Moving to Non Time Based Legal Fees: In House Counsel-an integral part of the solution

Rhino-Charging-e1358064915990.jpg

This article was first published in the December 2012 edition of The Australian Corporate Lawyer, the quarterly publication of the Australian Corporate Lawyers Association (ACLA) and is reproduced with kind permission from ACLA.

With the days of time billing inevitably drawing to a close John Chisholm urges lawyers and clients to embrace the change and work together to develop alternative fee arrangements.

OK, let’s get it all out on the table right from the outset.

Firstly, I don’t believe law firms should charge you by the time it takes them to work on a matter for you and I don’t believe you should purchase your legal services this way.

Secondly, I think you are not only doing yourselves a disservice by purchasing legal services this way, you are also doing a disservice to your external law firms.

Thirdly, if you do buy by time, don’t ever complain about the uncertainty of legal fees or surprises when receiving a bill for legal services–you are partly to blame.

Fourthly, you can do something about it.

Value pricingAs we know, the traditional law firm business model, at least since the 1970s/1980s in Australia, largely operates by leveraging people and hours. For most lawyers and indeed their clients this model has worked, but increasingly its shortcomings are being exposed. It is now widely acknowledged as a sub-optimal way to operate any business, especially a legal practice where the service primarily being sold is not time, but access to intellectual and social capital (i.e it's lawyers). The “we sell time” mentality that evolved from the introduction of timesheets which were intended originally as a management tool only (however misguided), but quickly morphed into a billing tool, is now under attack from many quarters.

For this article I am unable to set out all the shortcomings of the time based pricing model – you know them even better than I do– but there are thousands of articles, papers, blogs and surveys on the topic.[1] ACLA/CLANZ recently released it's own survey of in-house legal departments which revealed that although most GCs surveyed are happy with the legal advice they receive from their respective external law firms, those same firms’ methods of billing sometimes leave much to be desired and only 4% of those surveyed endorsed billable hours as the optimum approach to billing.[2]

Notwithstanding this widespread condemnation, the pace of change within the profession has been slow and billable hours are still the most common form of law firm charging.

There are a myriad of reasons for the slowness of change, and many clients say they put up with the status quo as they are not being offered any serious alternatives.[3] I can assure you there are an increasing number of firms out there who do offer alternative pricing models that they and their clients are very happy with.[4] I have worked with many firms over the years who have made the move away from time-based charging to agreeing their fees up front, and they and their clients have derived enormous mutual benefits from the move – in addition to certainty of price and “no bill shock” aspects. These other benefits include:

  • a better working relationship between lawyer and client,
  • better communication with their lawyers (not worried about being charged every time they pick up the phone to speak to their lawyer),
  • greater piece of mind about fees,
  • more team work and collaboration within the firm, and
  • the firm and their lawyers being more creative to find solutions.

As Danny Ertel of Vantage Partners says, “when firm partners and their clients set out to problem-solve, rather than posture about the size of the (fee) discount, they actually come up with some fairly clever arrangements”.[5] That is certainly my experience.

I well understand, especially in today’s economy, we are all under some cost and performance pressures and therefore the price paid for a particular service has got to represent ‘value for money’ from a buyers perspective. And, whilst we might all say we want to buy something for the cheapest possible price that is not often the case. You seek out your law firms on value -not price-and value in its most simplistic term is represented as follows:

Value  =  Benefits 

                     $

The more benefits you receive compared to the price you pay, the more value you perceive you are getting. If the price paid exceeds or is close to the benefits, then you will perceive you have received little or no benefit. If I were a law firm and I wanted to provide increased value to my clients I can either reduce my price or increase the benefits I provide. I know what I would prefer to do and I think I know what you as in-house counsel would prefer to pay for.

I believe clients – especially in-house counsel – can do a lot to assist their external firms in the transition away from time-based billing. To do that I think it might be helpful if we looked at the main objection law firms often raise when asked to agree a fee in advance (no not an estimate, range or quote – a dinky di fixed fee). A typical response might be along the lines of...“I cannot agree a fee up front as I don’t know what is going to happen in this matter – I don’t have a crystal ball”... And that is true, no law firm is going to know exactly what will happen on a file (notwithstanding they might have experienced a similar file hundreds of times before and would have a fair idea of what is involved).

So why does that matter? Well it matters because what the law firm is really saying is “...I don’t know how long this is going to take me exactly and as I charge you by time (every six minutes) I cannot (will not) give you a price until I have incurred the time. To do otherwise would be unfair to you (and me).” And, if you dig a little deeper, what the lawyer means is “time is a cost to me”.

But here is the rub. Time is not an actual cost to a law firm in the same sense as rent, wages, printing, etc, is an expense. Nearly all of the costs in every law firm are fixed and can be predicted, and believe me law firms are painstakingly accurate when it comes to their expense forecasts. A firm’s actual costs/expenses do not vary depending on the amount of time a lawyer spends on your matter. Very few firms pay their employed lawyers by time so all the firm is simply doing is making a record of time and then arbitrarily allocating a dollar value to each six-minute unit of that time. There is no accounting or economic justification whatsoever to support time being classified as a cost so don’t let your law firm tell you otherwise. At best, the only cost that comes into play might be an opportunity cost i.e. instead of doing work on your file a firm could be working on another client’s file.

