The Billable Hour v. Value Billing

Posted on May 18, 2011


In between college and law school, I went on a National Outdoor Leadership (NOLS) course in the Absorka Mountains of Wyoming. For one month, we backpacked from place to place as dictated by Xs on the map laid out by our instructors. Some days we followed trails, but more often than not we bushwhacked off trail in whatever way we thought best. In this pre-GPS age, map and compass skills were essential, and the failure to triangulate off mountains and know where you were at all times could lead to hours of extra hiking.

The maps we used were from the U.S. Geological Society (USGS) and you could purchase quadrants from the USGS that covered the entire United States. Because of the distance that we were to travel over the month, we had several different maps, although we only would use a couple, at most, during the day.

One day while we were hiking, our trail was going off the bottom left corner of the map. We got out the map of the area immediately to the right of the first map. There on the map immediately to the right, the trail picked backed up and looked like it would be a continuous, steady route. The issue was that the route went off the bottom of the left trail and picked back up on the bottom of the right trail. The only way to be sure where we were going was to get out all four maps in the quadrangle and lay them together. Unfortunately, the bottom two maps were deep in our packs, and we weren’t eager to dig them out. Surely, we figured, the trail was straight, and we could go smoothly along our way.

Well, of course, the route was not straight. The trail dipped down and forked. If you went straight, you missed the fork to the east which was the correct trail. Before we went too far off the intended path, we realized that we must have made a mistake. Instead of backtracking, we tried to cut back to the original trail and find our way in the swamp. After several hours of making no progress in the swamp, we finally dug deep in our packs and got out the two bottom maps. Realizing the error of our ways, we got back on the right trail and made it to camp exhausted, weary and many hours overdue.

As I reflect on the role of the business lawyer, I wonder if we could have been helped by a lawyer guide. As businesses thread their way across the business lifecycle trajectory, helpful advice from lawyers (and other professionals) is key to not getting stuck in pitfalls. The Business Lawyer’s job, in my view, is to provide advice at timely intervals. In our NOLS story, ideally, the advice would have come at the beginning. An experienced guide would have insisted on getting out a map. If we had asked our travel guide lawyer, ‘should we get out the map,’ ideally the business lawyer would have said, “Yes, you may be right, but the time spent looking in the pack is insignificant compared to the amount of time misspent if you are wrong.”

Of course, if the business lawyer had advised us of the risk, and the adventurers had decided to forge forward anyway, the lawyer’s role would change into the person to help the adventurers out of the mess.  At several points in the story, the business lawyer ideally would have stopped the nonsense, backtracked and gotten the group back on the right path.

With that role of the lawyer as background, I think it is important to discuss the compensation of the lawyer — the dreaded bill. A good deal of talk exists about the horrors of the billable hour and the manner in which the billable hour does not align the attorney with the outcome of the task.  These arguments are helpful for both attorneys and clients alike in trying to structure relationships that work.

Jay Sheppard, who writes the Gruntled Employees blog, is a huge proponent of value billing. According to Sheppard, you find the value that you actually provide and find a new way to charge for that value. In his world, for example, he works with employers and employees, so his firm may provide a fixed fee to negotiate an employment agreement.

This approach allows a client to get a firm feel for what the service is going to cost. It presumably creates a relationship where the client and the lawyer are aligned, and the client can rest easy that the lawyer is not providing unnecessary service to create hours. Presumably, the lawyer will also need to do a good job, because in this business, his or her reputation is the single most important marketing piece. (I agree with this assertion.)

I have tried value billing before as well as its cousins — the fixed monthly rate, the limited scope engagement, and the fixed service fee. It may be the nature of my particular practice, but I have found that they generally do not work.

The problem with these new arrangements is that they depend on certainty when neither the lawyer nor the client can control all of the variables in play. In a small business setting, regardless of litigation or transactional situations, certain factors will greatly increase the size of a bill. These include:

1)     A lawyer representing another party who does not want or does not know how to handle the transaction efficiently.

