Fees - hourly billing v value-based pricing
By Richard Burcher*
In November last year, I undertook a survey on hourly charge-out rates within the legal profession. This is the fourth survey I have undertaken focusing on professional charges – the first was rural conveyancing transactions, the second was on ADLS commercial lease fees and the third was on family trusts.
As many practitioners will be aware, I have long advocated a shift towards value-based pricing in contrast to the historical slavish adherence to time records and hourly rates as the predominant, if not exclusive, determinant of what constitutes a "fair and reasonable fee".
Not surprisingly, I am asked from time to time, what actually is value-based pricing. Even Priestley J. wasn’t sure in Chean & Luvit v Kensington Swan [2006] BCL 962 as he considered a submission "… which suggests that in some circumstances, bills might be rendered on a time and attendance basis as opposed to ‘value billings’, whatever that latter term may mean".
I think most practitioners have an intuitive feeling for what is meant by value-based pricing but, for the sake of clarity, the context in which I use the phrase is simply one where there is a nexus between the client’s perception of the value they have received and the fee they have been charged. In other words, the practitioner considers that they have been properly remunerated and the client considers that they have received advice and service at a price they consider to be fair. The concept need be no more complex than that.
More often than not, that conclusion has little if anything to do with hourly rates and time recording. If you doubt that observation, from the client’s perspective anyway, consider the findings of Ron Pol (Team Factors – www.teamfactors.com) and his surveys of Australasian General Counsel, which show that only 6% of those surveyed considered traditional time billing to be the optimal method of pricing external lawyers’ work.
The notion that something is "expensive" or "cheap" is completely meaningless and unhelpful unless the cost is considered in some sort of context. The real issue for lawyers is to deliver good value. That is a completely different question from asking whether something is expensive or cheap. Something can cost a great deal of money and still be very good value.
Conversely something can cost very little and still be very poor value for money. It is all about the relativity of the price to what one is getting in return.
Lawyers’ preoccupation with hourly rates and time recording as the principal determinant of a proper fee continues to do both the profession and clients a disservice. There will, of course, be times where a fee arrived at using this traditional methodology is indeed a proper fee. However, many mistake the correct end result as justifying the methodology. It makes about as much sense as saying that a broken clock is working just fine because it tells the time accurately twice a day.
Nonetheless, under both the former Rules of Professional Conduct for Barristers and Solicitors and under the Lawyers Conduct & Client Care Rules 2008, time and labour expended is a factor that must be taken into account.
To date, all of my surveys have been based on common fact scenarios with which practitioners can identify and which form a far more useful basis for gathering data on pricing practices than merely considering hourly rates. However, I concluded that the survey series would be deficient without some comprehensive data on hourly charge-out rates.
Respondents from 473 firms participated in the survey – meaning there was at least one response from 29% of all law firms in the country, although responses were from individuals reporting on their personal hourly charge-out rates and were not collective responses reporting data from the whole firm.
The survey and resulting report looked at not only hourly rates in the abstract but also the correlation between fee generation versus staff salary ratios, as well as hourly charge-out rates versus annual fee budget. The results were segmented and reported on geographically and separately for equity partners and consultants, solicitors and legal executives.
The purpose of this article is not to report extensively on the results of the survey as the firms that participated in the survey and invested in the report are entitled to the benefit of having done so. However, one of the figures that is worthy of mention, because it underscores the nonsense that hourly charge-out rates have become, is the increment in partners’ hourly charge-out rates over the passage of time.
The survey very clearly showed that in relation to equity partners, relative to experience, increases in their hourly rates notionally peaked at seven years – and that’s not seven years as a partner but seven years of post-qualification experience, which could mean between zero and four years as a partner. That is not to say that they didn’t continue to increase after seven years of legal practice experience but those hourly rates certainly ‘hit the wall’ at the seven-year mark.
From that point forward, increases are negligible and it takes a further 33 years of legal practice to achieve an average $50 an hour or 20% increase. Most practitioners with 40 years of experience would, I am sure, raise an eyebrow at the suggestion that they are only worth 20% more than one of their staff solicitors 33 years their junior.
One of the numerous unsatisfactory byproducts of this regime is that the longer you have been in practice and the better you are at what you do, the harder it becomes to price a job appropriately, and the harder it becomes to justify or even explain a loading or premium that is attributable to one or more of the ‘soft’ costing criteria. By ‘soft’ I mean those criteria such as ‘skill’ that require a judgement as opposed to an arithmetical calculation.
And yet there is no shortage of judicial recognition of the importance of the soft costing criteria and the risks to both practitioner and client of focusing on time and labour only. Holland J. summed it up eloquently in JBL Consolidate (In Receivership) (1982) 1 NZCLC 95-049: "… if Counsel is entitled to say ‘ I have reached some degree of seniority and therefore I am entitled to $X for every hour that I am professionally engaged’, then the incompetent will be encouraged to be prolix and dilatory and the efficient and truly skilled will be inadequately rewarded".
*As well as being a partner in the Bay of Plenty firm Kaimai Law, Richard Burcher provides a variety of pricing services to the legal profession through his company, Validatum™ Limited (www.Validatum.com).
LawTalk 725, 16 March 2009