Legislation has been introduced in Georgia to provide more cost accountability to state-funded defense of capital cases.   What has caused the uproar?

 

In March of 2005, Brian Nichols was awaiting trial for rape in Fulton County, Ga.  While changing clothes to prepare for his court appearance, Nichols overpowered a deputy, walked into Judge Rowland Barne's courtroom through the judge's chambers and shot both Judge Barnes and a court reporter.  During his escape, he injured several and killed two others.  The manhunt that ensured culminated in an unlikely ending:  Nichols in the apartment of a drug user who was soul-searching and through an 11 hour conversation softened Nichols enough to let her leave.  She called 911 and Nichols eventually surrendered without further violence.

 

Since then, Georgia has seen one of the longest murder trials in state history take place.   Since Nichols qualifies as an indigent under Georgia law, the taxpayers are footing the bill for his defense.  The Atlanta Journal Constitution reported that the cost of the trial has exceeded $2 million in defense costs alone.  That has outraged the Georgia Legislature enough to change the law regarding representation of indigents in capital cases.  According to the AJC:

 

The bill . . . could reduce the financial burden on the Georgia Public Defender Standards Council, which oversees the statewide indigent defense system. Under the bill, the council would pay for the first $150,000 paid to private lawyers defending an indigent capital case and 75 percent of the next $100,000, with the county paying the other 25 percent. Beyond $250,000, the state and the county would split defense costs.

 

Here's the kicker:  The measure recommends that the council set contracts with flat rates for attorneys' fees and expenses in death cases.  Sound like a good idea?

 

Perhaps if defending capital cases were akin to filing Chapter 7 Bankruptcy.  However, for private sector attorneys who represent indigents in capital cases, does it remove the incentive to take on these difficult matters?  Would a criminal defense attorney zealously defend a suspect for a flat rate for both fees and expenses when you have Judges saying things such as"[e]veryone in the world knows he did it" (as the New York Times reported Judge Fuller said before having to recuse himself from the case)?

 

Is Georgia trying to limit the representation of indigents in capital cases?  Or are they only limiting the financial incentive to defend them?  If it is the latter, then ostensibly an attorney may lose the zeal to defend a client once the money runs out - unless they believe that the defendant is innocent. And that might be the point of the legislation.  [poll=8]

   

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It's not that I am against value billing.  I am just against the proposition that the hourly billing model is an inherent source of evil.  When reading Ed Poll's post on Professionalism versus Competence, a sentence caught my eye that appears to be another slam against the billable hour.

 

The post is about a recent USA Today poll asking whether co-worker's rude or unprofessional behavior should be tolerated if they otherwise do a good job.  Thankfully the answer was overwhelmingly no.  No one wants to work with rude people.

 

Poll notes the new firm Patrick Lamb co-founded this year that focuses on value billing.  There is much positive press when law firms move to this model so the marketing upside is a good thing.  But then came this:

 

As more lawyers succeed in this business model, perhaps others will follow. Then, perhaps, will civility in the profession be achieved.

 

Am I to conclude that without this business model (value billing), civility can't be achieved in the legal profession?  First, I don't want to mistake Poll's point:  that providing value to clients and a team mentality within the firm adds civility to the profession.  Agreed.  However, how is this at odds with hourly billing?  Is it because some (and unfortunately many) are sloppy in their billing process?  Or worse, unfairly padding their hours?

 

Assuming this is a widespread problem, does value billing fix it?  Maybe, but not by its presence alone.  If you sell services at a fixed fee, you had better know the price of your services or you won't be in business long.  Tom Kane explains in a recent post the importance of tracking time even if you bill at a fixed fee.

 

Understanding that in all but a few routine transactions there are variations in the time it takes to provide a service depending on the variables surrounding the case, you will need to account for differences in the price of particular tasks.  So while on the surface everyone may be paying the same for a service, some will be paying more for a task while others pay less.  It depends on how difficult the task is and how efficient the attorney. 

