Value Billing Unethical?

I promised David at EthicalEsq that I would respond to this post of his today. In a response to my previous post on value billing, David argues:

There are a lot of problems with the billable hours system, but most of them are the result of abuses rather than of the inherent nature of using hourly billing. In determining the reasonableness of a fee, therefore, the legal profession has attempted to avoid the worse distortions from hourly billing by not fully charging for hours spent "getting up to speed" in an unfamiliar area of law. The client rightfully expects expertise and needs to be informed by the ethical lawyer when he or she is not yet fully competent in a particular legal subject.

The client also rightfully expects to pay a fee that corresponds -- at least roughly -- to the amount of time spent by the lawyer. And, the honest fiduciary should let the client know approximately how much work is involved. Some sophisticated clients might want to experiment with or negotiate for some kind of value-related fee. But no sophisticate would say "I know you'll only spend a few minutes on this, but it's worth millions to me, so here's a seven-figure check." Instead, the savvy client would negotiate for, or shop around for, a more competitive fee, no matter the "value" of the result.

David and I both agree on quite a few things, the primary one being that a lawyer should educate his or her client up front about the basis for the fee and give them an estimate of the range of costs and outcomes. However, I feel (unlike David) that the billable hour system is the problem, for both lawyers and clients. The best indictment of the billable hour that I've found on the web is in this article where the author writes:

The billable hour, a practice used only since the early 1960s, has become an artificial device that ill serves both professionals and clients. It divides the time of the accountant and lawyer and consultant into parts, turns each professional into a bookkeeper, and creates such profound guilt for every working hour that’s not billable that important non-billable firm needs are inadequately addressed. It affords the opportunity for the worst kinds of excess, such as padding hours, thereby increasing revenue without supplying value – a short-sighted practice bound to backfire. It makes no distinction between the hour spent on trivial activities and the hour spent on substantive matters. Moreover, if the client perceives that there is no added value in the hourly bill, the general practice is to renegotiate the fee, which is becoming a common practice in today’s competitive environment – and makes a mockery of hourly billing. It’s such an anachronism, and so entrenched, that it precludes such rational billing approaches as value added and enhanced worth or contribution to a client’s business, neither of which is best calculated by the hour. As one sage put it, it’s a virtual cartel in which every firm seems to arrive at the same billing rate, even though quality of service is not consistent from one firm to another. Or even from one partner to another in the same firm.

How many other products are bought this way? My wife and I are going to be building a new home this year. We we were given a choice by our contractor to pay a set price or be charged on a "time and materials" basis. We chose the former. I don't care how much my contractor profits on the job so long as I get a quality home for a price I'm willing to pay. To use another example, should I agree to buy a car at $200.00 per hour multiplied by the time taken to build it? If I get a lazy shift the day my car rolls down the line, should I expect pay more than my neighbor who bought the same car built by a more efficient crew for thousands less?

The Illinois Supreme Court requires lawyers to adhere to the code of ethics. Rules of Professional Conduct, Rule 1.5 (which David quotes in part in his post) states:

Factors to be considered as guides in determining the reasonableness of a fee include the following:

(1) The time and labor required, the novelty and difficulty of the questions involved and the skill requisite to perform the legal services properly.

(2) The likelihood that the acceptance of the particular employment would preclude other employment by the lawyer.

(3) The fee customarily charged in the locality for similar legal services.

(4) The amount involved and results obtained.

(5) The time limitations imposed by the client or by circumstances.

(6) The nature and length of the professional relationship with the client.

(7) The experience, reputation and ability of the lawyer or lawyers performing the services.

(8) Whether the fee is fixed or contingent

. Only one of the thirteen underlined factors speak to the time spent on the task. I argue that many of the other factors speak to the value received by the client. In the end, I think David and I both agree that a lawyer should charge a fair fee. In value billing, what is "fair" is in the eyes of the client. In hourly billing, what is "fair" is in the eyes of the lawyer. Which is a better way to serve your clients?

I do know this, I will not be offering my clients the option to choose between hourly and value billing. I refuse to perpetuate a system that allows me to charge more to a given client the less efficient I am. My prospective customers will have the choice to use me and my value billing system – or they can go to a “traditional” lawyer who bills by the hour. As my site says: "No more stinkin' timesheets."

Comments

[David Giacalone]

You've given me a lot to think about, Matt. Thanks. However, it seems that most of the major issues I raised haven't been addressed. It would really help to know how you think "value billing" would work in practice with a client. If you're not basically saying "what's it worth to you?", than what process do you use?

Here's a couple of quick thoughts/questions:

The problems you raise with hourly billing are still primarily problems caused by abuse of the system by unethical, greedy lawyers and/or firms with very bad management skills. How would "value billing" work with lawyers less scrupulous and client-concerned than you?

There are so many significant differences between buying a lawyer's service and having a house built or purchasing a car or any consumer goods, that it's difficult to even begin to respond. The lawyer's expertise, and the result achieved are not tangible and most clients can't judge the quality of the service, even in hindsight. With almost all major consumer goods, the buyer has the opportunity to intelligently judge quality and compare prices in advance, and rely later on warrantees. If the market for the product is at all competitive, the consumer can expect workable price competition.

Bravo, if you have enough disposable income that you don't care how much profit a builder or auto manufacturer makes off of you, but I'm wondering where you'll find a lot of consumers who feel that way. Indeed, you better not let them know that you feel that way.

Hourly billing is not all about counting hours -- the hourly rate itself is obviously very important. Many of the Rule 1.5 factors relate to the size of the hourly rate (e.g., lawyer's expertise, reputation, skill required, opportunity costs). The number of hours spent marks the maximum limits of the total fee.

I still must ask how charging what the market will bear -- or forcing the client to place a value on a service -- jibes with the fiduciary obligations of a lawyer

I'll give this more thought and continue this interesting and important discussion at ethicalEsq.