The Truth About Hourly Billing: A Ridiculous Tradition that Must End
If you are wondering how lawyers get clients you would probably never think about billing as a competitive advantage. It’s time to think again.
The majority of my time is spent working with lawyers. Every one of the lawyers who come to me wants to provide great service to their clients at a fair fee. They want to make a great living and live a great life®.
Yet so many of these well-intentioned professionals embrace a fee model that is antithetical to building a great relationship with their clients and antithetical to allowing professional practitioners to make a great living and live a great life®.
I’m talking about hourly billing.
I know all the reasons you feel you need to bill by the hour. At the top of the list is the fact that everyone else is doing it. Also on the list is the tacit acceptance of this methodology by clients. Finally, on the list is your ability to invest your time in thoroughly educating yourself on the facts and background of the matter and be compensated for doing so.
None of those reasons is good enough to continue this practice.
I teach my clients (lawyers and other professionals) a value based billing methodology that is today, a competitive advantage.
This methodology begins with a demonstration of the value you provide to the client. This allows you to frame the discussion around improving the client’s situation and away from the work it takes to achieve that outcome.
Think about that for a moment.
Would you pay the manufacturer of an airplane for the hours it took to assemble it? This would mean the first flight on a 747 would cost $14 million per passenger. And then after the first group of people paid the plane off in full, the next group of people would be asked to pay for the hours involved in manufacturing the airplane again. And then the next group. And so on.
This is a ridiculous scenario.
When you board a 747, you are paying to get from point A to point B. That’s why you are paying the fee charged by the airline.
As a professional services provider, people are coming to you to improve their situation. Hopefully, you have helped other people improve similar situations. Your experience, your skill, your talent, have value beyond the number of hours you invest in a client’s matter.
Why not bill a fair fee (fair to you and to the client) based upon a number of factors the client considers critically important?
If you want to learn more about these factors, listen to the podcast I recorded this past week. You can find it by following the link below.
You don’t have to agree with me on this issue. Not everybody will.
The truth is, enough people agree with me on this issue that we have lawyers in just about every practice area using value based billing right now.
This is one of the reasons these lawyers get clients.
So if you’re not a client, I hope you don’t agree with us. Because right now, in your neighborhood, in your practice area, there IS someone who gets this. There is someone who has a value based methodology for setting fees.
That person is competing with you right now. And he is probably eating your lunch.
Understanding Perception of Value
A big part of lawyer marketing is demonstrating the value you provide to your client.
If you want to differentiate your law firm from every other firm in your area, you should consider value based billing as an option.
The first thing to keep in mind is that value resides in the mind of the client. It is his perception that matters most in this process. You believe your law firm offers exceptional service at a fair fee. But we must always remember our role in crafting a fee agreement is to offer a valuable service to the client at a fee that is valuable to us.
Previously we discussed the three step process of value based billing. Now let’s take a step back and look at the factors that influence the perception of value in the mind of the client.
Here are the eight factors that contribute to a value based fee and the initial questions to ask to begin a discussion about each of them:
The Problem and The Symptoms:
What is the client facing? How bad is it? Does he understand how bad it REALLY is?
When a client initially comes to you he usually brings you the symptoms. It is up to you to help him understand the actual problem. It is also incumbent upon you to relieve the symptoms and the problem, or at least improve his condition.
If the client does NOTHING what is likely to happen?
When it comes to lawyer marketing, you have to motivate the client to take action. Clients rarely do something unless they have to. Paint a picture for the client and help him see the worst case scenario and the likelihood of that unfolding. Use case studies and actual scenarios to make your point.
The more risk the client faces, the more value you provide in mitigating the risk.
Notice I mention “mitigation” and not “solution.” You can never promise a specific outcome. There are too many variables. You can only promise to do your best to improve the situation.
Probability of a favorable outcome:
How likely is it that you can significantly improve the client’s condition?
If you have seen similar (or even identical) scenarios before, you should have confidence in your ability to have some sort of positive impact on the client’s situation. This confidence should be reflected in your pricing.
Again, do not promise any type of outcome. Simply present case studies similar to the client’s scenario and discuss what you would do to make things better.
Speed of resolution:
How quickly can you make the client feel better?
