A Modest Proposal for Alternative Fees

There’s been so much talk recently about “alternative fee arrangements” (AFAs) that, frankly, we’re exhausted.

But before we give up on the subject entirely (which, don’t be alarmed, we shan’t do), it’s perhaps time for a pause and a recap of where we are.

First, shall we recount the defects of the billable hour?

• It begins life based on “cost of production,” not “value to client.”  Microeconomists would tell you this makes no sense.
• It permits, nay welcomes, inefficiencies.
• As we have seen over the past 30 years or so since it became the norm (news flash–it was not always the norm), it engendered ever and ever higher ratios of leverage, which both clients and firms are now coming to rue as a shortsighted detour.
• It disemboweled the use of knowledge management and information technology to accelerate and streamline basic, garden-variety tasks such as document drafting.
• It led to exceedingly unwelcome “Surprise!” moments when clients received their monthly bills and the time invested over the past 30 days turned out to be far more than they had bargained for.
• And finally, it permitted all of us on the law firm management side to get exceedingly sloppy.  You don’t have to manage a project for profitability, lean-ness, and suitability for purpose, if you’re on a cost-plus billing model.  This may have been the most pernicious influence of all.

So where are we now?

Stepping back, I find one of the oddest things about the entire AFA debate is the fact that the billable hour prevails in virtually no other industry.  Even Evan Chesler, writing over a year ago in his arguably self-serving column in Forbes, wrote that he was happy to have “Joe the contractor” quote a price for remodeling the Chesler family’s kitchen without regard to billable hours because “We didn’t care how many hours Joe, or his electrician or his plumber, would be running their meters. That was Joe’s problem; we had our price.”

Doctors, dentists, accountants, advertising agencies, financial and wealth management advisors, management consulting firms–just to consider sectors of the professional services industry arguably analogous to ours–never bill by the hour. 

Do we have it right and everyone else has it wrong?

Still, price matters.

So permit me to suggest where I think the fundamental disconnect between law firms and clients comes on the topic of AFAs:  We tend to believe what we do is more valuable than clients do.

I’ll elaborate:  We would like to think that virtually everything we do is unique, a one-off, a “bespoke” transaction or litigation.  But clients know better.  A lot of what we do, even in the most arcane M&A deal or international arbitration proceeding, is fairly rote.  It’s due diligence, it’s discovery, it’s researching background law for updates (the intellectual equivalent of Shepard-izing), and it’s also, given the size of our firms and the size of teams deployed on such matters, a lot of internal management friction as we bring everyone up to speed.

If so, the answer is what?

Communicate, communicate, communicate.  Talk with your clients about what’s commonplace or commodity work, and what calls for senior grey matter involvement.  Be candid.  Sure, litigation and deal-making are unpredictable, but much of the behind-the-scenes blocking and tackling that goes into disputes and deals is not unpredictable; it’s manageable.

You can (yes, you really can) quote fixed fees for all of the commodity work–at least in segments, or tranches.  Your clients will appreciate this.  They’re businesspeople and you would be demonstrating that you think like a businessperson as well. 

As for the unpredictable elements?

Here’s a wild concept:  Don’t quote a price.  Tell your client you’ll suggest a flat, fixed amount when it’s all over.  Which they can accept or reject.

I guarantee you you’ll quote a figure the client will accept.  “Yes, that’s what it was worth.”  And your entire fee conversation will last less than 60 seconds.

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Update:  February 26.

A loyal reader writes:

I started reading this, and disagreed with the idea that
legal services should be priced based on value.  My recollection of
microeconomics is that prices reflect marginal utility only where there is no
competition; perfect competition, in contrast, leads to prices that reflect
marginal cost.  Lawyers are easily replaced; every firm has competitors,
and no firm has some capability that no other firm does.  I would argue
that the legal market is thus highly competitive because there are so many
substitutes, and this has led to pricing based on cost (e.g., the billable
hour).

 

Then I got to the part about billing the client after the fact,
and it struck me as brilliant (especially as many clients are happiest at the
end of the transaction – and they’ve seen what I’m contributing, and thus have
a better sense of my value).

Of course, scarcely any lawyers would agree that they face any real competition, much less perfect competition!  And therefore there aren’t any conceivable substitutes for their deathless counsel.