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Why law firms should embrace value pricing

How many times have your clients been shocked at your bill? asks Jeremy Streten.

user iconJeremy Streten 24 August 2017 Big Law
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Have you ever had them dispute how long it took you to make a telephone call, how much time you actually spent talking about work on that telephone call or questioned how long it took you to draft a document?

Do you dread sending your clients a bill because you know they will want you to justify the time that you spent doing that work?

If your firm is billing for its work based on the time that you spend on a matter, then you would answer yes to most, if not all, of these questions.


The inefficiencies of charging on time

Charging for legal work based on time is an antiquated business model that clients dislike. They want to know what they have been charged upfront for the work that you are doing. The concept of charging for legal work based on time is based on the formula business revenue = people power x efficiency x hourly rate.

This formula is flawed for a number of reasons:

1. Charging for your work based on time is actually inefficient. When you first start your career as a lawyer, it may take you a day to do a certain task, such as drafting a contract; the second time it may take you half a day; the third time a few hours, and then an hour from then on. As you become more efficient, the amount of time that you can bill for a certain task diminishes.

2. We all have the same amount of time in a day to do our work. This means that there is a cap on the total number of hours that you can do your work and charge in a day.

The common response to these arguments are that “We will just increase our hourly rate”. That might sound good in practice, but have you ever known a client that liked an increase in their hourly rate. I have even heard the justification that the client will appreciate the higher rate because the solicitor has become more efficient. The client will not see the increased efficiency and will question the increased rate.

What is value pricing?

Lawyers charging fees based on the value that is provided to the client is nothing new. It was the dominant method for billing before the late 1940s.

This changed when lawyers were sold on the benefit of their staff keeping time sheets, and then saw it as an easier way to bill. Value pricing is the method of charging for the work based on the benefit that the client will receive rather than the time that you spend doing that work.

The regulation of lawyers often requires that we provide a quote to our clients as an estimate for the work that we are performing. As a starting point, lawyers should simply move to quoting that fee as a fixed price.

Experience will dictate whether that is a fair fee for the work that is provided. There are better ways to calculate these prices, but this is a good place to start.

Who will benefit from a move to value pricing?

The move to value pricing will benefit many professionals, especially lawyers.

Charging for work based on the benefit that the client will receive and disclosing that fee upfront to the client will remove the common argument between lawyers and their clients about the actual amount of time they spent doing their work.

Employed solicitors will also benefit from the move. If they are no longer charging on time, they will benefit from the not being bound to the billable hour and the minimum number of hours billed in a day.

Clients will benefit as they will know what they are being billed upfront and will not have any surprises. When engaging with a client, you need to properly define the scope of work being performed.

If that scope changes, then you need to discuss that change and any additional cost with the client. This discussion is also a better way to deal with your clients and will create greater trust with them.

The move to value pricing will not be easy. I know this from my personal experience and also the experience of other solicitors that I have advised on these changes. However, the benefits it will provide to your business, client base and employees will be immense, and will result in you enjoying your business even more.

Jeremy Streten is a lawyer and the author of the amazon bestseller, The Business Legal Lifecycle, which is designed to help business owners understand what they are doing in their business from a legal perspective and give them a plan for the future.

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