Originally published on March 8, 2011 in our free SmallLaw newsletter. Instead of reading SmallLaw here after the fact, sign up now to receive future issues in realtime.
The notion of lawyers departing from the billable hour is the talk of the profession. You can't swing a timesheet without hitting another article on this topic. Even the world's largest and most profitable firms are seriously evaluating "alternative fee arrangements" or AFAs as some call them. For all the words being spoken and written, few have discussed the core proposition behind alternative fee arrangements — value to clients. Small firms in particular must understand this key concept before they can make the transition.
A Brief History of (Hourly) Time: Are You a Contractor or a Lawyer?
When a lawyer bills by the hour, or every six minutes to be more precise, the sole determinant is lawyer time expended to perform the task. How much time did you spend on the client's matter? Notwithstanding write-downs, hourly billing mostly ignores your productivity and whether you achieved the client's desired result. Many lawyers have hanging in their office the image of President Lincoln accompanying the quote that "A lawyer's time and advice are his stock in trade."
Some law firms use the phrase "non-rate realization." They judge lawyers on whether they realized their hourly rate. In the annual lawyer review, law firms do not consider whether lawyers created value for their clients. However, the reality is sinking in at many law firms that while lawyers do not often discuss value creation, clients are asking: "What have you done for me lately?"
Hourly billing is akin to cost plus construction, which has the effect of eliminating all risk on the contractor and shifting all risk to the property owner. If the contractor is inefficient, the property owner pays. If the contractor departs from the plans, the property owner pays. So it is with hourly billing — the lawyer's major risk is non-payment of the bill.
The client's world focuses on whether its customers receive value. Yet, when clients look at the business model of their lawyers, they see the cost plus construction model. Few businesses operate on a cost plus model — at least for long.
Four Hurdles on the Road to Alternative Fee Arrangements
A lawyer's value to a client encompasses a wide variety of factors, including the following:
1. What Was the Outcome?
Among the most important of value determinants is the outcome you achieve. The client will ask whether you obtained the result the client wanted. When the client is writing the check to pay the legal bill, the client is thinking about the outcome. In the client's world, results matter.
2. What Will It Cost?
When you charge by the hour, the client does not know how much the legal services will cost. In the client's world, businesses operate on the basis of knowing what something costs before making the decision to purchase the item or service. Yet, in the legal world, cost is an open ended matter.
Lawyers respond, of course, that no one knows how long a matter will take and, therefore, it is perfectly reasonable for the legal bill to remain uncertain. Yet, in the business world, the cost of just about everything can be measured with sufficient effort. Even lawyers can look to prior cases of a similar nature and project costs. Software can capture information to assist with this statistical analysis. If lawyers can find a way to predict in advance the cost of the legal service, lawyers can give value to the client.
3. Was It Finished on Time?
In the client's world, deadlines matter. Customers want and demand a service or a widget on time. Businesses that deliver on time succeed in the marketplace. In the legal world, the duration of a matter is often not a major consideration.
To be sure, some external deadlines exist such as docket control by judges, or closing a deal by year end for tax purposes. But for the vast majority of legal work, whether it be wills, contracts, etc., there is no specific deadline. Yet, clients judge you by whether you performed the legal service on time even in the absence of a specific deadline.
This issue concerns efficiency. If lawyers are efficient and get the legal work finished and to the client quickly, then the client judges the lawyer favorably. The perception exists, rightly or wrongly, that lawyers want to take longer to finish something because they charge by the hour.
4. How Well Do You Know Your Clients?
To state the obvious, your value is directly proportional to what you know. This knowledge is not simply about the law, but includes your knowledge about your clients. Lawyers who know their clients well are valued.
Knowledge about clients is a moving target though. Clients change. New business ideas are hatched, key employees depart, customers of clients come and go, business fortunes decline or improve, cash flow becomes constrained, etc. Lawyers who keep up with the activities of their clients become highly valued.
In-house lawyers often describe a critical source of information — the water cooler conversation. The idea is that in-house lawyers gain valuable information at the so-called water cooler. For outside counsel, the hourly billing model stands in the way of water cooler information.
When a client thinks about picking up the phone to have a conversation with the lawyer, the client thinks about the cost of the call. Often, the concern of a legal bill prevents the client from making the call. Lawyers should wonder about how many client contacts they miss on account of hourly billing.
An alternative billing arrangement removes this barrier. How much additional legal work could you obtain as a result?
I'm Out of Time but the Conversation Must Continue
Many other factors exist regarding value apart from those discussed above. Instead of thinking about how you spent your last six minutes, alternative billing focuses your mind on how you can become not just valuable but invaluable to your clients. As far as aspirations go, I can't think of a better one for small firms.
Written by William D. Elliott.
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