I say to the law firms I work with that they should stop being fixated on their inputs (their time) and focus much more on the outputs (the value) they create for their clients.

So here lies another rub. Just as law firms have got to stop focussing on inputs (time) so do you as clients. The only “time” you should be concerned about is turnaround time, so you need to get over calling for and examining firms timesheets or even worrying about how much profit a law firm makes from you. You should be focussing on the value – or otherwise – your law firm is providing to you and rewarding, not penalising, your law firms for quicker turnaround time.

So where could you start and what non time-based fee arrangements work best? There are a multitude of fee arrangements out there.[6] As you may know, I am a strong proponent of value-based fees, which essentially are fees agreed up front between a law firm and client for a specified scope of work based on the value of the work to the client. It is based on the client’s perception of value and if the client believes they have received value they have (and of course the reverse is also true).[7]

So how does a client and their law firm arrive at the right price?

There is never a right price – never has been and never will be. As value is both subjective and contextual what you might pay for some legal service will be different to what a colleague might pay. Indeed what you see as a benefit might be someone else’s burden.[8]

I do not believe there is any short cut way of doing this other than to have a conversation with your lawyer about what you value and about fees.

This conversation will obviously differ, dependant upon circumstances and especially the relationship you have with your lawyer. In addition to scoping the actual matter, some of the more common questions lawyers will often want to ask before agreeing on a price are:

  • How important is the mather to you and why?
  • What are your priorities?
  • What is the expected turnaround time for the matter or what are some milestones?
  • What do you think is necessary (what is your perception of the scope)?
  • How informed and how often do you want communication? (all developments or only significant developments)?
  • What do you expect from us?
  • Who do you want working on your matter? Do you care?
  • How do you want us to prioritise your work? Is all your work the same priority?
  • What would a successful resolution of this look like to you?
  • What value adds do you find most effective, what could we tailor specifically to you to make your life easier?
  • What information do you need to provide to those you report to?
  • What is my budget for this?

As a client your obligation to your lawyer should be to provide as much information as you can to enable your lawyer to scope the work for a given price and to understand what is and what is not important to you.

Does it mean you agree on a price in a vacuum? No, of course not. In deciding whether you are receiving value or not, you will take into account a range of things, not the least of which might be what you have paid in the past for a similar service, what the “market price” is, etc. If your law firm is good enough to be able to give you an estimate or a range of fees up front they ought be able to give you a fixed price for a defined scope of work. Some clients even happily pay a premium for a fixed price over the uncertainty of hourly rates.

Although most law firms are now more aware of alternative fee arrangements and some even employ professional pricers, many are still learning the ropes when it comes to agreeing fees up front and properly scoping a matter, but if you work together with your firm and take small steps the rewards for both of you will be significant. Of course, mistakes will be made along the way (they are now using time-based billing), but both of you can learn from any mistakes.[9]

Like anything, the more you practice the better you will become and I think you may be pleasantly surprised at your law firm’s response if you ask them to work with you on a fixed fee basis. If you do that but your external firms are still not willing to give you certainty of price, I suggest you then look to the increasing number of other law firms who will.

 

John Chisholm

 

Footnotes:

  1. There are many articles listing the deficiencies of the time-based costing model, but for a recent summary an article I wrote for Lawyers Weekly in August 2012 titled “Firm Of the Future or stuck in the past?” may suffice. My website lists several more articles by other authors & commentators on the same topic. www.chisconsult.com
  2. ACLA/CLANZ In-house Counsel Report: Benchmarks & Leading Practices 2012
  3. See article by Chris Merritt published in The Australian 19 October 2012 titled “Corporates rail against time charging”
  4. Chris Merritt in an article in The Australian, 19 October 2012, titled “Fixed fees gives Advent Balance the inside track” lists some Australian law firms who genuinely provide fixed fees, but there are several more including those that only provide non time- based fees to selected clients or within selected areas of their practice
  5. Fee negotiations part 4: Getting creative with alternative fees - Blog Post, 14th February, 2012 @ www.dannyertel.com
  6. Non time-based fees (sometimes termed “alternative fee arrangements”) might include such models as: fixed fees, phased fees, event based, milestone fees, retainer agreements, timeline fees). I do not include fee models such as capped fees, blended rates, discounted rates and the like - all of which are still based on time in one form or another.
  7. For a more detailed understanding of value-based fees any of the books written by Ronald J. Baker - the doyen of value-based pricing in professional services - on the topic are excellent especially his latest book “Implementing Value Pricing: A radical business model for professional firms” (2011 Wiley)
  8. Richard Burcher of Validatum in his blogpost of 13 July 2012 titled “Value Pricing: capital acts between consenting adults” has an excellent summary of what might constitute a “fair” price between a client and lawyer.
  9. Most of the firms I work with never have a fee dispute with their clients not only because they agree their fees up front but because they also provide a Service Guarantee to their clients along the lines of “notwithstanding our agreement on fees if for any reason you believe we have not provided value to you simply pay us what you think we are worth”. How many of your law firms do this?"