VeraSage

Ethics and Hourly Billing

Ron Baker - 08/27/2006

In Brendon’s recent post on What is Value Pricing? Part 5, Carolyn Elefant left a comment that deserves a response, and hopefully it will start a further dialogue on the importance of ethics and pricing.

Carolyn, thank you for your comment.  It contains vitally serious questions and I will try to give it as much attention in a short comment in order to provide a meaningful answer, all the while knowing we could debate this topic endlessly, as the ABA has, and never reach any meaningful conclusions.

When a professional firm provides a value proposition to the marketplace, it is offering a bundle of characteristics, most of which can be broken down into three categories:

• Price
• Quality
• Service
  

We believe technical quality is a table stake, the minimum you need to play the game.  In the airline analogy, no one thinks an airline should cut corners on quality—safety and maintenance, for instance—for the cheapest paying customers.  The plane must arrive safely for all passengers.  But charging different prices to different customers requires differentiating some aspects of your service offering, not your technical quality.

A professional services firm cannot really compete on technical quality for the very reasons you cite.  The bar expects you to bring the same level of expertise, skill, judgment, etc., to all of your clients.  But that doesn’t mean you have to offer the same level of service, or prices, to all customers.  Even under hourly billing, different customers can pay different prices based on who does the work, the mix of personnel doing the work, etc.  The problem is, this is all based on inputs and efforts, not results and value.

If I were to take your reading of the professional code to its logical extreme, all lawyers should price equally.  Why do people, though, willingly pay some lawyers more than others?  Is it because they are technically more competent?  For some, this might be true; but for most we believe people pay premium prices for excellence in service—responsiveness, pro-activeness, reliability, accessibility, certainty in delivery, etc.  These characteristics can be modified based upon level of price paid, just as with airlines or American Express’ Green, Gold, Platinum and Black credit cards.  This is more than just being “nice” to your customers.  It’s actually offering them different levels of service based upon the value you create for them.

For example, some doctors are moving to concierge medicine, whereby certain patients pay a premium in order to have certainty in appointment times, access, and in some cases, house calls.  The doctors have to give the same level of technically competent medical care to all their patients—regardless if they are paid by Medicare or privately.  The differentiator is based on access, much like airlines will bribe low-paying customers off the plane in order to accommodate a higher status frequent flyer.

The ways in which you can differentiate your services in order to provide various levels of value to your customers is only limited by your imagination.  Not all customers want Disney level service, but rather prefer Southwest because of its lower price.  Other customers want to be pampered by Ritz-Carlton and demand a lot of hand holding.  We believe the customer has a right to decide, and innovative law firms recognize that not all customers are the same, nor do they want the same level of service.  All do demand the same level of technical competence, and rightfully so—again, it’s a table stake, not a competitive differentiation.

I would like to turn the question around and ask, What is so ethical about hourly billing?  Given the abuses we have seen with this method over the decades, why do lawyers cling to the belief this is an ethical pricing method?  Here are just some of the abuses it fosters:

• Double billing
• Overstaffing of lawyers
• Excessive research
• Surgeons piercing ears
• Travel time
• Attorney conferences
• Rounding up issues
• Overhead allocations
  

As a customer, I get a fixed price from every business I purchase from, including my homeowners insurance, which has earthquake coverage.  My insurance carrier certainly doesn’t know the exact cost of the next earthquake, so they must price based partly on actuarial risk, just like lawyers should in litigation issues.  No insurance company would price based upon hours, since it doesn’t take risk, or value, into account.

I say this with the following caveat:  some legal work must be based on an hourly basis.  Bankruptcy work is done hourly (unless you are representing the creditors); and some litigation where the court has jurisdiction over the fee must usually be done on an hourly basis.  But even here, courts allow different hourly rates based on a host of factors not related to time, and according to the ABA and other sources I’ve read, only 15%, at most, of legal work is subject to this type of judicial oversight.

From an ethical standpoint, let us apply Immanuel Kant’s categorical imperative to hourly billing.  That is, would you want all businesses to universally price by the hour?  The answer is an emphatic no, since customers want to know the price of what they buy before they buy it.  As one lawyer said to me, “I would never buy the way I sell.” That’s profound.  Offering fixed prices to customers in advance, with a fixed scope like contractors and auto mechanics, meets Kant’s categorical imperative, and thus makes it a more ethical pricing strategy.

There is much more I can say about this topic, which is why I have devoted a chapter in each of my books on pricing to ethics.  I’m sacrificing accuracy and completeness in order to give you a more prompt reply.  But rest assured we should keep this dialogue going, and we will post more on ethics and pricing in the future.  In the meantime, we welcome any and all comments on the ethics of hourly billing versus value pricing.