 

In fact, if anything, value billing helps budgeting for lawyers since you can set goals on how many tasks you sell clients.  Crafty firms can then weed out the difficult cases through case assessment to maximize profit.  Finally, marketing efforts can sway those who would buy into the "value" concept unaware of the higher price they are paying for a simple legal task. 

 

Am I saying this is how firms who "value bill" operate?  No.  Can they operate this way?  Yes.  Is that a better value to clients?  No.  And to answer the presumptive rebuttal, "with value-billing, if the client doesn't like the fee, we will adjust it for them" I would answer, "and how is this different from hourly billing?"  I've yet to meet a lawyer that is unfamiliar with post-bill adjustments.  Some attorneys have a chronic habit of reducing their fees prior to billing as well.   The biggest attraction to the value billing model isn't the savings to clients (marketing notwithstanding), it's the potential for higher revenues for well-managed law firms who price margin into the fee.  The value of value billing to the client is nothing more than trading actual cost for pre-performance cost certainty - that apparently can still be negotiated after the service is provided (at least when firms open the door for negotiating fees after performance).

 

Once again, it comes down to trust.  If there is a trusted relationship between attorney and client, then attorneys shouldn't overbill their clients and clients shouldn't question attorneys' fees (after-the-fact) - regardless of the method.  As Poll states in an earlier post, "there is a very small percentage of 'bad apples' in the legal profession."  The devil isn't in the billable hour.  It's in those bad apples.

 

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A friend of mine practices in firm that specializes primarily in transactional work. Much of the work is billed flat fee but they still track their time so the firm can determine profitability. Recorded time is set against an attorney's budgeted hours for the year so that they are credited for their flat fee work. My friend lamented associates padding their worked hours for flat fee work so they make their budget numbers. In this case, padding hours doesn't affect clients since the fee is pre-set but it does affect reporting of profitability.

Aric Press, Editor-In-Chief of The American Lawyer, wrote in the December, 2007, In-House article that 2008 may well be the year when clients start to demand alternative fee arrangements:

One of the unintended consequences of electronic billing is that clients can now easily compute and compare the cost of tasks. Soon there may be other technological threats based on knowledge management that can convert once complex acts of lawyering into rather commoditized routines.

I have been pretty adamant in my defense of the billable hour. That doesn't mean that I am against alternative fee arrangements when the use of them will improve the efficiency of the firm and thus increase profits. Recording time, regardless of fee arrangement, is still a good idea. However, sometimes it just makes more sense to bill using fixed fees for certain tasks.

Why not take advantage of this and place an internal value on the task as well? You can do this by determining the time it takes to perform the task, then mark it up to the market price (perhaps based on the hourly rate times the time it should take to perform it). When a task is routine, standardization gives firms opportunities that can revolutionize a firm's business model. Not only will attorneys have a value based on their billable hour, but certain repetitive and reproducible tasks can be valued as well. Your firm will diversify its product offerings to clients, giving them more options for services and giving you more options to strengthen the client relationship. You could ostensibly set a price list for legal products - in effect competing with the emerging online forms market.

In the example of my friend's firm, creating a standard task that is reproducible and given a proper value reduces the inaccuracies in reporting due to "padding time" by associates trying to make their numbers. In the example of the firm whose client has already placed billing guidelines on a firm, this has the equal benefit of both providing cost certainty to the client and saving the attorney from repetitive time entry.

There is also the benefit to the general practice firm. The firm can market package transaction services at a set rate, and tack on billable hours beyond the scope of the repetitive (and priced) task. Sound a bit like value-billing?

How would this work? For transactional work, it would be as simple as setting a value upon a routine task, such as creating a will. For a simple will, attorneys will determine what the variables are, determine what it has cost in the past, agree upon an acceptable price based on market acceptance and variables, then price it.

In a litigation matter, it is no different. Many firms are already required to provide budgets based on tasks for the benefit of client cost allocation. Each task that the firm performs can be priced. Litigators can anticipate the course of the suit and determine a cost for the entire matter. There should be a value placed upon every legal task, whether it be writing a status letter, reviewing a file, etc. The price can take into consideration variance in time it takes for different attorneys to perform the task. That is up to the firm to decide.

