f/k/a . . . the archives

September 11, 2007

finally: NLJ on the realities of alternative billing

Filed under: lawyer news or ethics — David Giacalone @ 1:42 pm

It’s great to finally see some straighttalk today in the legal press about alternative billing. In the blawgiverse, you will search in vain (except here at f/k/a, and an occasional word from Carolyn Elefant) for any acknowledgment by those who sell legal services, or their consultants, that alternatives to hourly billing come loaded with their own difficulties and anti-client incentives. So, I urge both sellers and buyers of legal services to read “Firms Learn to Cope With Alternative Billing Plans: Clients see corner-cutting, slowdowns” (The National Law Journal/Law.com, by Leigh Jones, September 11, 2007).

The NLJ article begins: “As more corporate clients are getting the alternative billing arrangements they want, they are claiming some pushback from law firms trying to make the best of the new deals.”

“A mix of sky-high billing rates, ballooning associate salaries and pressure from company executives has heightened corporate counsel’s demand for different ways to pay their outside law firms.

“And while they report that more of those firms are answering the call, in-house lawyers say that these new payment methods create their own sets of challenges in dealing with outside counsel.”

. . . “The arrangements include fixed fees, contingency/results-based fees, retrospective-based compensation, blended rate deals, discounts and more.”

Hourly billing indeed has incentives that cut against lawyer efficiency, but “But alternative arrangements take longer to devise, say lawyers from both camps, and they are far from foolproof.” (The foremost problem — how to get people on a fixed fee to work hard enough — is an obvious issue far too often concealed by the lynch mob that is trying to kill the billable hour and ignored by the customer looking for other options.) Here are some of the important points made in the article (emphases added):

  • “One of the primary problems in-house counsel say they encounter is a slowdown in work performed under a fixed-fee arrangement. “There is a grave concern that outside counsel will take their eye off the ball,” said Steven Lauer, general counsel for Global Compliance Services Inc., a provider of corporate compliance services and products.

“If the parties miscalculate how long they expected a matter to take, and if they do not make contingency plans for extensions, law firms may be tempted to start pulling lawyers off the file. “Once they blow through the fixed number, there’s less work [completed],” [James] Potter [general counsel of Del Monte Corp.] said.”

  • “Arrangements that are some derivation of hourly billing, whether it is a discount or a “rate tiered to volume,” are the easiest to negotiate, he said. The further the attorneys get from the traditional form of payment, the greater the unknowns become.”
  • “Particularly irksome for Potter, at Del Monte, is the bait and switch that he says starts at the proposal stage.” Many law firms in recent years have improved the pitch to win bids from in-house counsel. The problem, he said, is in the delivery of services. He sees a mismatch between the assurances made by the team that sells the deal and the resources available to actually do the work. He attributes the disconnect, in part, to poor internal structures at firms.
  • Bonuses tied to outcomes are also problematic, [Potter] said. At the conclusion of a matter, in-house counsel may consider the result merely adequate, while outside counsel may view the outcome as extraordinarily positive — and seek additional compensation for it accordingly. [Editor's Note: As Rees Morrison recently advised: "[D]on’t promise a bonus for the inevitable; reward outcomes that on the probabilities known at the start are exceptional.”]
  • If difficulties do arise, they usually are an indication of a larger problem between in-house counsel and the law firm it hires, said Andrew Shipley, assistant general counsel of Northrop Grumman Corp. . . . The defense contractor giant utilizes a variety of alternative billing methods, depending on the matter, but central to any arrangement, Shipley said, is the quality and efficiency of the lawyers and their written product.
    • For lawyers inexperienced at creating alternative arrangements, there is a learning curve, . . . although legal departments are calling for more billing options, they, too, are often inexperienced in negotiating the arrangements. . . . Because alternative methods may be new territory for both groups of lawyers, drawing up solid agreements can be time-consuming. . . . During those meetings [to draw up alternative fee contracts], one group should try viewing the situation from the other’s vantage point to help align interests.
  • Very often, in-house and outside attorneys don’t mean the same thing when they use the same words,” he said. The word “productivity,” from the law firm’s perspective, means the hours associates can bill a matter. To in-house lawyers, it means “efficiency,” he said.