Clients pay for quick certainty. Even if the outcome is less than ideal, the client will accept it and begin to move on with life if it happens quickly.
If you can provide speedy certainty, you can command a fee premium.
Is this situation keeping the client awake at night?
All decisions are made with emotion first and supported by logic. Help the client FEEL better and you can name your price.
How much is this situation costing the client?
Money makes the world go ‘round. If you can stop the financial bleeding you can charge more.
Who else does what you do?
If you have no competition, you can name your price. If your competitors advertise every 2 minutes on TV and radio, you will need to clearly differentiate yourself and your law firm in order to charge more.
Your differentiating factor:
What makes you different compared to everyone else who does what you do?
You have to make the case that there is nobody like you. You’re one-of-a-kind. If you cannot be compared to everyone else, you can set your fees as you see fit. This is probably the most basic element of lawyer marketing. Differentiate yourself from everyone else who does what you do.
Each of these factors plays a role in the client’s perception of the value you provide. Your job is to help the client view his predicament (and you as the remedy) through the lens of all of these factors.
Given the totality of his dilemma, and your value as demonstrated through each of these elements, you should be the obvious choice – regardless of price.
Three Steps to Value Based Billing
The way you structure your fees can be a competitive advantage. This is one of the most important and one of the most overlooked aspects of attorney marketing.
We work with the attorneys in our program to develop a value based billing option that their clients love. Value based billing involves identifying the value of your services to your clients and then setting your price accordingly. Doing this is both an art and a science.
For simplicity purposes, I’ve broken it down for you into three steps.
First: Conduct a Diagnostic Interview with the Client
The most important part of a value based billing relationship is identifying the needs of the client and the impact your work will have on him.
This may seem strange. After all, don’t you have to find out the impact of the results on the client in all other pricing scenarios?
When you bill by the hour you can spend lots of time gaining an understanding of the client’s situation. In fact, the diagnostic process can be ongoing. Documents are examined, interviews are conducted, and research is undertaken, “just to be sure.”
Focusing on value requires identifying objectives and value for the client – right from the beginning of your work and the efficiently working toward achieving the best possible outcome.
We teach our attorney clients a formula for conducting a diagnostic interview. This interview helps crystalize the value you are expected to provide, in the mind of the client. It goes beyond setting expectations. It helps you determine what you will do and how it will impact the client.
Second: Identify the Important Elements of Value for the Client
The great misconception with value based billing is that if you just present the client with a flat fee and he feels it is a good deal, he will accept. That’s just not so.
There are eight important elements of value you must address with the client in order to be certain he understands the value he is receiving.
Each of these elements is complex and could be the subject of an article themselves but I have outlined them in a podcast available by following this link.
We have our clients use these value elements as a check list. The attorney simply goes through the list and identifies each element in the case of the client.
Third: Present the Value Proposition to the Client
Finally, you present the value proposition to the client. At this point you simply reiterate all of the value elements and demonstrate how you will address them with the client in this situation.
There’s more detail involved and we will be discussing this topic with more frequency, but as an attorney marketing strategy, value based billing is a concept whose time has come.
Legal Marketing: Alternative Billing Can Still Be a Competitive Advantage
Over the course of the next five years hourly billing will be phased out by most General Counsel in large corporations. You can already see the change coming. As an example I submit this article from The Metropolitan Corporate Counsel website. The article sites a survey conducted by Leader & Berkon in mid 2010 that found 56% of in-house counsel believe the trend to move away from hourly billing is growing. The survey also found that one third of those companies had selected outside counsel because of an alternative fee option.
What This Means for You
Moving away from hourly billing is still being viewed as a competitive advantage. But it will become the norm…soon. You should get on board.
You have an opportunity to become one of the leaders in alternative billing. You can still get out in front of this movement and champion your “client friendly” fee structure as a competitive advantage. It will get you more meetings with senior level decision-makers. It will get you more opportunities at work you would never have been considered for in the past. It will allow you to take business from many big law firms who are slow to adjust.
But first you need to embrace alternative billing.
Moving away from hourly billing is still an option because many clients do not know there is an alternative. Once the adoption of alternative fees reaches critical mass, you will be forced to change in order to survive.
Make a move to alternative fees and use it in your legal marketing. It will not only help align your interests with your client’s interests it will help you attract more clients.
