Charge for Value not Time: Why Alternative Fee Arrangements Make Sense
Insight Michael Moradzadeh · July 18, 2011
A business is defined by what it sells. A fairly obvious proposition, one would think. Well, then, what is it that law firms sell? The obvious answer should be solutions to legal problems. But, too many law firms are not in the business of selling those services, they are oddly in the business of selling hours.
There is so often a gross disconnect between client and lawyer when it comes to the simple issue of fixing fees. The client, after spending some time with a lawyer explaining a legal problem or a matter in which counsel’s advice and assistance is sought, will then invariably inquire “how much will your fees be for this matter.” The lawyer’s response is too often very much along the lines of “my hourly rates are $X, my partner’s are $Y and my associate’s rate is $Z. If this colloquy occurred in a courtroom, the opposing lawyer would rise and say “Object! Move to strike as non-responsive.” The judge would then intone “sustained.”
The responding lawyer might as well have quoted his law firm’s rental expense, insurance premiums and IT costs. Interesting, perhaps, but not responsive.
Lawyer’s clients are not interested in buying hours. They are interested in buying solutions. Clients, like airline passengers, are not necessarily interested in the route to be followed to get to a destination; they only want to know how much the passage will cost and approximately how long the voyage will take. Law firm clients, again, like airline passengers, are somehow indifferent to the fact that the airline may have incurred unanticipated costs because the voyage took longer because of weather or mechanical factors. Lawyers to often seem to believe that they are defined by their “hourly rates.” Lawyers seem to believe that they can take the collective intelligence, experience, judgment, training, wisdom and knowledge of the lawyers within the firm, stirred them in a blender and commoditized them into a one-dimensional hourly rate. But, as I said at the outset, this is not relevant, not responsive and a matter of indifference to clients. Clients are looking for solutions. Clients believe that solutions to legal problems have value and are prepared to pay fair value for these solutions. Accordingly, it becomes self-evident that pricing by the hour is precisely the wrong measurement to use to ascertain the value created for the law firm client.
One of the main reasons professionals undervalue their services is because they are operating under the wrong theory of value. Value, like beauty, is in the eye of the beholder. What counts is what your customer is willing and able to pay for your services. The subjective theory of value explains how transactions occur in the marketplace. No client buys hours. Hourly billing too often measures the wrong things.
Lawyers also sell expectations, which clients purchase. In today’s world, it is not enough to meet the client’s expectations; a lawyer must exceed them. No two clients are alike, nor do clients necessarily want to be treated equally; they want to be treated individually and fairly.
Accordingly, it is basic precept of Rimon to have a shared understanding with our clients regarding basic principles:
- The scope of our engagement. We endeavor to carefully craft exactly what the scope of the work is that our clients expect us to perform. We also endeavor to reach a mutual understanding of tasks that may be outside the scope of a particular engagement and how such services might be priced if we are called upon to handle the out of scope work.
- Expectations. We also strive to fully comprehend what our client’s expectations for our performance are. Once we obtain that understanding, we take every opportunity to exceed those expectations. Value. In order to arrive at a fair and reasonable price for our services, we also need to gain an understanding of how our clients assess the value of the finished product we are to deliver.
- Flexible pricing. We offer a variety of billing alternatives, including fixed fees, a reduced hourly fee against which a premium fee is paid upon the successful conclusion of an engagement, contingency fee arrangements, capped fees and, yes, hourly fees where our clients feel it appropriate. We avoid any surprises by having enabling our clients to log in at any time on our extranet and see exactly what is happening with their matters. We monitor our billing budgets closely and are happy to remit bi-weekly billing summaries.
We understand that successful professional firms of today are pricing their services according to external value created—as perceived and determined by our clients —rather than internal costs incurred in generating those services. That, we believe is one of Rimon’s distinguishing characteristics.