Value pricing

What follows are my rambling first thoughts about value pricing, penned without having read any of the leading treatises on the question, and without having read any sophisticated value pricing-based retainers.  I am most willing to be shown the nuances and possibilities overlooked in my preliminary explorations.  I am not wedded to any of the positions.  I put them up for discussion.  I think the hourly rate as currently applied is dreadful in many ways, but I have anxieties about how fixed fees and value billing would apply in practice outside the relatively even bargaining ground of major firms and major corporations’ in-house legal teams in which it seems often to be discussed.  I have this anxiety that it is not going to do anything to remedy the most basic problem causing the cost of access to justice to be too great, the rapacity of mediocre lawyers, and may in fact exacerbate it.  I suspect that well-drafted, well-regulated fixed fees will crap on the current regime, but think the current regime might be greatly improved, narrowing the gap. And I worry about the regulation of fixed fees, given our legal system’s prima facie reluctance to interfere in fairly negotiated contractual arrangements.  In other words, I worry that the sanctity of contract will inhibit the adjustment by the courts of fees rendered by lawyers to clients.

When I think of fixed fees, I tend to think of them in very simple terms: ‘I will do your case for $100,000, including disbursements and counsel’s fees.’  There is a tendency to think of the $100,000 as a cap, but in a simple agreement like this, the lawyer will get the fee if the other side dies and the cause of action dies with him, or the other side settles a few days into the retainer, or the client stumbles across a smoking gun which renders their prospects of victory at nil.  Galling as paying anyone $550 per hour for a job which may go on and on and on may be, paying someone $100,000 for next to nothing must be even more galling.  Of course value pricing retainers may be very sophisticated, and I am guilty of myopia.

There is also, I think, a tendency to think of fixed fees as giving certainty at the outset in a way unique to this method of charging.  In Victoria (and, I think, everywhere else in Australia), solicitors must by law estimate at or near the start of a matter its total costs — their fees, witness fees to be charged as disbursements, counsel’s fees, and other disbursements such as trial and transcript fees — or, if that is not practicable a range of the possible total costs. So clients should be entitled to be placed into the same position as the solicitor in terms of knowledge of how much their matter will cost, with the advantage of fixed fee being no more than the apportioning to the client the risk of the matter turning out to be simpler than the price justifies and to the solicitor the risk of it being more complex.

Because of the poverty of solicitors’ compliance with the obligation to give a good faith considered estimate of total costs at the outset (and the almost complete non-enforcement of the obligation), fixed fees represent a great improvement to clients who fix them in their interests.  But at least some of that improvement could be achieved by fixing the current system by enforcing the requirement for good faith carefully considered estimates of total costs, rather than moving to fixed fees.  Quite a bit more could be achieved by introducing penalties for solicitors who exceed estimated total fees without justification.  More again by stamping out fraud.  And I suspect that the very real practical advantage of fixed fees begins to diminish somewhat as soon as the fixed fee becomes a series of fixed fees, and subject to scopes of work such that disputes over variations assume all the difficulties of construction law, except that one party will be a lawyer who will not have to engage lawyers to have the dispute on his behalf.  Especially is that so in the case of the ad hoc user of legal services who have no commercial relationship with the lawyers within which to negotiate.

I have this anxiety that what fixed fees are really about is allowing lawyers to sell their learning (aka ‘intellectual capital’) for fees much greater than usual rates would allow for the time involved in solving the client’s problem, or advising or representing them.  This is where ‘value’ comes in, I worry: where the value of the lawyer’s services to the client exceeds the product of the lawyer’s time multiplied by usual fees, the client should be charged more to reflect the value to the client of the services.

And I think I have a problem with the entrepreneurial professional. No doubt some people think I am an entrepeneurial professional, what with my blog and all, but from time to time prospective clients inform me of their problem, I send them a seminar paper that covers what they know, and they get what they want with a few minutes of my time at no fee.  More often, I provide advice for a few hundred dollars which a non-expert charging on time would be likely to charge substantially more for.  I think of this as the upside of time based billing, a manifestation of the proposition of the profession as a public service.  I want to make a good living, but if I can assist without spending too much time, then I feel some sort of duty to do so.  Of course there is nothing about time billing which makes it inherently favourable to giving away your intellectual capital.  Value pricers can be kind too.  But I just get the impression that value pricing as a mindset will tell lawyers that they must charge a premium whenever a good chunk of their ‘intellectual capital’ is let loose.

