The billable hour is a cornerstone of the legal profession. For generations, lawyers have relied on increments of time to create value-based billing and quantify the services provided to clients. The more time a matter takes, the more lucrative it is for the attorney and the law firm. Yet, as the practice of law evolves and advances, attorneys are realizing that this model of value-based billing may not be the optimal choice.
Many attorneys are choosing to quantify their services based on the value that they provide their clients instead of the billable hour. They are finding that this type of billing benefits their firm, while also benefitting their clients.
So, what exactly is value-based billing and why should your law firm move in that direction?
What is value-based billing
Some legal experts define value-based billing as moving legal work away from the attorney’s point of view and towards the client’s point of view. It involves looking at the client’s goals and their perceived value in reaching those goals. You then use that information to develop a singular value for the matter at hand. It’s essentially a fixed-fee based arrangement, where the client agrees at the outset of the case to pay a flat fee for your services. Regardless of how many hours the case ends up requiring, the client pays the agreed upon fixed fee.
Value-based billing may take a few different forms. In a fixed-fee arrangement, the attorney provides the client with one set price for the matter. A hybrid billing arrangement combines fixed-fee billing with hourly billing. There is also a milestone based fixed fee, where the client pays a separate flat fee when specific milestones within the case are met.
While value-based billing is much more common within the legal profession than it was a decade ago, there’s still a lot of reluctance within the industry. Some attorneys are just unwilling to move away from the billable hour – I presume out of fear that they will not make the same amount of money with a fixed fee. But done correctly, with proper planning and research, value-based billing can actually result in higher profits than hourly billing. That leads me into reason #1 why your firm should move to value-based billing:
Reason #1 – Increased profitability
Planning is a substantial part of value-based billing. To set fees that adequately correspond to the amount of work involved, it’s necessary for attorneys to take a close look at similar matters they previously handled. Value-based billing requires that you:
- Look at the case carefully before taking it on, identifying each of the necessary steps for meeting the client’s goals. If you have taken on a similar case in the past, you may go back and review what was involved in bringing the matter to an end. If you have never before handled this type of case, you may consider consulting with a colleague or mentor who can provide some insight.
- Consider the time each of the individual steps will take, along with the value of each step, to determine which member of the firm is best suited to handle it.
- Make a plan to minimize wasted time and non-billable tasks.
If you put in the advanced effort, you can go into each matter with open eyes and handle it in a way that maximizes profits while minimizing costs.
Reason #2 – Clients pay for your expertise and ability – not your time
If you take hourly billing out of the equation, your clients don’t care if it takes you three hours or thirty hours to complete a matter. They just want it done and done correctly. This argument begs the question, “Why are you charging clients for something other than what they are asking for?”
When you present your client with a fixed fee for a matter, you are giving them a value for their case and the work they provide. Of course, the number of necessary hours goes into calculating your value, but the client sees the matter in terms of a set value, not how many hours you spend on it.
Reason #3 – Stronger client relationships
Billing is a common source of contention between attorneys and their clients. Clients despise unanticipated expenses and inflated invoices. They can lead to strained client relationships and even lawyer grievance complaints. Constant billing disputes create distrust between you and your clients, possibly even leading to a negative reputation for your law firm.
Clients prefer value-based billing because it provides them with upfront knowledge of their legal costs, with no surprises on the end. They are provided with information before representation begins, so they know exactly what the case will entail and how much it will cost.
Reason #4 – Place the focus on the client
There is some argument within the legal community about the billable hour and its usefulness in advancing the interests of the clients. Because attorneys make more money from performing more tasks, they may be tempted to perform additional tasks, regardless of whether they are highly necessary to the matter or only minimally connected.
For instance, the lead attorney on a case instructs a junior associate to perform unlimited research hours on a contract dispute issue, even though the issue does little to further the client’s overall goal. Some legal experts assert that this type of behavior is more concerned with furthering the financial goals of the firm than the overall objectives of the client.
Reason #5 – Reduce inefficiencies
Value-based billing has a built-in incentive to move the case along, instead of spending wasteful hours on lesser productive tasks. Under a fixed-fee arrangement, the best course of action for the firm is to move the case to completion in as little time as possible. Therefore, efforts are placed on tasks that advance the case, rather than those that do not.
I again go back to the pre-evaluation that occurs when using value-based billing. It provides you with a greater understanding of what is required for successful completion of the case, which translates into greater efficiency within your provision of services.
Value-based billing is gaining ground for a reason – not only does it benefit your firm, but it benefits your clients as well. Get on board and find out how value-based billing can strengthen your legal practice.
About Erika Winston:
Erika Winston is a freelance writer with a passion for law. Through her business, The Legal Writing Studio, she helps legal professionals deliver effective written messages. Erika is a regular contributor to TimeSolv and a variety of other publications.