Value Based Billing-An Innovative Solution for Law Firms
Do your clients ever get frustrated with the size of their bill, which was unexpected? Do you have prospective clients who want a reasonable projection of what their matter will cost, and you are unable to give them a very predictable cost? Are you tired of time keeping and trying to meet seemingly arbitrary hourly billing requirements? As a firm owner or manager, are you tired of chasing clients for payment of outstanding balances on their bills?
We attorneys have always used an hourly billing process. However, it creates a lot of issues, for the client, for the attorneys, and for the law firm. But there is an alternative which answers many of these concerns. That is the value based pricing system.
In this newsletter, I will discuss some of the problems with the hourly billing system, explain what a value based system is and how it works, review the primary obstacles to it, and explain the many benefits it can bring to your law firm.
Problems With An Hourly Billing System
There are many problems that the hourly billing system that we have always used as attorneys creates for the client, for the attorney and for the law firm. These are some of them:
Inability to effectively predict costs. I screen our incoming calls from prospective clients. What they always want to know about their litigation or family law matter is, “what will it cost?” I am never able to give a very effective answer to that. The answer is “it depends!” That is never, ever satisfying to them. They want predictability, stability and security.
Arbitrary billing amounts. I have had many occasions to observe different attorney bills in different contexts. I never ceased to be amazed that one attorney might draft a pleading in .5 hours, and another attorney takes 2.0 hours. The inconsistency between the amounts attorneys bill for the same work can be quite astonishing. And, it can be very unfair to the client.
Conflict with the client. Our clients want to obtain good value for their project. They obviously want to pay less. The law firm wants and needs to bill more. There is an inherent conflict there between the law firm with its goal of billing more and a client with the desire of paying less. This conflict is accentuated by the hourly billing requirements. Attorneys are expected to bill a certain number of hours regardless of whether those hours provide good value to the client.
Attorney frustration. So many attorneys are overworked, stressed and burned out. That largely is caused by the hourly billing mandate. Attorneys are expected to bill a certain number of hours per month and are held accountable if they do not. It creates not only time stress for them, but emotional and mental pressure as well. So many attorneys are dissatisfied with their profession because of the stress and anxiety that the hourly billing requirements place on them.
Bills not getting paid. Typically, we work on our files in a month. We send our clients bills at the beginning of the next month and we expect them to get paid. They are not paid timely. The client makes a reasonable excuse, asks for more time, and the next month we send another bill. This can continue, and often there ends up being a very large balance owed. We are told by our malpractice carriers not to sue our clients to receive fees, but the outstanding balances are quite large. This creates stress for the firm managers, and also financial issues for the firm. Often hourly rates and billing requirements are increased to account for the large amount of bills that go unpaid. Chasing clients for payment is a very unpleasant task.
Client dissatisfaction. Our clients are often shocked at the size of the bills. They did not expect that. And they did not agree in advance to pay that amount of money. As a result they are frustrated and dissatisfied. They may stop working with us. Sometimes they may even file grievance complaints because of their dissatisfaction. They certainly will not be referring others to us when they have that disappointment about the size of the bills. They often feel like they did not receive good value for what they paid.
What is a value based billing system?
Value based billing does not concentrate on the cost of producing the work, the hours spent and the hourly rate. In fact, time is no longer kept. Is there any other arena where you purchase a product and are concerned about the costs of production? When we buy the car of our dreams, do we consider how many hours were spent to produce the car or the cost of the materials that went into making it? Or do we look at whether the car provides good value to us?
Instead, the value based system determines the value you will provide to the client by focusing on the outcome and the result. The value is based on the client’s perception of value. The value-based fee delivered to the client the value that they desire, and a reasonable profit to the lawyer. The client and the lawyer are now in alignment. They share the same goal, providing value, meeting the client’s expectation, with the understanding that the attorney will be making a profit for their service.
The system creates alignment between the client’s expectations and goals; the client’s objectives and the intended results; the lawyer’s expertise and abilities; and a reasonable fee to be received by the lawyer.
In the system, the client is given a fixed rate for a limited scope of services. The client is given options about alternative ways of handling the matter that will require additional fees. The scope of the services and options is limited; if matters arise which are outside of that scope, additional arrangements are made for payment of fees for that expanded scope of service. Consideration is given to the client’s objectives and anticipated results. The client chooses what scope of services he wants for that price. The client pays in advance for that scope of service. The client’s objectives, ability to pay, and desired outcome are all factored into the projected charge for the scope of services.
The client makes the choice. He obtains the value he wants. He is happy to pay for that scope of service. The law firm now has an incentive to handle the files efficiently and promptly as it can to conclude the matter, achieve the client’s goals, and maximize its profits.
Now, the client, attorney and law firm are all in synergy.
Concerns about the value based system
There really are only 3 issues about the value based system none of which is compelling:
Tradition. In the legal profession, we have always primarily used an hourly billing system. It is all we know. Anything else makes us very uncomfortable.
Lack of familiarity. We do not understand the value based system, it’s completely different from the hourly billing we have always used, and we are unfamiliar with it. Changes are difficult and we will have to learn a new way to predict and bill our files.
Unpredictability of our charges. We don’t know how long this litigation or family law matter will take. We can’t adequately predict the appropriate charge.
None of these are satisfactory reasons to not start utilizing the value based system. Yes it is new to many of us, but that is innovation. The hourly billing system has caused so many problems for clients, attorneys and firms, and there is a better way. It may seem initially difficult to predict a value based price for a limited scope of services, but haven’t we been handling these matters for years? Can’t we predict a fair charge to investigate the matter, discuss settlement and draft an agreement? Or exchange discovery and discovery responses? Aren’t we able to properly see what the client’s objectives are and determine what is good value to the client that would also derive a profit for us?
Benefits of a Value Based System
There really are innumerable benefits to setting our pricing for services on value rather than timekeeping. These are just a few of them:
Clients know the cost and accept it upfront. Clients will know the exact cost for the services they are receiving. The like predictability. They buy into the amount and accept it.
Clients have choices about the scope of services. This gives clients an option of how much it will cost and what they will receive which they like.
Clients are satisfied. Clients are receiving exactly the value they choose and are pleased to have their outcomes achieved for the cost that they chose.
Clients refer other clients. Because our clients are so satisfied, love the system, and have their goals met, they are happy to refer others to us.
Attorneys are happier. The arbitrary hourly billing requirements and timekeeping mandates create huge stress for associates and attorneys.
The law firm and client are in synergy. The conflict between the client who wants to pay less and the law firm that needs to build more is removed. The parties are working together to achieve an agreed objective as expeditiously as possible.
Greater profitability. Because the law firm now focuses on efficiency and innovation, the attorneys are happier and the clients are satisfied. The firm becomes more profitable as a result.
Bills are paid timely. Because the agreed fee is paid up front, there is very little chasing clients for fees.
Conclusion
As can be seen, the value based system is different and for some of us, perhaps even unsettling. But, it aligns the law firm with the client. It creates profitability and greater job satisfaction. Our clients are happier.
What’s not to like?
Are you open to consider using a value based system for your firm?