By standardizing the value of certain tasks, it also opens another opportunity for building firm expertise: giving royalties to attorneys who create reproducible work product. Firms spend years building up forms. Forms are rarely created again - they are typically modified. Yet no one gets credit for creating the forms.

By giving an attorney a royalty for a form, you encourage expertise to be passed on to the rest of the firm. You can position attorneys who have a talent for researching and integrating current law into forms as work product creators and attorneys who are better at managing relationships and matters representing clients. Both have value. Both can be compensated based on the work they perform. Form writers would receive a percentage of the cost of the task as a royalty for a certain time period whenever their form is used. Just as you should place a time limit on origination credit, you should only provide royalties on forms for a certain time.

How can this be advantageous to the firm? Several ways:

• It encourages information sharing within the firm.
• It compensates those who provide value to others in the firm.
• It can further a strategy of increasing leverage by giving credit to partners while reducing their billable hours.
• It transfers the wealth of knowledge gained at the firm's expense back to the firm.
• It can aid the strategy of succession planning by providing a route to semi-retirement while ensuring that the firm maintain its areas of specialization.
• It allows partners to spend more time on what they excel in most: rainmakers focused on marketing efforts and strategic planning and grinders developing work product.
• It gives firms an opportunity to give associates responsibilities that will benefit the firm as well as the associate.

Of course, with any change in policy, there are uncertainties that have to be addressed. For example, what if another attorney within the firm finds a problematic provision in the form and proposes to change a few clauses? What if the attorney proposes an entirely new form? Although in theory it would be a good thing to have several different forms from which to choose, logistically it may make more sense for your firm to settle on a preferred form from which attorneys may receive a royalty. That along with determination of the royalty percentage is sure to provide lively discussion in the partner meeting.

Whatever direction your firm goes when applying new policies, it should conform with a universal requirement of periodic measurement and adjustment.

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"Is the billable hour dead, as many like to proclaim (whether wistfully or presciently?)" So starts the Executive Summary for the 2007 ALM Billing Rates & Practices Survey. The relentless assault against the hapless billable hour continues. Here is yet another blog post arguing against hourly billing. Yet if you look at billing rates, they continue to increase. The 2007 ALM Billing Rates & Practices confirms this, but also drills down into respondent's use of alternative fee arrangements.

According to the ALM survey, the average billing rate nationally is $240. This is in line with the 2007 Law Firm Economic Survey from LexisNexis, where nationally, attorney rates were at $249 (broken down: equity partner rates were at $263 and non-equity partners billed at $235 on average). In the ALM survey, "[a]ll but a small percentage were the leader, managing partner, shareholder or owner of their firm", so I didn't include the firm effective rate that includes associate and paralegal rates in calculating the $249 (for those of you thumbing through the LexisNexis survey). Only 8% of the ALM respondents were associates, so it may very well be that average rates were lowered to $240 in the ALM survey by the associates (who in the LexisNexis survey billed at $175 per hour).

The survey is heavily weighted to small firms, with about a third of respondents being solo practitioners and 58% from "small firms" defined as between 2 and 39 attorneys. Why ALM decided to include mid-sized firms (Juris defines mid-size to include firms with attorneys with over 10 attorneys) in the small firm category, I don't know, but it might be due to a small amount of respondents in that 11-39 range.

As further comparison, the average national billing rate for equity and non-equity partners in the 2007 Altman Weil survey was $315. The National Law Journal Billing Survey partner average was $427. Both the Altman Weil and NLJ surveys target larger firms.

One of the observations of the survey was that size of the law firm matters and the above figures certainly indicate this. However, in the LexisNexis survey, the observation was different: it isn't the size that matters, but "that law firms that outperform with regard to per-partner income do so because they excel in performance on the key law firm profit drivers." The ALM Billing survey doesn't profile the firms for per-partner income and thus only looks at part of the picture.

In the chart above, each quartile was ranked for the following key profit drivers: productivity (billable hours), leverage, billing realization, effective rate, and operating margin. The highest performing firms ranked the lowest in all of the indicators.

