By Ramon Jimenez, Esq

I have been saying this for two years now.  Clients have a general mistrust of hourly billing, said panelist Christopher Marston, whose firm, Exemplar Companies Inc., has successfully implemented a value-pricing model.  Fees there are based on the value of the service provided to the client, rather than the time expended to complete the service.

According to Marston, this value-based approach to pricing is more inline with what clients want. While lawyers think in terms of increments of time, clients think in terms of value. “People are buying outcomes and solutions. They are not buying your time,” he said.

Moreover, Marston believes the traditional time-based model of billing is flawed. The billable hour method is based on a perceived direct relationship between labor and the value, he explains. In other words, the more time a task takes, the more valuable it must be to the client. But—“If that were the case, the piece of coal you found next to a diamond would have the exact same value.”

Marston also points out that the billable-hour method limits profits. “On every six minute increment of time, you’re making the same margin. The worst part of it is that you’ll never make [a] higher margin. You’ll always make a lower margin because clients can always cut your fees. They’ll never give you more. Billable hours cap that margin.”

Exemplar’s value-based model starts with understanding the resources involved with each task at hand and determining a reserve price for those tasks. The reserve serves as the pricing floor. The firm then considers the value it adds to the transaction to determine its price.

Understanding how much value it adds to the transaction is key to Exemplar’s price determinations. “You don’t want to give away value without reaping a reward,” said Marsten. For instance, clients who demand especially prompt service pay a premium for that attention.

Similarly, fee arrangements that shift risk from the client to the lawyer also raise prices. For example, time-shifted billing methods—such as contingency arrangements where payment is only triggered by an event that is usually out of the firm’s hands—should always require a premium. “Where there is a ‘give,’ there should be a ‘take,’” said Marsten. “If you’re going to give the customer a contingency, then you need to price accordingly and command a premium because there will be a percentage of time you can’t collect.”

Fee arrangements that are not based on time require lawyers to pay close attention to the scope of the projects they are considering. While lawyers may have control over creating the boundaries of their representation, the problem to watch for is “scope creep.”  “Put the scope on a tack board above your desk and make sure you are asking yourself the question, ‘Did the customer pay for this?’” advised Marsten, who said that scope creep happens most often when associates are doing the work of the engaging attorney.

Beyond determining prices, lawyers considering non-traditional fee arrangements must observe ethical guidelines—not just the Model Rules, but also local rules and restrictions on fees that vary from one jurisdiction to another, cautioned panelist Margaret Raymond, a professor from the University of Iowa College of Law.