f/k/a . . . the archives

January 31, 2004

Valuable Debate on the Ethics of Value Billing

Filed under: pre-06-2006 — David Giacalone @ 3:03 pm

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Our post Wednesday about ethical issues raised by “value billing,” has achieved its purpose — starting a spirited debate.   See the thread here, with a valuable contribution from our thoughtful reader “Dave,” and the responsive posting by Matt Homann yesterday, who started it all over at the [non]billable hour within his praise for value billing.

 

Because “Dave” raises arguments that I believe represent the views of many lawyers (especially those who are very active in the use of technology to serve their clients and who believe in good faith that they are best serving their clients), I’m going to quote his Comment and my response here on the Front Page (emphases added):


Dave:   David, I respectfully disagree with your analysis of “value billing” (or flat-rate billing, or whatever you want to call it). First, your analysis assumes that the billable hour should be the base for any comparison (i.e., value billing is fair only if the charge is less than the comparable billable hour). This assumes that the billable hour is a fair method in the first place.

Lawyers are not only charging for their time, they are also charging to reimburse them for undertaking a certain amount of risk and to obtain the value of their expertise. Say that I have studied LLCs exhaustively and, due to technological efficiencies, I can set up an LLC for a client in less than an hour. What should I charge for that service? In other words, what has the client obtained from me and how should I be compensated? The client not only received 45 minutes of my time–he or she also reaped the rewards of many hours of research and preparation that enabled me to prepare an LLC in such a short amount of time. If my hourly billing rate is $200, should I charge the client $150 for my service? That amount seems to undervalue what the client received–a legal entity that I have basically warranted will be upheld if challenged at a later time. How is that only worth $150?

%key  On another note, consider percentage billing. Many financial advisors charge their fees as a percentage of the total assets under management. Why not charge estate planning clients or transactional clients the same way? This brings a dose of reality to the situation. After all, the monetary value of an estate plan to a client with $100 million in the bank is much different than the monetary value of an estate plan to a client with $100,000 in the bank. The lawyer’s risk is greater as well. Why shouldn’t the fee reflect this difference? The same goes for a business transaction. Why shouldn’t the lawyer’s fee be a percentage of the deal?

These types of fees give certainty to clients–something which they cannot get in billable hours scenarios. The client knows in advance that it will cost, say $1500 for an LLC or 0.5 percent of the client’s total assets to obtain the value of your services.


“firecrackerG”


Editor:  Dave, Thanks for giving us your perspective. This topic is clearly going to call for a lot more thinking and writing by me. Here are some quick reactions to your points, which are also offered with respect and an open mind:


The “reality” is that technological advances and efficiencies are expected — in our economy and in basic economic theory — to bring prices down. So is an oversupply of service providers. Your approach seems to be stripping the client of both normal market benefits and fiduciary protection.

An attorney’s hourly rate is expected to take into account the attorney’s expertise and investment in human and machine capital. The attorney states his or her hourly fee, explains it if the client wonders why it is so high, and then (after some negotiation, perhaps) either enters into an agreement with the client or doesn’t.

Your estate planning example seems to me to show the perils in your approach from the clients’ perspective:


Talking about the attorney’s risk but then not trying to measure the risk when setting a fee seems a sure way to overcharge. The attorney may have more risk when dealing with a $100,000,000 estate plan than with a $100,000 estate plan, but it is surely not one thousand times more risk.

Also, the attorney would certainly spend far more hours working on the $100 million dollar estate than the $100,000 bank account, when setting up an estate plan. Those extra hours — multiplied by an hourly fee that represents the attorney’s expertise and efficiency — compensate for the “extra” value added by the attorney.


plungeGraphG  As with contingency fees, percentage billing is only fair to clients if the client is fully informed about just what the lawyer is bringing to the table to “earn” the percentage. It’s bad enough that personal injury lawyers basically demand to be made a partner in every client’s injury claim. To force this upon ever-more types of clients, without fully informing the client, seems to me to be putting the lawyer’s financial interests far above the clients’ interests.

The LLC example is also worrisome to me. If $150 seems too small a return for your time, perhaps you need to adjust your hourly rate to reflect your perceived self-evaluation. That allows the client to determine your value in a manner that the client can grasp and deal with. As a fiduciary, you need to let the client know just how much time you’ll be spending — explain to the client why less than an hour of work is “worth” $1500.  

