I’ve wanted to post something on this issue for a long time but only recently came across some other blawg observations worth noting.
On David Giacalone’s f/k/a blawg, he recently posted about some Value Billing Issues for Today’s ABA Ethics Teleconference which he hoped would have some discussion about the ethics of “value billing” (for an explanation of value billing, see below.) David is clearly not a fan of value billing and he is correct that not enough has been written yet about the ethical aspects of using fee alternatives to the billable hour.
David’s post is worth reading in and of itself, replete as it is with links to many of his other posts and articles about the ethics of value billing.
I highly recommend reading his “smart clients care about . . . ‘marketplace value’” post, particularly the Comments at the end in which he and value billing advocate Allison Shields (her blog is here) repeatedly go back and forth. It’s very interesting reading. There is also a rebuttal to David on the Legal Ethics Forum.
My take on the David Giacalone v. Allison Shields debate is this – I think David is too hung up on his belief that some value billing proponents have allegedly suggested that value billing is a way to dupe clients into paying higher legal fees than they would ordinarily. Now perhaps David has read more widely on value billing than I have, but I have not seen this suggestion. What I’ve read, particularly on accountant and value billing godfather Ron Baker’s site, is that value billing’s proponents argue that in some situations, simply billing by the hour does not truly compensate the lawyer for what he or she has accomplished for the client.
Consider this hypothetical – a Fortune 500 company is being investigated by the Department of Justice. Assume that if DOJ ends up suing the Company and wins, it will cost the Company hundreds of millions of dollars. The Company can turn to the Acme Law Firm to defend it, which will put a team of 7 lawyers on the case ranging from junior associates to a senior partner, all billing by the hour. They begin gearing up and start billing thousands of hours at a blended rate of $400/hour for what looks like will be a long, protracted battle with DOJ.
Or, alternatively, the Company can retain the Zeus Law Firm who has as a partner John Doe, a former Deputy Attorney General at DOJ. Over many years at DOJ, Doe gained a reputation for integrity and brilliant legal work. He is respected by many at DOJ and has the ability to directly contact the senior decision makers at DOJ who will take his calls and his requests for meetings.
Let’s say that the Zeus firm has pegged Doe’s hourly rate at $750/hour and let’s further assume that after putting in 20 hours on the Company’s matter, he’s able to persuade the DOJ to drop it completely or to end it by allowing the Company to pay a minimal fine or penalty.
Question: what is a “reasonable” fee for Doe under the circumstances?
Hopefully they will correct me if I’m wrong, but I think Ron Baker or Allison Shields would argue that Doe simply billing the Company 20 hours x $750 grossly under-compensates Doe for what he did for the Company. The Company hired Doe precisely for his experience, reputation and contacts. He saved the Company hundreds of millions of dollars and did so very quickly and efficiently, not to mention also saving them millions of dollars in legal fees had they retained the Acme firm instead.
I certainly agree with David that no lawyer should ever use a fee arrangement that is designed to camouflage an undisclosed fee hike or an unreasonable fee.
But that’s not what Ron Baker and Allison Shields are saying. Are they saying that in certain circumstances a lawyer can properly charge a client more than y hours x z rate if that formula does not reflect the true value of the work? Yes, as long the fee arrangement is clearly understood by the client, is agreed to in advance, and reflects the value of the work to the client as evidenced by certain clear and agreed-upon value or performance metrics in the retainer agreement.
If all that is spelled out up front, then I don’t see what the ethical problem is even if the fee ultimately ends up being more than y hours x z rate.
Friday, December 5, 2008
Subscribe to:
Post Comments (Atom)
3 comments:
Hello, DMG. Thanks for taking up the topic of value pricing. I just want to make a few quick points: First, I am not (by a long shot) saying that all alternative fees are unethical, and not even that all Value Pricing is unethical. Second, like yourself, I believe that a fully-informed client can usually fend for himself or itself. Third, however, my main point is that the less sophisticated the client is about lawyers and their fees, the more information the lawyer-fiduciary must provide.
In the context of clients wanting to try something different from hourly billing in order to reduce and better-control their fees, the lawyer using Value Pricing (which, remember, asks the client to guess in advance what the service is "worth" -- without knowing the level of service or the results) especially needs to make sure that the less-experienced client understands just how much or little he or she might be doing for that fee before charging the client a "certainty premium" that goes with the pre-set fee.
The business client in your example might have enough experience with lawyers to make a good decision, if given enough information. But, I am not so sure that we should be asking the average person coming in for divorce mediation or a will "what is peace of mind worth to you?" when pricing the service in advance. Plumbers don't do that. Nor do medical doctors or auto mechanics. In what circumstances should we allow lawyers -- despite their ethical and fiduciary duties -- to engage in such psychological tactics and price-sensitivity games in order to generate increased income?
Another perspective: the ex-regulator working the other side of the street is already charging a higher hourly rate that takes into account his or her experience and useful contacts. How much of a premium over the hourly bill should a fiduciary be seeking (in advance of knowing the results)?
This topic is far too complicated for any brief discussion or single hypothetical. I have been asking many questions about specific tactics used in value pricing, based on the expectations of its proponents (unknown by most clients) that they will consistently generate premium fees for lawyers. And, I have asked ethics experts to analyze the issues and hopefully offer guidance as to what standards to apply (we do need them still, don't we?) to a fee that is unrelated to the effort or risk taken by the lawyer or the costs incurred by the law firm. What information must the client be given and what tactics must the lawyer avoid?
Value pricing proponents tell each other they deserve to make more than they could using hourly billing, and they expect to make significantly more. Clients need to know that when they go looking for alternatives to the high cost of hourly billing. They need to know what questions to ask and what information to insist upon before they agree to be paying a premium fee.
David,
Once again you misrepresent our (pricing with purpose) argument.
"...the lawyer using Value Pricing (which, remember, asks the client to guess in advance what the service is "worth" -- without knowing the level of service or the results)" - Not true! We advocate agreeing to a price upfront for a very specific level of service. We call it scope. Changes in level of service are handled via change requests.
"Value pricing proponents tell each other they deserve to make more than they could using hourly billing, and they expect to make significantly more." - Not true, we believe the customer (I know, you use the more derogatory term, client, as in the great unwashed) is the sole arbiter of value and is therefore entitled to a) know the price upfront and b) be given a 100% money back guarantee.
Your entire argument is based on two faulty premises:
1. The labor theory of value, fully discredited in 1991 with the fall of the Berlin Wall.
2. That billing by the hour somehow magically makes people ethical.
There are unethical practitioners on both sides of this debate. I ask you who is more likely to be more ethical:
a) someone who bills by the hour with a $5,000 non-refundable retainer or,
b) someone who offers a fixed price upfront with a 100% money back guarantee?
Ed, Despite your insistence at my website that I come here and respond to your arguments, I am not going to go point by point through them. They are no different than those that I have seen for years from value billing advocates -- often Straw Men that distort my arguments.
I will remind you, however, that I have never said that all instances of hourly billing are ethical, nor supported the use of Non-Refundable Retainers. (I believe, of course, that lawyer fees are in general too high.) And, I want to point out one important mistake you are making: I note that Value Pricing asks the client to guess in advance what the service is "worth" -- without knowing the level of service or the results. You reply that "We advocate agreeing to a price upfront for a very specific level of service."
You are confusing the client knowing what you say you will do with the client knowing in advance how well you will perform the services -- both how thorough you will be and with what level of expertise (and success).
Given limits on my time and energy, I'm finished with the conversation at this website. Feel free to seek more detail at my site, in posts such as this one and those linked therein.
Post a Comment