Rees Morrison [of the Law Department Management weblog], told NLJ that “Lawyers can avoid most alternative billing headaches through careful planning . . . Well-crafted agreements need to have buffers in place if matters get sticky.” I hope buyers of legal services will be vigilant when setting up arrangements for treating unexpected (or expected but nonetheless surprisingly resource-needy) problems that arise during a matter. You especially need to be wary of law firms that will try to exploit such events.

Value Billing is Not Always a Great Value: On April 21, 2005, in our posts ron baker: sensitive guy? and ron baker & price sensitivity, we tried to help the buyer of legal or other professional services understand some of the traps that underlie concepts like alternative billing or value billing, as they consider pricing methods other than hourly billing. (and see “still sensitive over value billing” May 6, 2005) We focused on Ron Baker, because he is repeatedly said by alternative billing cheerleaders at law firms to be the great theorist, practitioner and teacher of value billing and similar concepts. In his writing, however, Baker consistently makes the point — listen up clients! — that the goal of escaping the billable hour is to increase profits and charge super-premium prices, by getting the client to agree on price when the client is least sensitive to increases and the professional has the most leverage.

Thus, in the article, “Change Orders: What a Concept!” Baker tells his audience: (emphasis in original)

The moral: Always set your price when you possess the leverage.”

Baker then suggests ways in which the client can be maneuvered so that “a premium price” can be charged. He stresses, as do I:

“A favorite way to make the client insensitive to premium fees is the use of Change Orders when services are needed beyond those covered in the initial fixed-price arrangement [no kiddies, pricing can’t really all be done up front].”

In a subsection titled “Change Orders Indicate a Climb up the Value Curve,” Ron gleefully points out that: “One of the greatest advantages in using a change-order policy for all scope changes is that they point out value pricing opportunities.”

Baker’s parting wisdom: “change orders have ‘value pricing’ written all over them and should be priced accordingly.”

If you are not yet convinced to be wary of Change Orders and similar tactics, please read Baker’s “Change Orders and Innovative Pricing Methods,” (SmartPros, Jan 24, 2000). Here’s how our prior post summarized the article:

Finally, if you’d like to see some of the results Ron suggests can be had using his value pricing techniques, strategies, and psychology, see “Change Orders and Innovative Pricing Methods,” (SmartPros, Jan 24, 2000). It seems that clients, properly “leveraged,” will offer to pay two or three times as much (sometimes ten times as much) as a professional’s regular fees, and the professional can sit back and rake it in, righteously smoting the evil hourly billing system and increasing the client’s perceived value. (The shrewd professional will even give the client a discount off the 200% or 300% premium fee the client has offered to pay — earning both merits points in ethical-code heaven and the client’s trust and loyalty.)

Of course, as always, I worry about the unsophisticated consumer of legal services who does not have the information, experience or leverage to venture safely into alternative billing arrangements — especially when those who tout them the most often have the smoothest, most-soothing patter about the advantages that switching from billing by the hour can bring. The Big Boy Buyers of legal services might have a learning curve, but they have plenty of time and opportunity to travel on the curve and get it right. Most “Main Street” clients do not.

You can read much more about the issues raised when considering alternative bill methods in our recent post, “broadening the hourly-billing debate — consider yourself, your clients and your ethics” (Aug. 18, 2007), which collects links to other postings on the topic, and has lengthy excerpts from many of them.

complaint bill

for the fat green frog
crouched on the log
time is flies

……………………………….. by George Swede – from Almost Unseen

the bill collector
with shoes on steps inside
to the hearth

a nightingale singing
included in the price…
five-penny tea

river boat–
on a night of fireworks
still selling fireworks


harvest moon–
the peddler selling
eight cent sake


they even sell tea
not worth a fart!
summer trees

selling morning-glories
wet with morning dew…
a tough character

……………. by Kobayshi ISSA, translated by David G. Lanoue

11 Comments

  1. David,

    I continue to be amazed how you distort my work by selectively quoting passages, without reporting my entire approach to Value Pricing.

    We advocate up-front pricing, change orders, and a 100% money-back guarantee. Clients love it not because Ron Baker says they do, but because this is how all human beings buy things–they know the price BEFORE they buy, not during, or after.

