1 February 2012 Jay Shepherd

There are only 2 types of law-firm fees

If I read another article about “alternative fee arrangements” or hear of another two-day seminar explaining all the various and complicated AFAs out there, I’m going to try to swallow my tongue. (Disclaimer: This is of course hyperbole. I’m not going to do that. And don’t you try it either, just to see if you can do it. You can’t. End of disclaimer.)

Lawyers beholden to the Prohibition Era model of billing and the consultants who court them are desperately trying to show how complex and scary AFAs are. The clients and other lawyers who read these articles and go to these seminars walk away shaking their heads and surrender to sticking with the old billable-hour model. Maybe with a discounted rate, please.

But I’m here to tell you that it is not at all complicated. In fact, if you have seven seconds, I can tell you about all the different types of law-firm fees. Ready?

There are two:

  1. Time-based pricing
  2. Solution-based pricing

That is all.

No, really. It’s no more complicated than that. Time-based pricing is what nearly every law firm does, where the price of the legal services depends on the time spent doing the work and the rate of the “timekeeper.”

(In truth, I’m being generous here, because it’s not really “pricing” at all. Pricing is when you tell the client what something will cost them before they buy it; time-based law firms don’t do that at all.)

Under the time-based-pricing model, invented in 1919, every activity is worth the same amount on a minute-by-minute (or really, six-minute-by-six-minute) basis, regardless of how important the task is. With few exceptions, every client is charged the same per hour, regardless of their differing needs. The only measurement of value is the amount of sand that has dropped in the hourglass.

Solution-based pricing is when a law firm sets a price based on the value of the solution to the client. It’s that simple. I’m not saying it’s easy, because it’s not. It takes a lot of thought and preparation and understanding and empathy and experience to figure out how much this particular client values this particular solution at this particular moment. But that’s OK because we’re professional knowledge workers, not pieceworkers in a pin factory.

Clients — simple question: Do you want the price of your legal work to be based on the time lawyers spent, or on the value you place on the solution? It’s one or the other.

(See, I just spared you that two-day seminar on AFAs. You’re welcome.)

What do you think? Can you come up with any other methods? Bet you can’t. But give it a shot in the comments. (I particularly look forward to time-based lawyers protesting about how hourly billing is a kind of solution-based pricing. Good luck with that.)

Originally published in The Client Revolution

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