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7 November, 2009  
Value billing

Does better lawyering achieve better results? ... If it doesn’t, should clients pay more for it? ... The US CJ sticks his oar in … Value billing – even more upside than time billing?

imageUS law professor Richard Abel (who is one of the world’s leading authorities on the legal profession) said:

“Lawyers do not want to quote prices to clients in advance. They detest clients who shop around.”

Sadly, some lawyers have been forced to succumb.

Many legal transactions are largely non-contentious, have predictable outcomes, don’t involve large sums of money, and don’t involve much law.

This renders the legal work involved definable and once work is definable it can be measured and quoted for in advance – and that leads to competition and fixed fee offers.

Ambitious lawyers gravitate towards work that is billed after the event.

The lawyer can better ascertain the depth of the client’s pocket and how much force feeding (of “legal work”) the client can be made to endure.

The most common “after the event” fee calculation device is hourly billing.

It takes no account of the value of the work to the client. The client must pay even if no value is received, unless there is a “no win no fee” deal in existence.

As Queensland District Court Judge Gill said in 2001:

“Given the nature of what solicitors do, they will sometimes be in a position where their efforts on behalf of their clients are unavailing or essentially unproductive. That does not mean they were negligent, and does not mean that the client is entitled not to pay for them.”

Lawyers discovered hourly billing almost by accident.

Law firms decided to measure how much work their lawyers were doing. Hourly billing was to be a way to monitor lawyers within the firm, leading to increases in productivity as the “dead wood” lawyers were identified by their timesheets.

But law firms quickly discovered that they effectively could turn the timesheets into invoices and forget about improving productivity.

As long as the dead wood wrote figures in their timesheets, all was well, and overall profitability skyrocketed.

The American Bar Journal said in December 1991 (“The future of the practice”):

“In the 50s or 60s during some time and motion studies somebody noticed that if you kept track of your time you ended up billing more and people still paid. Suddenly firms started billing just by the hour.”

As the NSW Legal Fees Review Panel said in December 2005:

“Time recording is now used to price legal services, even though it was originally intended to cost them, i.e. to allow the firm to track and measure its inputs into providing its services to clients. The costing mechanism has now effectively become the product.”

In 2005 US lawyer Robert Pack wrote The Tyranny of the Billable Hour.

imageThis article mentions that “the billable hour standard has been especially bad for the legal profession” and depicts the time billing concept as a bit of a prison for lawyers.

The accompanying picture, however, could suggest that they could bend the bars to escape, were it not for the dollar sign holding them in place.

And who is it behind those bars? The partners, or the employee lawyers?

Robert Pack’s article noted that:

“Prior to the 1950s the profession managed to function by relying on other arrangements such as fee schedules set by bar associations, fixed fees, contingencies, services rendered, and value of a lawyer’s work to the client. Then the emphasis shifted to the billable hour.”

A commonly suggested alternative to hourly billing is a regime of “value billing” where legal fees are calculated according to the results obtained for the client.

imageBroadly speaking, this is what used to occur before hourly billing.

Steve Mark, the NSW Legal Services Commissioner (pic), said in 2004:

“Before lawyers began worshipping at the altar of the billable hour, they charged under a system by which they examined the matter’s commercial value and value of the matter to the client. This business model, which has seen a revival in the United States and parts of Europe, is commonly referred to as ‘value billing’.”

The way value billing worked back then was explained by US Professor Carl Bogus of Indiana University in 1994. See Into the briar patch again.

In the good old days of value billing, client bills just said, “To services rendered” with a figure beside that, preferably in guineas.

Using heavy quality paper for the bill also helped, as did a complete absence of evidence that the initial figure had been dumped and replaced by another one.

Nowadays, clients demand more information.

How can lawyers explain the value they added? (Net, that is, after fees.) In litigation, can they really say that if you hire us Judge X will smile favourably on you, but if you don’t, she won’t?

In the USA, there are some “loser pays the winner’s legal fees” litigation situations, in which judges set the fees.

A District Court judge had set a $6 million time based fee, with an additional $4.5m “enhancement” as a reward for the …

“higher degree of skill, commitment, dedication and professionalism to this litigation than the court has seen displayed by the attorneys in any other case.”

imageThe case has gone to the US Supreme Court and during legal argument Chief Justice John Roberts Jr (seen here) even challenged the premise behind fee enhancements – that better lawyering can achieve better results.

“The results that are obtained are presumably the results that are dictated or commanded or required under the law … It’s not like, well, you had a really good attorney, so I’m going to say the law means this … but if you had a bad lawyer, I would say the law says this.”

But, value billing has an ace up its sleeve.

Whereas in the old days it generated lower fees than hourly billing, it may be possible to make value billing “outperform” hourly billing.

In the US Gill E. Wagner, President of Honest Selling teamed up with lawyer Timothy Takacs in 1998 to write Value Billing: Its Time Has Come which says:

“The process of billing clients on the basis of time is a twentieth century phenomenon… The legal community, at first reluctant, soon realized that the billable hour was their friend. Initially designed to reduce legal costs, time-billing quickly became a tool for increasing law firm revenue… Notwithstanding time-billing’s financial bonanza, value-billing can do even better… Time-billing is constrained by … well, time. People can only work a given number of hours in a year, and firms can only charge clients so much per hour before the rate becomes prohibitive. As a result, law firms effectively place a cap on how much revenue they can generate.”

Hourly billing as too much of a constraint on fees. Who would have thunk it?

Once new style value billing is performing better than hourly billing whatever will be next?

Fee calculating machines operated by lawyers? (Note the “colossal bonus” feature.)


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