    Yes, kiddies, up-front pricing can be done all the time. My insurance company sells me earthquake insurance, and they certainly don’t know when the next quake is going to strike, or how large their costs will be. But I get a fixed premium.

    Isn’t it amazing that they can price with so much risk but you think your fellow lawyers can’t? You don’t think lawyers aren’t subject to the laws of economics do you?

    You’re recent rant here has added absoutely nothing to the debate that hasn’t been thoroughly refuted by both Richard Reed in his 3 seminal ABA books (ever read them?), and by myself in my 5 books, as well as our Web site, which lists Trailblazer firms actually doing what you say can’t be done.

    Don’t you hate those black swans that exist when all you think that exist are white swans? The black swans refute how you believe the world works, and yet you ignore them, are not aware of them, or dismiss them. Not very scientific. Yet they bring down, like a house of cards, how you think the world works.

    If the billable hour is so great, why is everyone so unhappy with it? And why doesn’t every other business use it?

    To take your argument to the logical extreme, I should insist my airline charge me $4 per minute, that way they won’t cut corners on safety, maintenance, etc, by giving me a fixed airfare.

    This is not just nonsense, its nonsense on stilts, and goes against everything we know about economics, human behavior, and value.

    One more time (for the kiddies): hours don’t equate to value. And that is the fundamental problem with the billable hour.

    Respectfully,
    Ron Baker, Founder
    VeraSage Institute
    http://www.verasage.com

    Comment by Ron Baker — September 11, 2007 @ 6:27 pm

  2. Ron, I’m glad you wrote, because any thoughtful person can readily see that your arguments are almost too weak to even be called specious. While I quote your actual words and link to your full articles, you distort my words and ascribe notions to me that I have never stated, implied, nor believed. And, you do not disavow your prior words.

    Your airline argument raises so many Straw Men, it’s a wonder it doesn’t burst into flames. Your analogy to insurers — who have virtually unlimited amounts of experience data and openly spread risks among thousands or millions of customers — is so silly, I’d think you’d be ashamed to use it in public. It doesn’t pass the old Blush Test we learned in law school.

    I am not against alternative billing options — only against attempting to use them to extract even more money out of clients than happens under hourly billing (or with a standard contingency fee).

    You have consistently tried to sell “value billing” to service providers as a way to greatly increase fees (and even allow them to work less). That’s how you convince otherwise intelligent people to buy your books, and attract paying audience members for seminars and webinars. I’m trying to make sure that the buyers of services are not lulled into a false sense of safety by lawyers using the alternative billing mantra.

    If what you have to say is so persuasive, you should be pleased that I’m pointing to your body of work and giving you so much publicity. But, I understand why having your greed-filled quotations repeated to the wrong audience irks you.

    Money-back guarantees only work if clients have enough experience, information, and confidence, to analyze their situation and assert their rights. I’d love to hear how the guarantee jibes with your goal of extracting double and triple the hourly rate from clients.

    As I have said often before, I believe most lawyers charge too much for their services. Of course, hourly billing has built-in disincentives for efficiency, but so does every other pricing mechanism. There is, however, nothing inherently unethical about hourly billing, as long as the lawyer in good faith sets the hourly rate by using the traditional factors(such as experience, complexity, skill required, etc.), works efficiently and competently, and keeps the client well-informed. And, the ethical lawyer knows that “actual hours X rate” is the maximum that will be charged the client — with hours reduced for time used inefficiently or getting up to speed in a new field.

    This “kiddie” is not fooled by your posturing. “VeraSage” needs to work a bit on both the truth and the wisdom angles of its pitch. Prospective buyers need to know where you and your followers are coming from, before they buy into your “value” game.

    Comment by David Giacalone — September 11, 2007 @ 7:44 pm

  3. I have been following this debate and I am getting a bit confused. David, You seem to think some people need to be protected from Ron. People have free will and ability to discern and in my opinion need to be respected for that. People who buy Ron’s books do so of their own volition. He is not a hypnotist. They can decide if what he says is a fit or not, can’t they? And who are these clients who don’t have “enough experience, information, and confidence, to analyze their situation and assert their rights.” Isn’t that kind of insulting? I say let’s respect people’s ability to decide, as I said before, what is a fit and what is not. Framing this debate in terms of people who are too ignorant or unsophisticated—or who need to be protected by others— makes me uncomfortable. If you have problems with Ron’s approach, I guess I would like to hear it without the protectionist slant.

