours does not get a lawyer closer to value created for the client.


Your construction example, I think, is flawed. My insurance company sells me earthquake insurance (I live in northern CA). They don't know when the next quake will strike, how big it will be, or how much in damages it will ultimately cost them.

But guess what: they give me a fixed premium, up-front, like I purchase everything else. This is such a basic law of economics I'm amazed by the contortions defenders of the billable hour have to go through to avoid it.

Change Orders are what is used when litigation goes outside of originally planned scope. If mechanics and contractors can use them, I think lawyers can be taught.

The billable hour does not provide extreme accountability, unless you like rewarding efforts over results, costs over value, and inputs over outputs.

If it was such a good system, why is everyone unhappy with it? Why doesn't any other business use it? Perhaps my airline should charge me $4 per minute to fly?

To Chuck's comment, I'm not a consultant "hocking" my services. I founded a think tank that gives away an enormous amount of intellectual capital for free, to help professionals such as yourself adopt a more rational pricing model, one that fits a knowledge economy.

And it's not a new gimmick. The ABA has 3 books on it, as mentioned above, from 1989--that's nearly 20 years!

There is no relationship between inputs and value Chuck. Will you pay me to mow your lawn with my BB Gun? If so, I'll be right over.

A lawyers' value has two components, you are correct. But they aren't ability and effort, they are results and intellectual capital.

Lastly, there are firms that are doing this, some of which are family law firms. Some are litigators, but this is the group, by and large, that claims it can't be done.

The ones that figure it out first will have an enormous competitive edge, while their competitors remained mired in the mentality they sell time.

We are burying the billable hour, one firm at a time. The knowledge is out there for anyone willing to read some books and our Web site.

No charge. No gimmicks. Based on economic theory and empirical human behavior, not to mention how every other business prices.

Sincerely,
Ron Baker, Founder
VeraSage Institute
www.verasage.com

Christopher Marston, Esq

Hi Chuck,

I cannot disagree more with your sentiments. It is no more correct to say that lawyers are selling time than to say that any employee in this economy is selling time. We are a law firm that is entirely pricing on a fixed-price basis. . . based on VALUE and nothing more. . . not time. . . not hours. . . no minutes. . . but VALUE. You are also wrong that lawyers end up with the short-end of the stick when they fixed-price {we certainly do not} . . . you have confused two different theories of pricing with one another. If the price is based on an estimate of hours, you are absolutely correct. . . and it is a SILLY model to price based on a time estimate. When you price based on value, all of a sudden you realize you can add tremendous value and wisdom, charge for it, and spend hours LESS time to do it. Result: More value to the client, less time worked, higher "effective" hourly rate. . .if you must think that way. {which is still wrong because any business person knows that hourly rate does NOT equate to profitability. I can state from experience of a firm that uses exclusively fixed pricing based on value in ALL cases, including litigation, that it can be much more profitable that any billable hour system and, perhaps most importantly, provide much more rewarding work for our attorneys. Would you rather spend 2O percent of your time billing and collecting or doing great and challenging work?

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