Has value-pricing become more valuable during COVID-19?
Fixed-fee or value-priced billing is not a new phenomenon in the legal industry, with many NewLaw firms (and even traditional law firms) offering some version of it to clients. However, with COVID-19 tightening purse strings in many sectors and bringing uncertainty across the board, do all firms need to reconsider their stance on pricing. In other words, do we need value-pricing now more than ever?
Time billing
Time billing has been the number one way in which law firms have billed their clients for decades. It is a simple method in theory: the lawyer estimates the time it will take to complete/attend to a matter as against their hourly rate and that of their supervising partner (and any other member of the firm being involved, the lawyer records the amount of time spent on the matter in increments (usually six-minutes), and then the lawyer sends the client a bill at the end of the matter based on the time spent on the matter.
While it is a simple method, there are in fact several flaws to the time billing method that can go unnoticed if left unchecked. The largest of these is that billing clients based on the amount of time spent on the matter can create a conflict between lawyer and client, meaning that lawyers:
are unduly incentivised to spend more time on a matter in order to hit their billing target for the day / month / quarter (therefore creating inefficiencies);
spend time recording how long they spend on a matter - rather than purely focusing on the actual desired outcome for the client;
the hourly rate of the lawyer is not commensurate with the value the client is receiving; and
clients don’t receive cost certainty – as estimates can (and often are) exceeded.
This can then very often lead to a higher risk of cost disputes between the client and the lawyer when the initially estimated costs blow out, and this model of billing as also rewards input over outputs.
Value-pricing
In response to the flaws in time billing, value pricing (often called fixed-fee although the two are different) provides cost certainty for the client, enabling them to plan their legal spend more effectively and budget better. The fee itself is based not on the estimated time the lawyer will spend on the service but a range of factors, and enables clients to make better decisions as they can weigh up the costs of legal representation and services against the benefits and drawbacks of the matter at hand.
Further, with value pricing the focus is placed on the value the lawyer can create for the client rather than the time they spend, which aligns with the client’s primary interests over the lawyers. Lawyers are therefore encouraged and incentivised to work efficiently to add as much value to the client’s case or matter as they can, and unlike time billing, it gives the lawyer a chance to problem solve on the run rather than working for time or their own bottom lines.
Case Study: Law Squared’s approach to value-priced billing
By removing all time recording and individual financial budgets for its lawyers, Law Squared is one of a small handful of firms who have jumped in and fully adopted this model focusing on outcomes from the outset. Whilst a number of firms still record time for their lawyers as a ‘measure of productivity’ (this is also flawed), Law Squared has done away completely with any form of individual metric for its lawyers.
Value pricing is exactly like it sounds. Our lawyers put their focus into the value of the work or the outcome for the client, not the input of their time. Each piece of work is scoped separately and there is no standardised “price list” – we simply evaluate the value of the work to the client.
At Law Squared, we have a distinct way in which we start the conversation about our services with our clients. Based off of our value-pricing billing model, our lawyers aren’t driven by financial metrics nor are they measured on them therefore, we engage with our clients to better understand the needs of the business and how we could assist them and at what cost, offering certainty on delivery and pricing.
As a next step, our team provide a clear scope of work with several options and a fixed price for each level of service, to place the power back in the client’s hands and empower them to decide what’s right for them – not the other way around. By providing the client with these options, it gives them the buying power and also the flexibility to choose which level of service they require.
Throughout the scoping process, our team looks at:
the client’s objectives (non-legal);
what work we will do;
what work we won’t do;
when the work will be delivered;
value of the work, i.e. how the work will help the client achieve their objective; and also
ultimately, the price.
You will notice that these steps do not include the time in which our team will complete a matter.
What has been our experience during COVID-19 with value pricing?
In short, it has empowered our clients to make better informed decisions and further solidified our thinking that it is the better pricing approach.
As mentioned, the onset of COVID-19 in Australia (and Victoria specifically) was a trying time for businesses financially, and our clients’ businesses were no exception. But the onset of COVID-19 didn’t mean that legal issues just stopped cropping up; if anything, the number of issues our clients faced increased, and they were left trying to deal with these on a very limited budget.
By Law Squared adopting a value pricing model, and continuing to stay true to this throughout COVID, our clients received the benefit of both:
certainty on costs - at a time when they may have been significantly financially constrained and still are experiencing the effects of this; and
efficiency, in circumstances where guidance from the State and Federal Governments were constantly changing on the daily.
By providing our clients with the value pricing, it empowered them with the right tools to weather the COVID-19 storm and come out the other end.
So, which is the better model?
Ultimately we believe that value pricing is best, and this has remained our position since our firm was established.
Being one of the only law firms of our size who do not use time, or individual financial metrics as a form of measurement of our lawyers, our clients are the ultimate beneficiaries of a truly outcome focused law firm. Value based billing poses a positive alternative to the traditional model of time billing, and it is not only your clients who will reap the benefits – the pressure placed on the shoulders of lawyers is significantly alleviated, and in our view, ultimately makes for a more fulfilling, and prosperous, workplace.
By continuing on with the outdated way of time billing because “it’s just how we’ve always done it”, law firms are ignoring the widespread change that is already underway, and risk losing their best clients and talent.