April 18, 2008

Value Billing

Over at her blog on The Atlantic, Megan McArdle muses about hourly billing at law firms. Her lens is that hourly billing is not female-friendly, with which I disagree. Hourly billing is not family-friendly, and men like to spend time with their families, just like women do. If we want to talk about gender differences, the real difference is that men, in practice, sacrifice their family time in favor of work to a higher degree than women. Why that should be the case is something I will leave to the talented Ms. McArdle and others to consider.

Because the real issue that interests me is what she calls “contract billing” and what I have learned as “task billing” or “value billing.” Lawyers hate billable hours. Most lawyers would leap at the chance to work on a basis that would compensate them for their time at about the rate they are being compensated now, but relieves them of the tedious duty of tracking their time spent doing tasks. I know I hate billing my time. It’s tedious and I often forget to do it while my mind is supposed to be occupied on the mental task at hand. I am hardly unique in my profession. Problem is, without the billing end, the job generates no money at all.

Clients will embrace a value billing model, too – they don’t understand what it is that a lawyer does with five hours of time, but they do understand that a certain amount of expertise and labor went in to drafting a motion. If the lawyer charges a regular hourly rate of $300 an hour, and the motion wound up taking five hours to draft, the motion costs $1,500. But clients rather pay $1,500 for the motion itself rather than 5 hours at $300 an hour for the lawyer to draft it – even though the bottom line is the same. Why?

Well, two reasons. First, there is risk. Before the lawyer writes the motion, it is not clear how long it will take to do the work. In an hourly billing system, the client bears the risk that the lawyer will encounter an unexpected snag in the legal research or have to spend more time than anticipated in tracking down a piece of obscure evidence that the motion needs. In a value billing system, the lawyer bears that risk. Second, there is control over predictable outputs. The client buys a motion for X dollars, the client gets the motion, the client feels like he is in control. If it’s hourly, the lawyer tells the client, “The motion took five hours to write, so you owe me $1,500 dollars.” In the first model, the client feels like he has more control over the output.

The trick to offering value billing to clients is for the lawyer to figure out, in advance, how long it will take to draft the motion. At that point, the pricing becomes a matter of figuring out what work is involved in a project, and letting the client know the cost. Sophisticated clients know they’ll have to pay good money for legal work and that the result is always uncertain. But sophisticated clients will also embrace the opportunity to participate in figuring out how the work can get done.

The incentive for attorneys then becomes to do the work in as efficient a fashion as is possible while still delivering high-quality product. And isn't that what being a good attorney, or indeed any good service provider, should be about -- doing your job better, faster, and cheaper?

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