    Comment by Stephanie West Allen — September 11, 2007 @ 11:11 pm

  4. Stephanie, I guess you are confused. The entire concept of fiduciary duties, and much of the code of ethics, is based on the fact that lawyers have far more information and experience than do most clients, and therefore clients may need additional information (or protection) in order to assure they that are treated fairly and the outcome is appropriate under ethical standards.

    I’m not trying to keep anyone from considering or entering alternative fee arrangements. I merely want to make sure they are armed with sufficient information to protect themselves.

    When clients are told “try this, it is really better for you,” and “this” is likely to cost them more than the hourly-based high fees they are already complaining about, I believe they deserve to have enough information to make smart choices.

    It’s possible that you only live in a world of highly sophisticated clients, but let me assure you that some very smart, able people — not to mention some that are far less capable — do not know enough about legal issues and services to make choices about fee arrangements without more information. In addition, there are many situations where I would be among those prospective clients who could use advice from an expert. And, I surely would not be insulted if an expert looking out for the client’s rights offered to give me some pointers. What would insult me is to have lawyers and consultants try to hoodwink me into equating receiving higher value with paying higher fees.

    People can surely decide whether they agree with Ron or not, but I believe they have the right to hear my side also. They surely also have the right to buy his books — but my point is that Ron pitches the books to sellers of professional services by promising them golden treasures (at the expense of clients).

    It’s a good thing I’m not allergic to hay, because you and Ron have sent out an army of Strawmen against me, without even pointing to one thing that I have said in this post that is untrue or misleading.

    Comment by David Giacalone — September 11, 2007 @ 11:35 pm

  5. Stephanie, I guess you are confused. The entire concept of fiduciary duties, and much of the code of ethics, is based on the fact that lawyers have far more information and experience than do most clients, and therefore clients may need additional information (or protection) in order to assure they that are treated fairly and the outcome is appropriate under ethical standards.

    >>You make me smile, David. Are you saying that the lawyer has more information and experience in the exchange of money for services or goods?

    I’m not trying to keep anyone from considering or entering alternative fee arrangements. I merely want to make sure they are armed with sufficient information to protect themselves.

    >>Which is exactly what the expert Ron is doing. Clients can read his books if they don’t trust their lawyers. Have you read his books? Which one? I plan to read at least one so I have a more thorough understanding. From what I do know, value pricing seems like a much better solution for both client and lawyer. The client maintains control and I support the client being on as equal a footing as possible with the lawyer. The billable hour puts the client at a disadvantage.

    When clients are told “try this, it is really better for you,” and “this” is likely to cost them more than the hourly-based high fees they are already complaining about, I believe they deserve to have enough information to make smart choices.

    >>Where are you coming from with this suspicion that lawyers are out to cheat or dupe clients? Why would a client stay with a lawyer who was cheaing him? Who do you think should give them the information to make smart choices? How do you know it will cost more?

    It’s possible that you only live in a world of highly sophisticated clients, but let me assure you that some very smart, able people — not to mention some that are far less capable — do not know enough about legal issues and services to make choices about fee arrangements without more information. In addition, there are many situations where I would be among those prospective clients who could use advice from an expert. And, I surely would not be insulted if an expert looking out for the client’s rights offered to give me some pointers. What would insult me is to have lawyers and consultants try to hoodwink me into equating receiving higher value with paying higher fees.
    People can surely decide whether they agree with Ron or not, but I believe they have the right to hear my side also. They surely also have the right to buy his books — but my point is that Ron pitches the books to sellers of professional services by promising them golden treasures (at the expense of clients).

    >>Look at some of your implled assumptions. People need to be protected from each other. Lawyers are out to take the clients. Before you voice your side, don’t you think it would be nice to have a good grasp of the other side? Ron seems to be trying to understand what you are saying. He is a very bright and knpwledgeable man who cares about both clients and lawyers.

    It’s a good thing I’m not allergic to hay, because you and Ron have sent out an army of Strawmen against me, without even pointing to one thing that I have said in this post that is untrue or misleading.