Size, on the other hand, didn't make as much of a difference. For example, the per partner income of the top performing firms with 25 or more attorneys in the LexisNexis survey was $609,548. Income per partner for firms with 11 to 24 in the top quartile was $548,557 and with 10 or fewer attorneys, $512,896. However, the difference between quartile 1 and 2 across all sizes is substantial: $325,986, $322,876, and $294,871 respectively. While there is less than $100,000 that separates the smallest surveyed firms from the largest ones, there is nearly $300,000 difference between quartile 1 and 2 across firms of all sizes.

Which brings us back to the ALM Billing & Practices Survey. 88% of respondents to the 2007 ALM Billing Rates & Practices Survey reported that they offer "alternatives" to the billable hour and it made up an average of 37% of their revenues. That is a pretty substantial number. Given that the survey is made up of smaller firms, you may be tempted to conclude that smaller firms are moving away from the billable hour in order to compete better with larger firms.

That may well be the case, but it is just as likely that some small firms that continue to not operate like a business could be getting caught up in a trend that in the long run will drop their profits even lower while the solo practitioners next door is making half a million. If you don't measure performance, you won't know.

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Many in the legal industry are often found complaining of the reliance on the "billable hour" (see here, here, here, here, and even the venerable Scott Turow gets in on it here). Value-based billing and other fixed-fee type arrangements are offered as a better guide.

That begs the question: What has the billable hour ever done to deserve such lament? The answer, in part, may be due to attorney discipline. Again and again I work with attorneys who consider recording their time as an administrative chore, something to be done by others if at all possible. With this attitude, attorneys are likely backtracking to remember what work they did and inevitably are either billing too much or too little. No amount of discussion or proof by the numbers will convince the attorney who is unwilling to record their time as work is being performed.

Attorneys tell me about their clients wanting cost certainty, client questioning the time it takes to perform a task, and clients feeling overcharged for work. This leads many to discount their time through markdowns or taking a percentage or some subjective dollar amount off the bill. This tells me that the client has trust issues with the attorney (or the attorney is worried about it) and the attorney is making it worse by discounting (tacitly acknowledging the client's suspicions).

On the other hand, I know of attorneys who don't have this problem at all. They never write time down, they never discount, and they never have a client question their bills. The client trusts that what they are being billed is the actual work that the attorneys performed. What are they doing differently? Are they value-billing? No. They enter time as work is performed. They use timers. And they are disciplined. Here is the process:

A client calls. A time entry is opened. A timer starts. As the attorney talks, he/she writes in the narrative. If the call requires a letter or other task, the attorney does it, then comes back to the entry and types it in. Once finished, they stop the timer and mark the entry to be billed. Done.

What happens if another client calls? You pause the timer; open a new one. If you want to go back, you pause the second entry and go back to the first. You can do this on a piece of paper and a standard kitchen timer, but why would you want to do that? That only delays the billing of the work and duplicates the process of time entry. Utilize the technology that is out there to help you manage your practice. Do it yourself. Make sure your system has an easy way to access timers within a time entry and can manage multiple timers.

Working in this way can be learned. The difference between the attorneys above is that one looks at the matter first, then the time entry. The second attorney looks at the time entry first, then the matter. By wrapping the tasks you perform inside of a time entry and utilizing timers, you won't over charge and you won't need to discount your time. Better, you won't need to reconstruct your time entries later, wasting billable time and invariably leaving billable work unrecorded (and unbillable).

If you want to stop billing by the hour, that is fine. But I don't think that is the problem for clients. I think it is a matter of trust. Don't allow your relationship with your client to get this way - utilize timers and don't bill any more than the time you work in a matter. And record your time as you work!

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There are three key strategies for increasing revenue from existing clients:

• Make it easier and simpler for people to get what they need

• Provide good enough solutions to those with low-end requirements and risk

• Remove barriers to consumption

Talk to a small business owner or mid-level executives in larger businesses and you find out that they avoid calling their attorney. Why? Because they know that the clock is always running and can easily escalate into a significant unplanned expense out of proportion to the client’s sense of need or risk.