2)     An adverse lawyer on the other side of litigation who desires (either at his or her clients’ or his or her own behest) to utilize the full array of tactics available to a party in litigation.

3)     A party on the other side who desires to remain unrepresented but does not have the ability to understand the transaction, situation or documents.

4)     A client who appears to have relative sophistication at first, but as the matter evolves, he or she clearly does not understand the transaction.

5)     In a business setting, a preliminary agreement is reached but as issues are dealt with more completely, the initial agreement fails to work.

Essentially, if I was to affix a set fee to everything that I did, I would have to factor in, to the best of my ability, the risk of these events happening. While this may be theoretically possible, I think there is a question of fundamental fairness to the client. If I am pricing my services to account for the reality that the above factors will occasionally occur, then I believe I am overcharging the client where none of these factors occur.

We recently handled a business divorce for a client. If I had been asked to fix fee the amount, I probably would have charged something along the lines of $5,000 a month for as long as the case went on with a minimum three month fee (i.e. $15,000 minimum). Instead, we handled it by the hour. Although this is a situation where the factors listed above can and do often come into play, in this situation, everything went about as smoothly as possible. As a result, the hourly price was well under the $5,000 we would have charged in a monthly fixed-fee arrangement.

Let’s go back to the adventure guide analogy. My role as a lawyer for businesses is essentially that of a guide through the business legal maze made more complicated by the human element. Without being egotistical, the value I bring to this relationship and various problems is in my presence. If I was the guide for the group that was going off the map, there are several places I could get involved. Clearly, the best place to enter the picture is in the initial decision to not get out the map. If I were called at that point, ideally my advice would be to take a second and get out the maps. That 15-minute phone call could have saved an enormous amount of time and effort. I greatly enjoy getting these phone calls, and I get real satisfaction from helping a client avoid trouble all together.

But how do I charge? If my call saved a client $20,000, I arguably should be entitled to some, or maybe all, of the $20,000.  If I was a true value biller, and a client truly believed in value billing, then I should be getting more than my quarter of an hour charge. The problem is that I have never been able to convince a client of this dynamic.

Assuming I did create some value billing for these types of situations, in order to do this I would also need to incorporate the situations where a client gets off the map — the situations where a client does not call at the critical juncture or alternative and I miss the whole dynamics of the situation. (Neither I nor any other lawyer can claim complete clairvoyance in predicting future outcomes.) Let’s hypothetically say that I have created an in-house counsel method that adequately compensates me (but not unfairly or unreasonably) for my time and the factors that I cannot control. Several clients buy into this arrangement, fully aware of and appreciative of the economic arrangement.

More likely than not, this arrangement would be some flat hourly/monthly fee. Let’s say each client gets billed $2,000 a month. Client A calls in the month, and I keep him on track. The cost to me is my quarter of an hour — currently around $75. Client B goes off the map, which causes me to expend approximately $3,000 worth of time.  I am still profitable for the month; I have charged $4,000. However, Client A, with the easy-to-solve problem, subsidizes Client B, with the messy problems. Maybe one can argue that over time this inequity will iron out; however, my experience tells me that it does not.

Given this dynamic, most clients will take the risk on themselves that these factors will or will not come into play. I agree with this approach; in fact, when I engage a professional for business services, it is quite clear that I am in the best position as a client when I am getting charged by the hour. The risk frankly belongs on the client. If we can truly quantify and charge for all of the risks, then our role as a lawyer is commoditized. While I recognize that there are several dynamics in the market place that make a lawyer more of a commodity, I personally am not selling a commoditized service. I am a professional guide who strives to serve my business clients through the risks, known and unknown, so that they can grow their profitable business. I know that many lawyers can and do thrive by understanding that what they are offering is a commoditized service, but for me, that is not my goal.

Accordingly, I bill by the hour. I try to give good estimates, which include the risks, “We can do it for x, assuming a, b, or c does not happen.” To a large degree, this approach is from lessons learned the hard way, and while I always want to best serve clients, I consistently come back to the fundamental truth — everyone is better off being billed by the hour.

Mike Goodrich
Goodrich Law Firm, LLC