Allocatur

Certainty has a Premium

A front page article in today's Australian Financial Review does not predict the death of the billable hour, but certainly shows its waning in favour.  As Telstra's Will Irving is quoted "Certainty has a premium it didn't have before the global financial crisis".

The clients I advise about alternatives to hourly billing are looking for one of two things:

• The lawyer to have some skin in the game

• Certainty of costs

With the former, there needs to be some value component in the arrangement and agreement about what triggers any value payment.  But the arrangements I see proposed by lawyers tend to be the same old hourly rates with a premium for "success".  Lawyers and clients need to be a bit more creative.  What is the value actually being delivered by the law firm?  For transactional work it may be preparing documents that are approved quickly by a regulator.  For litigation, it may be the accuracy of the initial advice on liability and quantum.  The value payment can be tied to that.

Then there is the true value billing arrangement - not tied in any way to time but solely relating to what the client perceives as the value of the lawyer's work.  The basic question is "how much would you pay me to achieve X?"

This is where there is a real problem for lawyers, as it involves dealing in intangibles - what the client wants and needs, and what their perception of value is, (a complex psychological and sociological question).  Until lawyers can break their thinking of tying value to time spent, they will never develop true value billing arrangements. 

But then we come to certainty of costs.  Generally this is achieved through some form of fixed fee billing, sometimes with a value component.  Fixed fees take work on the part of the lawyer.  The work needs to be clearly scoped.  Project management techniques and costing strategies used by other industries should be utilised to plan the matter and work out fees.  But this work has additional benefits - developing a matter plan enables both lawyer and client to see if the matter is going off track and address this quickly.  Secondly, other options and alternative approaches are often identified during the planning process and these can be explored.

But all alternatives require lawyers to take the leap of faith into the uncertain world of abandoning the hourly rate.  It takes courage, but in these uncertain financial times, clients are looking for lawyers who are prepared to be brave.

Rationalising Golden Parachutes

Golden Parachutes for exiting executives is a hot topic, in light of payouts to Lehman Brothers exec and others of banks being funded by bailouts in both the US and UK.

In my last post, I mentioned Watchell, Lipton, Rosen and Katz, the top New York law firm that has never billed by the hour, simply setting their fee.

 

For a further analysis of what took WLR&K to the top of the tree, have a look at Bruce McEwen's (Adam Smith) review of a book about the firm by one of their former partners.  The post was written in 2004, and is interesting in today's economic times. WLRK were involved in the development in the 1970s of "Golden Parachutes".  McEwen details the rationale and justification for the large payouts to executives who did not stay on after a takeover.  

"For many [in senior management] the jobs had taken years of effort to achieve....  The knowledge acquired by many of these executives was largely limited to the industry in which their company was involved.  There would be few opportunities for them elsewhere.  A senior manager's job also carried with it a position in the community and often defined social standing.  Much of that would be lost."

Certainly, in the present economic climate, there will be few opportunities elsewhere, but I'm not sure that most would accept this reasoning.  Nor does it sit with the value billing position adopted by WLR&K itself in that there is not the connection between payout and value delivered.

 

For an interesting detailing of who got what in their golden parachute, have a look at the Mint blog.  Perhaps a highlight is Alan Fishman who reportedly left Washington Mutual after being at the helm for only 17 days, and pocketed $19 million in severance pay and signing bonuses. 

 

Still not at $20 million for 2 weeks, but close - and better when you consider going to only one individual!

Pricing Blog from the Professional Pricing Society: Pricing Advice in Two Sentences

Pricing Blog from the Professional Pricing Society: Pricing Advice in Two Sentences.

The Pricing Blog is an interesting source for thoughts on value.  A recent post Pricing Advice in Two Sentences has advice from pricers of how to set the price.