Memphis Attorney Moves to Fixed Pricing

Thanks to Stephanie West Allen for passing along the Memphis Business Journal article from Friday, January 25, 2008, “Memphis attorney goes to task-based billing, but don’t expect local trend.”

The article talks about Scott Ostrow, a business litigator, who has decided to move to “value billing” or task-based billing. We at VeraSage make a distinction between “billing,” which happens after the work is performed, and “pricing,” which takes place before the work is begun.

Ostrow thinks lawyers have a public perception problem largely because of the billable hour. This is true. The billable hour misaligns the interest of lawyer and customer right from the start of the relationship, keeping the customer in a constant state of panic over whether or not the attorney is padding hours. Not to mention customers don’t equate value with efforts. Do you care how long it took Porsche to build your car?

The article quotes Lucian Pera, an attorney with Adams and Reese LLP, who says that although timesheets are a hassle, “in the grand scheme of things you get used to it.” This is not exactly how mankind progresses. “It’s hot in the south, but you get used to it,” would never have inspired the creation of air conditioning. The article goes on:

Pera believes “clients can be badly served by all methods” and is skeptical about value billing.

“The value is in the eyes of the beholder,” he says. “Not all depositions are worth $500; some are worth more, some less.”

He says that, hypothetically, hourly billing could vanish quickly from the legal landscape.

“If clients wanted, they could end it tomorrow,” Pera says.

Yes, value is in the eye of the beholder, and not all depositions are worth $500. So what?

The whole point of Value Pricing is to engage the customer in a discussion, up-front, to get an idea of how much they value something.

Hourly billing means undercharging for some work while overcharging for other work. Value Pricing removes this built-in subsidy.

Pera’s contention that clients could end hourly billing tomorrow is not going to happen, nor should it. As I’ve written before, sellers make pricing changes, not buyers. Once firms make the change, customers will defect to those firms that provide certainty in price.

The most obnoxious line in the article, however, comes from Tom Clay, principal of Pennsylvania-based Altman Weil, Inc, a consultancy firm. After citing surveys that show 90-95% of law firms still bill by the hour, Clay says:

“Value billing is hard to communicate to clients,” Clay says. “Who calculates that value? Clients’ views may not be consistent.”

Again, so what if customers views aren’t consistent. And consistent with whom? The law firm? Or other people in the customer business? (Clay is irritatingly unclear on this).

So, because value is hard to communicate we shouldn’t do it? But prices are determined by value. Businesses would be suicidal not to try to comprehend value when determining prices.

One wonders when Mr. Clay would like law firms to learn whether the customer had a different perception of the value of the work: Before or after the work has been done? At least if the firm learns before, they can make adjustments. If they learn afterwards, they have an unhappy customer who will inevitably spread ill will about the firm.

Is this that difficult for a consultant to understand?

I wish Steve Ostrow the best of success with his new business model. It proves there are some professionals who understand the importance of innovation and who aren’t sitting around waiting for their customers to make a change. Innovation is the responsibility of businesses, not customers.

Those who don’t innovate deserve to die.

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