    >>I was talking about what you seem to imply about clients needing to be protected—and from their own lawyers or prospective lawyers. That does not fit with my view of the world.

    I am not going to answer here anymore because the font is so little that I have to scrunch over to see and type in this little box. Thanks for the discussion. Always thought-provoking.

    Comment by Stephanie West Allen — September 12, 2007 @ 1:26 pm

  6. Hi, Stephanie. I’m sorry to hear our Comment box might keep you from leaving more comments here. I can’t change the size of the box, and hope you’ll try to tolerate it when you have something you really want to say. If necessary, send me an email with content for a Comment and I will post it and ascribe it to you.

    Mr. Baker is a very smart man who has completely distorted my position on value billing and hourly billing, so I don’t know just how hard he’s trying to understand it.

    Yes, I do think that clients need to be wary whenever they deal with fees and lawyers (or any other professional or service provider; don’t forget, I am a consumer and competition advocate, not a cheerleader for the legal profession). Far too many lawyers seem to believe that what the market will bear is what they will charge and the profession engages in far too little price competition, despite our being blessed with an excess of lawyers. Moreover, bar counsel basically only go after felonious or fraudulent fees, setting no useful precedent to measure excessiveness.

    Of course, there are plenty of honest lawyers, but most clients do not really have enough interaction with lawyers to gain the experience needed for firsthand confidence and trust.

    That brings up a major difference in focus perspective that I may have from you. From the beginning, this weblog has primarly focused on or worried about the average consumer of legal services — the man or woman who basically uses lawyers for house closings, divorce issues, auto accidents, and wills; or maybe the legal problems of a tiny business. They often do not have a lawyer or firm that they use regularly, or they merely go to the one their sibling, parents or friends have used. They use the Main Street lawyer — solo and small firms that constitute the vast majority of law practices in America.

    A large proportion of these clients find it extremely hard to afford legal services and they are very unlikely to buy a book about pricing professional services. Definitely, not at $40 a book. And, neither they — nor those with more disposable income — should have to do so in order to get treated fairly in entering into a fee arrangement with a lawyer.

    Again, I am not say “don’t use value billing.” [I used flat fees as part of my solo practice from the start -- but did so when I knew my very low hourly rate would probably be too high for the particular task.] Instead, I say “there are things you need to keep in mind to assure that value billing does not turn into venal bilking.”

    Comment by David Giacalone — September 13, 2007 @ 8:14 am

  7. Ladies and Gentleman,

    I am disappointed to see these types on comments on a blog by the Blogger. . . it was designed to elicit a healthy debate. David, It is SHOCKING that you really think it is somehow BAD for lawyers to make more on alternative billing than they might otherwise make billing by the hour, which is a direct quote and also self-defeating statement. You cannot say you encourage alternative billing and then say that you believe that ethically lawyers should ONLY make LESS money doing it! You actually believe that it is somehow unethical to bill a clint $5k for a $5Ok idea that took me 3O minutes to come up with? You may have a beef with Ron on the theoretical level, but we are practicing what he is preaching and I can tell you that not a SINGLE CLIENT has invoked the Satisfaction Guarantee and none of our clients would ever go to a billable hour now that a firm like ours has showed them what transparency and integrity and pricing means! Nothing personal David, but as someone who has truly done my homework on this issue and actually walked the walk, I can tell you that value pricing is MORE fair to the client NO MATTER HOW sophisticated or unsophisticated the matter. It is interesting that your platform is to be “protective” of clients by defending the “bend-over-and-get-screwed” by the hour model above a model that has proven to hurt nobody! Thousands of clients get screwed by hourly billing and it is simply amazing that anyone can come to a credible defense of it on an ethics basis relative to complete financial transparency!

    Comment by Chrisopher Marston, Esq — September 16, 2007 @ 8:56 pm

  8. When I first read this, Mr. Marston, I thought it was meant to be satire — showing the rapacity or simplistic thinking of some who tout value billing. Sadly, though, I guess you are serious.