Justifying a percentage fee or a flat fee by saying “the client has certainty” can often be simply a rationalization — so does a life-without-parole sentence, rather than 25-to-life. It begs the question as to whether the amount is reasonable in the circumstances. What would the likely range in fees be, if billed by the hour, for your hypothetical LLC client? One hour (likely) to maybe three hours (if there are unseen complications)? Even at $300 per hour, the fee would certainly be far below the $1500 “certain” fee. Trying to make certainty sound like a wonderful value or bargain for the client seems like lawyer-speak to me — and probably would to most clients.

pointerDudeSm  A good rule of thumb for a fiduciary (or any service-provider): if you’re embarrassed to tell your client/customer how little you have to do to accomplish the task, when compared to the fee, your fee is too high.  That’s why many informed consumers have rebelled against the customary real estate agent percentage when selling a home.  It’s also why a lot of probate courts have questioned or put a dollar limit on probate fees based on the overall value of the estate. 


Two final points: As discussed in this post, the special privileges that come with our professional license presume:



1)That since clients cannot adequately evaluate the quality of the service, they must trust those they consult; and 2) That the client’s trust presupposes that the practitioner’s self-interest is overbalanced by devotion to serving both the client’s interest and the public good.


As agent of reality, and consumer advocate, I must often tell my colleagues two things they don’t want to hear:


  • (1) in general, attorney services are worth a whole lot less (add a lot less value) now that consumers can read and write and technology makes it possible to provide legal services far more quickly and efficiently (or through self-help); and
  • (2) there are over one million attorneys in the USA and they are all looking to make a buck.

These factors can’t be avoided by coming up with new ways to “sell” and “price” the product or to push back market forces and the tide of history.



Techno Glitch Note re Comments:  For some reason, Comments to this post are not registering on the Comment meter below, although they are appearing on, and can be reached through, our Discussion Page listings.   For example, Dave has left an interesting reply that can be reached through this thread.

2 Comments

  1. David (yes I’m back)–I think that value billing is as problematical as time billing. Let me give some examples:
    1. I have spent a good deal of time putting various forms in HotDoc templates. It seems to me that my time in creating these templates is best viewed as invested capital that I deserve a return on when I make a “sale.”

    2. The problem with saying that time is time is time is that when I perform a service using my HD templates I justifiably deserve compensation not only for my time spent in using the template, but also compensation representing a return on my invested capital. (BTW, since all legal forms have a limited useful life, this return is not only interest, but some form of amortization of the “principal” cost. And I don’t see why I can’t demand a profit. Certainly, if I created a work of artistic merit that I could copyright I would be entitled to charge for the product each time I “sold” it.)

    3. On the other hand, what is a “reasonable return?” My guess is that a reasonable price on a flat fee project is much easier for the client to gauge than hourly billing. After all, to some extent the lawyer is taking a downside risk that the job will not become an excessive time drain. Because the price is fixed, the client can weigh whether going forward makes sense in the context of his or her risk/reward calculus.

    If I could, I would flat bill everything. (One of the problems with flat billing is that the clients pick up on it fairly quickly and take advantage of the situation, chewing up time since there is no marginal cost.) However, certain things cannot be flat billed. What does it cost to do an LLC operating agreement for instance. Well, a single member LLC operating agreement is simple. After that, the cost is somewhat open-ended since the bells and whistles that clients want/demand are almost unlimited.

    In any event, just some thoughts.

    Comment by Stuart Levine — January 31, 2004 @ 10:34 pm

  2. David,

    Thank you for the thoughtful response. However, I think that your response still assumes that the billable hour is a fair method of charging a client for a lawyer’s services. I think the debate might really hinge on the following question: What is a lawyer’s product?

    If your answer is “time,” then I would be forced to agree that the billable hour is the fairest (and possibly the only fair) way of determining an attorney’s compensation.

    But what if the answer is “advice” or “consultation” or “a will” or “a home sale”? Why is the billable hour the fairest method of determining the value of those products? Why can’t I charge a client $1500 for an LLC and see if the market will bear that price? If I charge all of my clients $1500 for an LLC, how is that price discrimination?

    I look forward to hearing your thoughts on this issue.

    Cheers, Dave

    Comment by Dave — February 2, 2004 @ 2:23 pm

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