On a recent trip to southeast France, I went to their version of a grocery store. The Intermarche’ is the French equivalent of Kroger, Publix, Albertsons or Wegmans. There is one big difference. U.S. stores encourage consumption by making the experience convenient for shoppers. The Intermarche’ reflects a French culture that discourages consumption.

Upon entering the store, the only available equipment for gathering my purchases were small plastic hand baskets about the size of those you see mounted on the handle bars of a bicycle. That was hardly what I needed to stock the rented villa for our group of eight. As it turned out, traditional wheeled shopping carts were located in the parking area. However, you had to deposit one Euro coin into a locking device to release the chain securing the cart. Of course, I didn’t have a Euro coin, so I returned to the store for change. The next surprise occurred when checking out. There were no bags, no boxes, and no sackers. You are expected to bring your own bag and sack your own groceries. Of course, I was the only person in the checkout lane with a week’s supply of merchandise. French shoppers limited their purchases. Each had their own shopping bag or individually decorated basket that they reused for shopping purposes.

Like the Intermarche’, law firms have erected barriers to consumption and can increase fee revenue and partner income by tearing down those barriers. Firms need to proactively propose a pricing arrangement that encourages their small business clients and mid-range corporate executives to call. In developing a pricing structure, put yourself in the shoes of your client. Predictability is often more important than actual cost. Department heads, division heads and other corporate executives are held accountable for their financial targets. Proactively offer a retainer arrangement that covers consultation on issues related to the normal operation of the business. The arrangement can provide that law firm services related to any particular matter that (in the judgment of the law firm) appear to require significant individual work shall be undertaken by the law firm only under a separate engagement agreement. The retainer arrangement will eliminate surprises. The clock only starts running when the law firm notifies the client that additional work on a particular matter will be outside of the scope of the retainer arrangement.

The client will call more often. The law firm will cement its position as a trusted advisor. More calls increase the opportunity for the law firm to add value under its traditional billing methods. The client will be happier and the law firm will increase fee revenue and per partner income.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

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The January California Lawyer (page 8) reports that lacking comfortable alternatives, lawyers and clients are staying hitched to the billable hour.

 

The article, Driven by the Clock, notes that C-level executives on the corporate side seem more reluctant than law firms to abandon the status quo—the traditional hourly bill.  Offered an alternative arrangement, one corporate executive rejected it, explaining, “I need someone watching my back. I already have an investment banker whose only interest is this deal is collecting his commission.”

 

The client did not want legal advice biased toward a certain outcome. One of the complaints against the “billable hour” by the business world is the perceived conflict-of-interest that may result in the lawyer finding things to do just to increase the bill. The article illustrates that alternatives to the billable hour can interject their own versions of perceived and real conflicts-of-interest into the lawyer/client relationship. 

 

As observed by Brad Brian, past chair of the ABA’s litigation section, “There is an interesting dance going on. A lot of clients want attorneys to think about billing alternatives, but they’re nervous about them too because there are risks on both sides.”

 

There is no single pricing solution that will make everyone happy all of the time.  It follows that a law firm should not have a single pricing model.  Where alternative pricing fits, alternative pricing is a road toward more partner income and happier clients.

 

Morepartnerincome.com is sponsored by Juris, Inc.  For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

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Rees Morrison reported that the InsideCounsel/DataCert Annual Report of Corporate Law Departments listed the top steps taken to reduce corporate legal cost. The list was derived from a survey of 180 law departments.

The top five cost reduction steps included:

1. Bring work in-house
2. Use of interns, paralegals or temporary staff
3. Moving to alternative fee arrangements
4. Preferred provider programs to reduce the number of outside law firms
5. Cutting staff

I was surprised by the third item on the list. Close to one-third of the surveyed firms reported using alternative fee arrangements to lower cost. Of course, we don’t know how extensively each of those firms is using alternative pricing, but it is worth noting that it has moved up in the consciousness of the General Counsel.

While the hourly bill is still king, we continue to encourage law firms to propose alternative arrangements wherever possible.

