When I talked to four law firm founders during a recent West LegalEdcenter webcast on How boutique firms are delivering greater value with alternative billing, I was surprised by the number of different ways they set prices. Even within a single firm like Pat Lamb’s Valorem Group there are “a limitless variety of ways to structure fees.”
For intensive, unpredictable work, Raymond & Bennett guarantees a budget for one phase of a case at a time. According to founder Bruce Raymond, “this makes it easier for the firm to map out with the client what needs to be done.” The budget agreement often includes an escape clause in case needs change. And when one phase ends, the firm can begin planning the next one from a more realistic starting point.
Shepherd Law Group often negotiates a monthly retainer, such as a single price for all of a client’s employment policy advice. “The help is unlimited,” Jay Shepherd emphasized. “Hundreds of times over the years I’ve said to clients ‘Why didn’t you call me sooner?’ before a matter got bad enough to need legal help.” The reason, of course, was that clients did not want to pay an hourly fee if they thought they could get by without a lawyer’s input. With this retainer arrangement, clients talk to lawyers sooner, and can prevent problems before they occur. “It’s a great way to build client relationships,” Shepherd said. And if it becomes clear to both parties that more help is needed than originally planned, at some point the monthly charge can be renegotiated.
At Bartlit & Beck, the price can be as simple as a monthly retainer, or it may be based on a set of benchmarks which they have established over 16 years of setting alternative fees. Fred Bartlit said that if other firms would typically charge $200K for a particular matter “We might do it for $100K. The difference is held by the client. If things don’t work out and the client loses, we lose too.” If Bartlit wins the case, the client has total discretion to set the remainder of the fee. It could be the $100K difference held in reserve, or it could be a multiple up to five times that amount. Since the client defines that part of the fee, the payment will be totally aligned with the client’s perception of value.
Similarly, Lamb said, Valorem has a “Value Adjustment Line on our monthly invoice.” Clients can add or subtract whatever they think is fair to reflect the value they have received. Again, the client bases the fee on results and satisfaction, and is the final decision maker.
In order to bid properly on a fixed price matter, law firms must invest time in due diligence up front. Some of these investments produce new work, and some don’t. “We turn down cases all the time,” said Bartlit. In this model, investing in due diligence is part of the cost of doing business.
You need to scope the work out carefully, Jay Shepherd said. “Sit down with the client and figure out what you are selling. Sometimes you’re in a rush but it’s important to figure it out up front.” If there is a radical change later, such as a client desire for a motion to dismiss, you can always do a change order.
Shepherd believes that ultimately prices should be based on the value to the client, not the cost to the firm. For example, success in a case about a secretary fired for chronic lateness is likely to have a lower perceived value than one for a CEO charged with sexual harassment, and that should be reflected in the fee.
Shepherd is such a strong proponent of this type of value pricing, that his firm has “tossed their timesheets” and do not even track their time on each matter. “No client wants to buy time; they buy our services, our results. Once you recognize this, I don’t see how you can bill by the hour.” Some of his practices are based on the writings of value pricing guru Ron Baker, which I described in Part 7 of this series. I also wrote there about the counter-arguments posed by proponents of another approach to pricing: cost-plus. This webcast discussion did not resolve the argument between value pricers and cost-plus pricers, but it did provide more evidence that people feel strongly on both sides of this issue.
On the cost-plus side, the other three firms do track hours to establish benchmark costs for handling new matters, and to see how well they did at the end of each matter. Bartlit & Beck refuses hourly work, no matter how high the rate, but both Valorem and Raymond & Bennett have a mix of alternative billing and hourly work. Both do some work for insurance companies, whom Pat Lamb said will be “the last industry in America to abandon hourly billing.” Bruce Raymond also quoted the example of a big Pharma company who was interested in alternative fees, but needed hourly records to provide empirical evidence. “Show me how it saves money,” this client said, “so I can convince my finance and procurement people.”
What all four firms did have in common was their focus on saving money for clients. As discussed in Part 7 of this series, when lawyers first start thinking about alternative fees, their natural inclination is to inflate the price by structuring fees to protect their own interests. From a marketing point of view, that is exactly the wrong thing to do.
When you are trying to develop new business, the client comes first. Of course ultimately fees must make business sense for the lawyer. But clients come first.
For a summary of this series, see the LegalBizDev Guide to Alternative Fees, in the free resources section of our web page.
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