The Billable Hour is Dead but Most Lawyers are in Denial
Many lawyers laugh at me when I tell them that hourly billing will be the death of their law firm. This is particularly true of the BIG LAW firms. You see, to BIG LAW hourly billing is an addiction no different than an addiction to crack or heroin. Through 2007 they were used to changing whatever they wanted (on an hourly basis) for their service and people would pay it.
Well that is changing.
Last year Pfizer (you may have heard of them) announced they were no longer going to pay law firms by the hour. They created a group of sixteen law firms to whom they give all their legal business. These sixteen law firms knew they were going to make less money in the short term but they felt they would make more money over the lifetime of their relationship with Pfizer. That is a focus on client lifetime value.
You don’t have to take my word for this. Watch this video from The Wall Street Journal. It is an interview with Amy Schulman, Pfizer’s General Council. Listen to her carefully.
What Ms. Schulman is really saying is: “If you charge by the hour, your law firm will not survive.”
When I utter this statement in front of litigators, they laugh at me. That’s right. Even though we have just come through the worst recession since the Great Depression and non-bankruptcy legal work was scarce, most litigators will not embrace a fee that is not based upon hours billed. Fortunately, it is not my problem. I just don’t work with them.
Let me explain why:
As someone who gets paid to increase the profitability of a law firm, if I work with a litigation firm that does not bill by the hour, I can get them as much work as they can handle. Often times, I can get them more work than they can handle. And the firm as a whole makes more money – in most cases DOUBLE what it made under an hourly billing model.
Our Value Based Fee Model has a flat monthly rate assigned to each client. The law firm then assigns a “managing partner” to that client. The managing partner handles a good portion of the legal work the client requires. In large clients, Managing Partners are assigned per matter.
The Managing Partner’s salary is charged directly to that client account (internally). The law firm then has a pool of other attorneys (usually less costly employees) who handle the day-to-day matters from the client (matters the client believes should settle, some transactional issues and legal research). There is a “trigger” built into the agreement with the client that automatically increases the monthly rate if a matter goes past a certain point.
Structuring the legal fees in this way, the client can make a decision on how to dispose of a case with full knowledge of the legal fees.
This is a competitive advantage for the lawyers with whom I work. Their clients always select this approach over the approach of a law firm that bills hourly.
So if you still bill on an hourly basis, let me tell you how my clients eat your lunch five days a week:
- They hire the best lawyers (Ivy League lawyers with 10 years or more of experience) and they pay them well (Why not? They know how much profit each of their clients will produce because they have long term contracts)
- Part of the lawyer’s time is REQUIRED business development
- Our law firms bill their clients using the model outlined above
- They budget based upon revenue (which we can predict with great accuracy)
So as you can see, if you still bill hourly, it is only a matter of time until my clients find your clients and steal them.
You can keep your head in the sand or you can embrace the future and move to this type of model.
When They Show Up, Bill ‘Em
Do you feel like you need to offer a free consultation?
Isn’t that part of law firm marketing 101?
No it is not. In fact, it is terrible law firm marketing.
Free advice is worth what you pay for it.
If you want to do anything for free, have an administrative assistant or an associate interview the prospective client to see if they qualify to work with you.
Yes. I know. Your competitors all offer free consultations. They all sit with clients for an hour at a time and listen to their tale of woe. They empathize and then, if they are lucky, the client signs up with them.
Did they teach that in law school? Was the class called; “How to be a doormat?”
The lawyers I work with do not give free consultations. They realize the value of their time and they demand clients respect it.
This is one of the easiest changes to make in your law firm yet it gives so many attorneys anguish. I am not sure why. Maybe it is insecurity or maybe it is fear of the competition.
If you do none of the other things I recommend on this website, at least start charging for consultations.
And so that you know that I remain congruent with my own advice: I charge $1,500 for a consultation. But that payment can be applied to any subsequent work we do together.
Few people waste my time. But you don’t have to be a law firm marketing expert to have people respect your time.
If you want people to respect you, you must respect yourself. That starts with respecting your most valuable resource, your time.
What You Get Paid For
The International Space Station is orbiting the Earth and the computer in Mission Control that regulates the oxygen regulator up in the spacecraft has broken. It needs to be fixed or the three astronauts conducting experiments in space will suffocate.