The current system of lawyers charging for their costs doesn’t work very well for those responsible for paying them.  There are two problems:

  • First, many lawyers charge too much.  This explains to a large degree why we are not very well liked.  I doubt that value pricing is going to do much to change this.  It’s not like lawyers are going to say ‘As this does not represent a very big problem for you, we won’t charge you as much as we usually do.’  (I suppose that where clients and lawyers enter into a costs agreement in respect of all work by a client for a year, the firm may structure itself so as to have a division doing the low-end work for less than they would otherwise in order to attract the high end work.  And in those retainers simple enough to justify a true fixed fee, the ability to shop around may bring the price of legal services in those areas down, in a way which the mandatory estimate of total fees required by law does not, since it is often not provided with any accuracy or in good faith.) The exponents of value pricing are forever going on about how the move to value pricing enhanced profitability.  It is talked about in terms of the tax expert who dreams up a solution to a client’s problems in the shower, rings the client, and says ‘I have an idea which will save you $1 million a year. I’ll sell it to you for $22,000.’
  • Secondly, clients get dragged into transactions and disputes without understanding how much it’s going to cost them in legal fees.  It is this problem that the regulation of legal costs in practice exclusively addresses, and is the problem to which, as I understand it, the value pricers propose the solution.  There is already a very strong protection available to clients and others who have to pay legal fees.  First, they can obtain taxation by the Costs Court, almost always at the lawyer’s considerable expense: clients need only (a) reduce the solicitor’s bill by one-sixth in order to have their costs paid by the lawyer (and there are a hell of a lot of bills which slicing a sixth off would be just the entree), or (b) demonstrate some non-compliance with the regime which requires lawyers to disclose information about their costs in advance, including how much ‘the matter’ is going to cost in terms of solicitors’ fees, barristers’ fees, and other disbursements.  Very few solicitors manage to comply to the letter with the costs disclosure regime, with the extraordinary further result that the client need not pay the fees until there has been a taxation of them by the Supreme Court, and the solicitors may not sue for them pending the outcome.  In the taxation, the solicitor is penalised by a percentage — regularly 15%, and up to 50% in relatively bad cases — for their disclosure default.  Second, in cases of serious disclosure defaults, the Costs Court can ignore the costs agreement in conducting the taxation, and tax the fees against the government promulgated court scales.  And if the costs agreements are unfair for some other reason, the cient can apply t0 VCAT and have them set aside.  Unlike just about any other contract, VCAT can set aside a contract entered into by a fair process but which is thought to be unreasonable in its terms.  Thirdly, in cases where legal fees are $25,000 or less, and there is a dispute about all or some of them, clients can lodge a costs dispute with the Legal Services Commissioner who will provide free mediation, including a free opinion from a costs lawyer often enough, and if that fails clients can refer the dispute to VCAT for an alternative version of a taxation.

But for some reason, clients do not often exploit these tools available to them, so that the system so weighted towards the client on paper, may be declared a failure in practice.  In a submission to the government the members of the now-abolished Legal Profession Tribunal once expressed their surprise at the paucity of applications to set aside costs agreements.  I do not really know why it is so.  Costs law remains somewhat arcane.  It is surprising that there is no annotated Legal Profession Act 2004. Lawyers expert in lawyer-client costs disputes are comparatively rare.  Many costs lawyers are good at party-party disputes but not so good at lawyer-client disputes, being much more mainstream commercial disputes outside of the traditional purview of costs law.  In part this is a reflection of the fact that prior to the Legal Practice Act 1996 there were comparatively few time costed retainers, while between 1996 and 2006 the law did not allow for taxations of costs agreements providing for hourly rates.

As noted, severe disadvantages accrue to solicitors who do not accurately make disclosure about their costs at the outset, but exceeding the originally estimated total fees for the matter does not necessarily result in disadvantage to the solicitor so long as they conscientiously re-estimate the fees as things change, and as soon as they realise their original estimate was too optimistic.  There should be a whole jurisprudence around how good an estimate of the total costs needs to be before it can be considered a compliant disclosure, but the law in that regard is hopelessly undeveloped. The only case I know is Casey v Quabba [2005] QSC 356, where the statement ‘it is estimated the possible range of fees and costs recoverable will be between nil and $250,000 (approximately)’ did not satisfy the NSW correlate of s. 3.4.9(1)(c) as not being a ‘genuine attempt to inform the client as required by the [correlate provision].’

