Why Give Up the Billable Hour?
The 20th-century advent of the office computer enabled law firms to track time and billing by timekeeper, client or case. At the same time, clients were less demanding, less interested in participating in the resolution of their problem. They willingly left the legal process to their lawyers and the billable hour was born.
Today, clients are more demanding. Prospects surf the internet comparing lawyer offerings and prices. Cost-value analysis becomes more relevant. They expect predictable costs, process efficiency and transparency, and a significant role in the development of their case. They focus on results.
The billable hour is an anachronism. While it may make timekeeping easier it fails to meet client demands. By financially rewarding time spent rather than results achieved, the billable hour becomes an impediment that creates perceived or real disincentives to collaboration and shared goals.
Focus More on Your Chief Revenue Source—Your Clients
Clients increasingly seek legal partners who understand their business objectives and are willing to share in the risks and rewards. Adopting a value-based pricing model encourages lawyers to center their services around client needs and outcomes.
Value-based pricing focuses clients and firms on the common goal of achieving the best possible outcome in the most efficient manner. This alignment fosters resilient, long-lasting client relationships grounded in mutual trust.
Value-based pricing provides clients with a predictable cost structure. Clients appreciate knowing up front what they will receive in return for their investment. Sharing risks and rewards fosters a collaborative approach to problem solving. It also enables clients to budget more effectively for legal services and eliminates billing surprises.
Making client commitment a significant part of firm culture can become an important market differentiator. Adopting a value-based pricing model signals a commitment to understanding and meeting each client's needs. Value-based pricing positions your firm as your clients’ partner, committed to delivering tangible value rather than just billing for time. This message needs to be the focus of your website, social media marketing and personal networking including your basic, 20-second elevator pitch.
Value-Based Pricing Implementation Begins with Research
There are many variations of value-based pricing ranging from flat fees to segment pricing to success bonuses. To select the most effective pricing approach for your practice you need to do research in two basic areas: your clients and your current cost of doing business.
- Client characteristics. It is important to really look at the clients who pay you the most, the ones you prefer to work with and the ones that seek solutions in your preferred areas of practice. This research includes not only an analysis of the work you do with them and the work you don’t get from them, but also, a review of these clients’ characteristics including their culture, products and customers, competition, organization and management issues. Reviewing the client as a whole and understanding the context that produces their legal needs enables you to build a growth strategy based on anticipation of those legal needs.
- Cost of doing business. To create a realistic, value-focused pricing strategy you need to know where you make your money under the billable hour system. To understand how you currently make money, analyze all matters for the past six months by activity and timekeeper.
- You may also want to find out what competitors are charging.
Value-Based Pricing Decisions
Implementation includes the following steps:
- Draft a new, value-based pricing menu incorporating the results of your research. Change your invoicing and billing system to focus on deliverables and outcome, showing how each separate activity moves the matter forward.
- Write a note to attach to all invoices explaining the new approach and when it will go into effect for each client.
- Review the language in your retainer agreement to be sure that you create shared expectations as to desired outcomes, specific tasks and key deliverables, while also including language designed to prevent scope creep.
- Add a page to your website explaining your new approach and the benefits for your clients.
Develop measurements—key performance indicators, milestones and outcomes—to track results and suggest improvements.
As technology-driven limitations on hourly billing become increasingly apparent, the legal profession is witnessing a steady shift toward a more client-centric and value-driven approach to pricing services. In an era of evolving client expectations, lawyers who adapt their pricing models to align with the value they provide offer a compelling alternative to the traditional billable hour; an alternative that fosters a client-centric approach, promotes efficiency and innovation, and emphasizes legal expertise.
The movement toward value pricing satisfies the needs of both clients and lawyers. Lawyers stand to benefit from enhanced client relationships, improved efficiency and a competitive edge in the market. Clients can plan for financial expenditures, track matter activity and participate in the evolution of their case.
Focusing on the value of their knowledge, experience and client service approach incentivizes lawyers to align their work product with client goals. Focusing on results, aligning incentives and fostering transparency strengthens relationships. Embracing value-based pricing becomes both a strategic choice and a commitment to move the profession toward a more client-focused, progressive future.