Joe Jamoke is in charge of computer repairs at NASA and he calls Acme Computer Repair to come out and fix the problem. The Acme guy arrives, walks up to the computer and lifts the cover. He eyeballs the situation, reaches into his bag, and pulls out a screwdriver. He snakes the screwdriver into a tight crevice and tightens a screw that has become dislodged. After removing the screwdriver, the repairman puts the cover back on the computer, flips the switch and the machine immediately lights up and begins to function as it should.
The repair man writes up an invoice and hands it to Joe. Joe is shocked to see that the bill is for $1,000. He turns to the repairman and says:
“This bill is outrageous. You only turned one screw. How can you charge this much for so little work?”
Before the repairman can even answer, Joe continues his rant.
“The only way this bill will ever get approved is if I have an itemized invoice to present to my boss. Please write up an itemized invoice.”
The repairman sits down and writes up the invoice as requested. He presents Joe with a new bill. It reads:
Invoice for Services
Turning One Screw…Fee = $1
Knowing Which Screw to Turn…Fee = $999
In the example above, the repairman did not get paid for the amount of time he put into the job. He got paid for the value he provided. This value came in the form of his expertise at repairing sophisticated computer equipment. The fact that the repair was done in a short period of time was probably advantageous if only mildly relevant. In this scenario billing by the hour or billing by the actual work performed would have been inappropriate. The only appropriate way to bill for the service rendered was value-based billing.
The situation described in this fictitious little scenario is identical to the situation most lawyers find themselves in everyday. The service they deliver to their client has significant value but they charge for the amount of time they spend actually doing the work. Most lawyers do this because they do not know how to properly bill for their services.
If you are one of those lawyers (an hourly billing lawyer who cannot figure out how to straighten up and charge an honest fee) I am going to give you a tremendous gift. I am going to introduce you to a process that will help you determine how to bill a fair fee and have clients love you for doing so.
Step One: Become a Recognized Thought Leader
This simply means packaging your knowledge, talent, skills and experience and showing the prospective client how it differentiates you from everyone else who does what you do. You can do this by writing and publishing papers, speaking at industry conventions, being quoted in the media, teaching college courses, etc.
Step Two: Assess the Situation and Determine the Value of the Solution to the Client
Will the client avoid a potentially significant legal judgment if you negotiate a settlement? Will the agreement you draft protect the client from financial harm? Does the contract for that $2 million dollar property insure that the client owns the air rights above the building as well?
All of these things are valuable. Interview the client and have him put a dollar value on the benefits of the matter at hand.
Step Three: Present Your Fee as a Fraction of the Value Provided
Be careful in this step. I am not talking about charging a contingency fee. I am talking about a comparison between the value of the potential outcome and the amount you charge the client.
The client needs a contract to purchase a $20 million asset. Lawyer charges $80,000 to negotiate and draft the agreement. The lawyer has done this two dozen times. He is a true dealmaker. The fee, which is less than one half of one percent of the total deal value is good for both parties because there is no incentive to spend any more time than is necessary working on the matter.
A client hates his wife. He wants his marriage dissolved as quickly as possible. He has significant assets but the laws of the state of residence are clear on spousal maintenance and asset division. The lawyer he selects is excellent at negotiating divorce settlements in an acrimonious setting. Speed of resolution has enormous value for this client. He happily pays $50,000 to get the divorce finalized within 90 days.
A radio personality on a Christian Fundamentalist station is arrested and charged with DUI. If convicted, he will lose his job and possibly never work again as he is renowned for his position of moral superiority. He hires a former prosecutor who understands the flaws in the alcohol detection equipment and police procedure because he spent 15 years prosecuting these cases. Retaining this lawyer and possibly getting the charges dismissed is highly valuable to the client because his seven-figure income is dependent upon his exoneration.
There are scenarios in your daily work that can productively apply a value based billing model. In fact, let me be perfectly clear: There is NO scenario…none…in which a value-based billing model is NOT applicable.
The challenge for you is not IF you can make value-based billing work in your practice, the challenge is WHEN you will make it work in your practice.
One thing I know is absolutely true: You have a competitor using value-based billing right now to sign up cases you deserve.