So the client in the real world ought to be delighted by a proposition that lawyers will fix their fee in advance.   And I do believe the hype about the benefits of value pricing for employee solicitors.  One of the things I have most enjoyed about coming to the Bar is being able to price my own services.  Barristers agree lump sum fees more than solicitors — often one gets a brief to appear on an application, and agrees a fee which is marked on the front of the brief for preparation and the appearance, however long it takes.  Once I have done so, I am much happier about spending as long as it takes to do a good job, unshackled from the anxiety about over-charging the client for excessive research.  Writing hourly fees for many young lawyers in medium sized firms is demoralising:

  • young lawyers do not actually believe they are worth the rates they are charged out at (because they’re not), and feel bad that their clients have to pay so much for their services;
  • they see their clients getting dragged into transactions and disputes they can’t afford or wouldn’t have got into had they known how much it was going to cost;
  • they see disputes being resolved as the result of inability to pay fees rather than any normative adjudication by the justice system, or a compromise properly informed by the likely range of outcomes of such an adjudication;
  • they get a tiny fraction of the fees for themselves, so they feel exploited by their already unduly wealthy partner bosses;
  • but unless they keep charging their clients liberally (fraudulently in some cases), what pay they do receive is at risk; and
  • they receive inadequate training, and end up charging their clients for their own education.

I can imagine that a firm operating on a value pricing model could be a great relief for young lawyers, assuming that a greater collegiality is fostered by the new model, and much more resources put into systematising practice, training lawyers, sharing and storing knowledge, and that activities are appropriately rewarded in a new remuneration model, though I am sure that there are a whole new set of tensions and problems which would reveal themselves, particularly in those firms which jump on the bandwagon, as opposed to the brave pioneers experimenting with this model of practice at the moment, embracing it with all the passion necessary in such a scenario.

But getting back to clients.  In theory, lawyers are already obliged to give good faith estimates of the cost of the entire matter — costs to the end of a trial in a litigation matter, and so should know, to the extent that the lawyer acting in good faith can tell, what they’re up for on a worst case scenario.  If things change so as to make them more complicated, or time consuming, then it is going to cost more.  But if a quick settlement is reached, then they’re going to cost a great deal less.  What’s the lawyer going to do in such a situation? Price a bunch of litigation retainers on the basis of the average cost of each one, take the benefits from those which take less time than average and wear the losses of those which take more time than average?  I don’t see it happening, except in sophisticated outfits.  It would have the result that:

  • Lawyers would have a financial interest in looking for the quickest settlement possible.  Indeed, lawyers who charge on an hourly basis sometimes tell me that where they use their contacts and relationships with the players in their field to negotiate a resolution by a couple of telephone calls which it would take a less-connected plodder months to achieve, they should be remunerated at a rate approaching the plodder’s fees.
  • Clients would have less incentive to do likewise, because they can force their lawyers to forge on, leaving no rock unturned (or no avenue of frustration of the counterparty unavailed of), until what the client considers to be the ultimate negotiating position.  Anyone who has done a reasonable amount of pro bono work knows of the difficulty in obtaining appropriate compromise when the client faces no financial cost in forging ever onwards in their crusade to justice.

So of course there is going to be a system of staged fixed fee retainers.  Lawyers may agree to do the first few stages for relatively little, effectively as loss leaders for the meaty subsequent stages.  And in negotiating the fees for the later stages, the clients will be effectively locked in.  Corporations with in-house counsel familiar with litigation will be able to negotiate appropriate fees, but others may not.  All sorts of variations are possible, and the market may create sophisticated models in time where super-profits and super-losses compared with time based costing are prevented by caps on the minimum and maximum fees chargeable over the course of the matter.  But in a simple arrangement providing for staged fix fee retainers, at least the client who has entered an hourly rates costs agreement has certainty of price in one sense from the outset of the matter: the lawyers will do the job until its end at rates the client is prepared to pay.  What is to stop a lawyer from saying that she will do discovery only for a fee which is considerably greater than it would in fact cost at the firm’s normal hourly rates?

And what if the lawyer does not perform? How will the fees be treated upon termination by the client mid-retainer?  Is it a repudiation of the agreement so that the client has to pay the contract price?  What if, pre-retainer, the lawyer has parted with all the intellectual capital justifying the fixed fee, and setting up the architecture of the matter, so that what remains is just application which any schmuck can do?  What if the converse is true?  All that has been done so far by the lawyers is preparatory schmuck work, so that the really difficult decisions, the expertise required to answer which justify the fee, has not even started.  All this would need to be carefully articulated in the retainer.

But it is always easier to perceive problems in change, and difficult to see the problems which inhere in the status quo.  Despite my anxieties, I support value pricing and fixed fees.  I just don’t want anyone to get too starry eyed about them.

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2 Replies to “Value pricing”

  1. Stephen, this is an incredibly thoughtful and considered post. I am grateful for your efforts to get to the bottom of the issues candidly and professionally.

  2. One of the problems with a fixed fee is that it can encourage the lawyer to increase margin (hopefully there is some) by reducing costs, which usually means assigning less experienced/qualifed staff to the work – which may just undermine the 'value' assumed in setting the original fee.

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