You want your alternative pricing approach to provide the firm with the opportunity to increase margins through efficiency while reducing the client’s cost and increasing their cost certainty. In my book, that means a fixed fee per transaction, project phase, or for a portfolio of business. In more common general business terms, it means packaging (defining scope) and adopting product-like pricing.

Clients want lower cost and certainty of cost, not just cheaper services. The law firm and the client can both win through increased law firm efficiency:

• Better scheduling
• Use of competent but lower-cost talent where appropriate
• Improved reuse of knowledge
• Better project management
• Taking increased advantage of technology to automate processes
• Equipping the client to carry part of the load

In most cases, law firms are viewed by the clients as too good, too expensive, and too complex. Alternative pricing is one way to shift law firm thinking toward “a solution that is good and simple enough for the situation at a reasonable price."

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
 

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If you haven’t read the paper titled The Truth About the Billable Hour by the Yale Law School Career Development Office, you should. The paper illustrates just how difficult is it for associates to accumulate the billable hour targets placed on them. Set the target too high, and a host of other important aspects of an associate’s life and career suffer: That can send retention plummeting through the cellar. The firm becomes a supply house for law firms who depend on laterals to fill their talent needs.

Goals need to consider more than just billable hours. There are seven areas where we can invest our limited time on this earth. If firms value their investment in associates, they will establish targets that recognize the importance of those seven areas when it comes to developing a well-rounded, productive member of the firm. What are those seven areas? They are job, family, religion, civic activities, health, recreation and self-development. These are competing choices for the limited amount of time available to us.

Our young associates are willing to shift a disproportionate amount to time to the job during the first few years, but there is a limit. In addition, what those associates value most is their professional development. Shortchange their development by over emphasizing the “billable hour goal”, and the associate’s tolerance for an exploitative work schedule dissipates even more quickly.

The difficulty of accumulating “billable hours” is also important from another aspect. It points to the importance of mining the law firm’s business looking for “defined scope opportunities” that can be marketed for a “fixed price,” making the law firm less dependent on the important, but income-limiting, billable hour.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

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The Entrepreneurial Law Firm in Three Steps

The entrepreneur’s sprit is a restless one. Here is a three-step classic road map that has been used by many entrepreneurs to transform a moderately successful service business into a significant financial success.

1. Figure out how to package the business’ services in order to market and price them like a product (the razor strategy)

2. Figure out how to add a service component to the packaged service product (the razor blade strategy)

3. Add amenities around the product and services to create a unique, high-value experience for the customer. 

Can the tried and true three steps work for a law firm? There are entrepreneurial firms already doing it. Here is a hypothetical example just to illustrate the application of the three steps:

1. An estate practice bundles its services in several different packages, each targeted to different segments of the population—the up-and-coming professional, the young married couple, the mature high-net-worth couple. The packages are sold for a fixed price, and promotional materials use the same look and feel as the brochure for a car.

2. An estate practice adds an optional monthly fee to its service package. This razor blade service includes updating the documents for changes in law and keeping the client informed of any changes or expected changes in taxes, laws, court decisions, and regulations that might affect their estate or estate plan.

3. The estate practice adds an extension to its office along with upscale hospitality staff, all specifically designed to cater to higher-net-worth clients. Everything about their high-worth facility and services is designed to reinforce the special VIP status of the firm's high-net-worth clientele. The experience provided for the client benefit raises the firm to an entirely new level, attracting high-net-worth clients.

The key is to focus on opportunities and to think strategically.

• What does the firm do best?
• Who are the prospects for our service?
• What distinguishes one type of prospect from the other?
• What is unique about each type?
• How can we build our services to appeal to some of the larger segments of the prospect population?
• What is the value proposition that appeals to those groups?
• How could we price this to be a success with the selected targets?
• What opportunities are there to provide a related ongoing service associated with the initial package of services?
• What experiences, amenities, etc. would appeal to our target groups, making our relationship more valuable for them?

Can you apply the three-step strategy to areas where your firm excels? Give it a shot. Maybe the light will come on, and your firm will start operating at a new, faster pace—entrepreneurial speed.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

 

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