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A top Boston corporate lawyer who's made a name for himself in the financial industry responded with a thoughtful question to something I wrote earlier. He wanted to know how value billing could work in his environment — a large-firm, corporate-transactional-work practice. To be sure, that's worlds apart from my employment-litigation-defense boutique, but that doesn't mean it can't work for him, too.
Here then is our back-and-forth discussion on the topic, starting with his question:
Here's the million-dollar question on alternative billing from where I sit: I can control everything that happens in a transaction that occurs in my firm, and price around 80% of the various structural things that can complicate a deal. I'd win some and lose some.
The wild card is the opposing lawyer: efficient and competent, or not? How much internal cost do I have to allocate to carrying both ends of the canoe, after setting my fee with the expectation of carrying one end? This seems to me to be the stumbling block for alternative billing in transactional engagements. Thoughts, law-firm revolutionary?
(I think he means me, and not without a tinge of irony.) Thoughts? Yes, many. First, you can't control everything in your firm. You don't know what rabbit trails of online research your junior associates might travel down. You can't always predict if one of your key partners will be overwhelmed with a competing project, or with the flu. Second, if you hold yourself out as an expert — as you should — then you should have enough experience to be able to price things notwithstanding your fellow canoe carrier. Third, why do we think law is any different from everything else? It's not.
Let's say you take a trip to Florida, and your flight cost you X dollars. If a headwind or a storm or congestion around Wilmington, Delaware, caused the airplane to burn up more fuel, will the airline change the price of your ticket after you land? No. Those "variables" didn't change the value to you of your flight. (If anything, the variables made your trip longer and less pleasant, lowering its value to you.) There are variables in everything. Saying "I can't price this because of the variables" is a complete cop-out.
That works for some of my clients, but not all. Clients who tend to use us deal in and deal out see the benefit of pricing in all of the variables. Clients who look separately for counsel for every deal, though, just want the lowest base price. The lawyer who sets a price that factors in all of the variables is going to get killed selling to this second kind of client because the competition will give an estimate based on a smooth execution and add on to that. Because client type 2 here usually purchases on the basis of the lowest base price, the lawyer who successfully prices in all the variables won't get any deals. I'm trying to figure out a way to use alternative billing for the second kind of client — it's much easier for the first.
The easy answer is that you really don't want Type 2 clients. Someone who comes to you for price will leave you for price. So set your price high enough to attract serious clients and weed out those Walmart shoppers.
The more-nuanced answer is that you, like 99.999% of all lawyers, are stuck in the Marxian labor-theory-of-value mindset. You believe that the value of your excellent service is based on the amount of work you have to do to provide it. The funny thing is, your clients don't believe that at all. They, like all customers, measure value subjectively: what it's worth to them at that time.
Plus, your method values all your time equally. To see why that's a problem, read these three posts: — "Billable showers," "What's my time worth?" and "Watching the time go by."