I have written in the past about the corrupting influences of the hourly billing system that is predominant in the law firm world, and in support of flat fees and other alternative billing arrangements. Yesterday I happened to read an interesting article by Patrick Lamb – the founder of the Valorem Law Group – on the issue of flat fees and value billing. In the piece, Lamb takes to task those lawyers whose idea of a flat fee arrangement is to simply estimate the number of hours thata matters will require, and multiply the hourse by the standard hourly rate thereby, voila, coming up with the flat fee. As Lamb trenchantly illustrates, such arrangements may be good business for the lawyer, but they are NOT value based billing:
The hours-based fixed fee is simply hourly billing presented in different clothing. An in-house lawyer who rejected a proposed fixed fee calculated in this manner, only to hear the firm say “the client didn’t want alternative fees,” told me “I’d have to be the worst businessman on the planet to accept that deal.” He explained that under an hourly arrangement, if the matter resolved early by motion or settlement, he only paid the fees incurred. Under the firm’s proposal, if the matter resolved early by motion or settlement, he still had to pay the full fee. There was never a point at which the client “won.” The space between the red line and the orange line represents risk previously borne by the firm that, under this fee model, is transferred to the client. Clients are too smart to do that.
In most instances, clients are turning to non-hourly billing to achieve predictability and lower total cost. If a firm is at all responsive to its client’s needs, the normal measurements are immediately out of whack. A fee that is lower than that expected under an hourly rate engagement will create a lower realization number. Realization is, of course, the percentage of revenue collected of the total billable number (total hours x standard hourly rates). Everyone with experience in law firm finance knows that a lower realization number is not a positive.
By all means read the whole thing. Anything that Patrick Lamb has to say on the issue of value billing – or law practice management generally – is always worth a read,