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Sorry, it’s perfectly fine if a firm sets a fee based on estimated hours of work

Corp. Counsel, April 2011 at 22, summarizes a recent panel discussion on alternative billing. Altria Client Services’ Murray Garnick, an Associate General Counsel, told the audience that “A firm is disguising hourly billing as value billing if it merely estimates the number of hours it would spend on a case and derives a flat fee from that.”

I disagree with Granick if his implication is that something devious or dishonorable happens if a fixed fee derives from an estimate of the amount of hours needed to accomplish the goal (resolution of a case). Estimated hours represent a solid basis for a flat fee. Moreover, a flat fee, however derived, differs enormously from hourly fees. The firm and the client have arrived at a mutually acceptable fee, and therefore value to the client, for services and the firm has an incentive to deliver on budget. No more time and materials, gone are the salad days of cost plus, both parties embark on a different paradigm: a major step toward efficiency and cost consciousness. The clock replaced by a price tag makes a huge difference, and it is irrelevant how the price came to be proposed.

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2 responses to “Sorry, it’s perfectly fine if a firm sets a fee based on estimated hours of work”

  1. Rees, I agree in part. A firm that fixes a fee based on estimated hours has answered one of clients’ pricing needs: predictability. It probably hasn’t answered the other, which is competitiveness: I’m willing to bet that most hourly-based fixed fees are pretty hefty, since they build in all the law firm’s inherent inefficiencies and probably include something like a 10% “just in case” markup to assuage risk-averse partners. Firms that learn to price work with more detail and nuance (and their number is growing) will arrive at a lower fixed price that still turns a profit — and at that point, firms fixing price based on hours will have to respond.
    That said, this approach has the advantage of reality: in practical terms, estimating hours is, right now, about the only way many firms can price work ahead of time. If we accept that it’s a transitional stage, rather than the end point of pricing evolution — as you say, “embarking on a different paradigm” — then I think we’re in good shape. But I do think the transition is already underway.

  2. Ron Baker says:

    I disagree with your premise.
    If the legal work involved entails any risk to the firm, than you simply cannot price by the hour. Why? Ask any actuary: You cannot price risk by the hour. There’s simply no model for it.
    Now, unless a firm is doing something that is riskless, they are sub-optimally pricing risk.
    Hours simply cannot be the talisman for pricing. Value is talisman. Determining value may be difficult, but I assure you one way the profession will never get there is to continue to count hours. The conversation must be changed, is being changed, and there are firms out there that have made the transition.
    Ron Baker, Founder
    VeraSage Institute