    You seem to think the lawyer is some kind of partner with the client in a business venture, supplying intellectual capital (with, of course, no risk of sharing in any of the enterprise’s losses), and somehow capable of measuring the value-added to the client’s enterprise. Thus, the lawyer deserves a share of the profits attributable to his input, under your theory, in exchange for legal services. I wonder if the computer or telephonic technician (or plumber) who solves a problem that could have shut down an office or business for a day or week should get a share of the profits saved by quickly solving the problem, rather than being paid a handsome hourly fee for applying his skills and expertise to avert or reverse a disaster. [The telephone technician and plumber owe no fiduciary or professional duties to the client, as the lawyer does, so I wonder why he doesn't simply refuse to fix the problem until the customer capitulates under the leverage created by the disaster?]

    I would like every client who would like alternatives to hourly billing AND also wants to pay higher fees to please raise his or her or its hand. Would those faced with an “unexpected” need for a Change Order, who would gladly pay the lawyer two, three or ten times a reasonable hourly fee for the extra services (depending on how much “leverage” the lawyer has in the situation) also raise their hands.

    Lawyer Marston, you seem to ignore the extensive criteria I put on what constitutes a fair and ethical use of an hourly fee, while ignoring ethical limits on the reasonableness of a “value-based” fee. Take off the blinders and maybe we can have a useful conversation.

    p.s. When you say “complete financial transparency”, do you include telling the client how much resources (in man hours) you believe a project will take or has taken?

    Comment by David Giacalone — September 17, 2007 @ 8:19 am

  9. [...] Billing by the hour has been the traditional way that lawyers (and other professionals) billed their time, but recently the billable hour has come under attack. David Giacalone at the f/k/a blog points out that some suggested alternatives to the billable hour may make clients and lawyers alike worse off.  (Late addition:  see the related article on the realities of alternative billing.) [...]

    Comment by Blawg Review # 126 » Small Business Trends — September 18, 2007 @ 7:23 am

  10. Hi David,

    Wow, I expected more from someone who claims to be professional. You use insults to hide your ignorance, and have far less expertise in pricing and economic theory than those you “argue” with, my fried. first, an attorney your father’s age would know that for CENTURIES our industry has been using fixed and VALUE-based fees (it was only in the late 5O’s that billing by the hour started}. If you were not so ignorant you would realize that many practice areas of our profession STILL use value-based fees, such as criminal law and some estate planning. If you you were not so ignorant, you would listen, not talk over, those who have more experience than you in alternative pricing models so that your readers can make educated decisions instead of hearing you insult dissenters from your pedestal. If you had a clue that an entire law practice is already operating profitably under a value-pricing model with HAPPY clients that WILL pay more for MORE VALUE (rather than more time}, then you might think before you speak. To those of you professionals who read this blog, it is Mr. David Giacalone’s degrading treatment of myself and the other commenters and thus the readers of this blog that causes the next generation of professionals to leave the profession or start something new. EVERYONE deserves respect, Mr. Giacalone. EVERYONE!

    If you want educated readers and educated discussion, don’t be an ASSHOLE to the professionals like Ron and I who dedicated hours each week of our professional time (free} to educate, share, learn, and explore with bloggers like you. Your responses to our comments speak volumes about your character and integrity. Clearly, you want a political platform more than forum for intelligent dialog. David. . . you will die long before I will, and I guarantee you that the profession will look a lot more like the one we are describing than you can imagine in your limited universe. I truly feel sad for you sir. . . and I will not waste my intellectual capital contributing to the page of a blogger who treats people like shit.

    Regretfully,

    Christopher Marston, Esq.

    [Belated Editor's Note (July 8, 2008): I just re-read this nasty little comment from you and then re-read my responses to yourself and Ron Baker, and it seems that you and Ron are doing all the significant insulting (especially you). Of course, if pointing out where you seem to be wrong or misleading, making points that you have no good faith response to, and caring more for the interests of the client than the lawyer, is insulting, then I guess I plead guilty. Meanwhile, I suggest that readers take a look at your humble little bio at Versage Institute.]

    Comment by Chrisopher Marston, Esq — September 19, 2007 @ 9:03 pm

  11. [...] that all writers favor flat fees or find them without their own faults. f/f/a… published finally: NLJ on the realities of alternative billing and yourself, your clients and your ethics. New York Divorce Report notes some problems with flat [...]

    Comment by Divorce Help Network » Flat fees and Divorce — January 5, 2008 @ 8:53 am

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