The heat is on! Well it would seem so if you have read all the recent stories about law firm clients demanding alternative billing structures. The Wall Street Journal was another notable media source commenting yesterday in a well written piece (story here).
There is much more to alternative billing than meets the eye. The ABA back in 2001 produced a commission on hourly billing and the negative impact on client-firm relations and the profession as a whole. They reported that hourly billing:
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affects firm culture and reduces collegiality
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discourages pro bono work
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does not encourage case or project planning
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may not reflect value to the client
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fails to discourage layering and duplication
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penalises the productive lawyer
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creates itemised bills that do not reflect value
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creates conflict of interest between client and lawyer
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fails to promote risk/benefit analysis
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major cause of associate dissatisfaction
What strikes me about this list is the major change in law firm culture and client-lawyer relations that will need to come about before alternative billing really picks up steam. For example, I was told recently by a lawyer that they need hourly billing and time sheets to manage their juniors or how else would they know what they were doing? Another one told me that only the top firms can hire the best people so they need to use this system to control their staff! The word that jumps straight into my head when I hear comments like this is TRUST!
Trust is the fundamental element that binds a high performing firm together and writers such as David Maister and Patrick McKenna have talked often about the need for trust based relationships in professional service firms. For law firms to truly embrace alternative billing they will have to fundamentally re-define their relationship with people inside the firm before they can effectively deliver alternatives to clients. Ronald Baker of the Verasage Institute is in Australia at the moment spreading the word of value pricing. He makes some very good points about the need for firms to determine what value they offer to clients and use a pricing council within the firm to set fees. He also makes a distinction between billing and value pricing. Billing is something that is done in retrospect whereas value pricing is worked out in advance.
In some parts of Asia, regulatory conditions prevent firms from using alternative billing in certain areas of practice (for example, litigation). Other issues holding back alternative billing is the lack of fundamental know how of law firms and clients of what alternatives are available and how they could be used. The main thing however is the mind set. Practice management and strategy know how in the region is still some way behind the US and lawyers mind set is a key factor in adopting a more client focused view. Many in house counsel have just not been exposed to these ideas and hence the dialogue that must occur between client and professional when working out value pricing simply cannot function as it should.
I don't believe value pricing and alternative billing is something that can adopted on a piece meal basis. In other words, trying to adopt some of the tenets of value pricing without a change in firm culture will only cause more problems than it solves. Firms must first embrace a culture that recognises themselves as a client value producing organism before they can articulate the value they deliver to clients and what they should charge for it. Value pricing is not only about premium pricing, it is about the firm structuring according to client needs so that the firm can become more effective at what it does, only then will it be able to offer fixed fee contracts whereby the focus is on effectiveness as opposed to just efficiency.
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