Stop punching a time clock. Isn’t it time you get paid for the value you provide?
Why Is It So Easy To Hire You?
Every so often I will point out things I think are worth reading for people interested in law firm marketing. This week I came across a post by Seth Godin on open buying and open selling. Seth is talking about the ease of getting something and its true value to the end user. This is a concept that is near and dear to me. If something is easy to get, how much could it be worth?
Let’s say you need to see a heart surgeon. It’s not an emergency but your doctor has detected an irregular heartbeat. The doctor doesn’t give you a referral (he doesn’t believe in them). So you are forced to find a heart surgeon on your own.
You go to the Internet and you call the heart surgeon who comes up on top in a Google search. You call the office at 9AM and get an appointment for 11AM. After a FREE consultation, you shake the doctor’s hand and he agrees to operate on you at 1PM.
What do you think? Is that guy most likely a good doctor or a bad doctor?
I know that sounds ludicrous but that’s what happens with many lawyers.
You can pick up the phone at 9AM, make an appointment for today at 11, go to the office for a FREE consultation and have an attorney retained by 1PM.
And the attorneys who operate this way wonder why they have so many clients who shop around.
It is not easy to hire a good lawyer. Good lawyers are selective in the clients they accept. Good lawyers are always busy…too busy to handle same day appointments or walk-ins…too busy to offer FREE consultations.
If you want quality clients you need to have a process in place to select them. If you want clients to listen to your advice they must perceive it as valuable. Law firm marketing helps influence that perception but commonsense must also have a role.
Clients get what they pay for…and they know it.
The Best Marketing for Law Firms Never Promises Anything
The bodies that govern law firms in every state have legislated against representing a potential outcome to a client. In part, this stems from sleazy practitioners making false or misleading statements in order to engage a client.
I am regularly approached by attorneys who “want to know the tricks around” this rule. Let me be clear: There are no ETHICAL ways around this. Excellent attorneys do not want to get around this. Good marketers and good marketing for law firms should never attempt to get around this rule. Here are three reasons why:
Outlining all the potential outcomes in a case increases your credibility with the client.
Attorneys can never promise an outcome in a case. Even giving the hint that a positive outcome is possible can sometimes lead to trouble. But most attorneys are also hesitant to discuss the potential negative consequences of the legal action.
Covering the entire spectrum of possible outcomes is something that good attorneys do with potential clients. They don’t stress the positive or the negative. The simply help the client understand the implications of each decision.
Giving the client the information about all realistic scenarios, up front, is something that enhances the attorney’s credibility in the eyes of the client.
Being transparent about the possible negative outcome increases the urgency.
Setting realistic expectations helps clients evaluate you fairly.
You can promise to return a call within 24 hours. You can promise to be honest with your client at all times. You can promise to deliver the developments on the case to the client as quickly as possible. But making promises you can’t keep is never a good idea in life or in marketing for law firms.
A Law Firms Marketing Madness: Cutting the Budget is a Bad Move
Many large law firms have been cutting their marketing budgets during the past couple of years. This is being done as a reaction to the broad economy and the perceived weakness in the demand for legal services. These law firms marketing madness will only make things worse.
Cutting the law firms marketing budget during difficult economic times is the wrong approach. A down economy is exactly the right time to spend MORE on marketing. Here are three reasons why:
Clients still need you to solve problems.
Do you really think there is a shortage of legal issues during a down economy? Come on now. Clients have either chosen to ignore their issues or they have put off fixing them until the economy improves. Your job (as a law firm business owner) is to help potential clients realize that their problems must be addressed now. It shows that you still involved in the community/industry.
Since we practice educational marketing, we are always providing value to our clients.
If you continue to provide this value, even during an economic downturn, you will build your credibility and goodwill within your community/industry. Law firms marketing in a recession are perceived as strong. Law firms marketing using educational marketing provide their clients and prospective clients with value. The combination of these two factors makes them unstoppable.
The return on investment is still there.
Think like a business owner. If you invest a dollar and you receive three dollars in return you have made a good investment. That’s what marketing is all about. Good marketers find out what works and they invest in it and leverage their investment to receive a great return.
Law firms marketing in a recession are rare but that’s all the more reason for you to INCREASE your marketing during tough times. Make the investment.
You’ll be glad you did.