If I understanding things correctly, the basic premise behind value billing is that the fee for a matter is determined by the outcome and/or type of services the client wants and the significance (value) of that outcome to the client. However, this does not mean that the client is completely free to dictate the fee received for services rendered. Rather it falls upon the attorney to educate the client as to the value provided (Ron Baker, Pricing Psychology). It is suggested that the attorney establish some measure of value. In Value Billing – What is it, and how is it done, Allison Shields suggests that the attorney:

[D]iscuss the client’s current pain or challenge – in other words, what is it costing the client to do nothing? What will it cost the client if the client delays taking action? What opportunities might the client miss? Or what would it mean to the client to reach their objective? How will the result achieved affect the client’s business or personal life?

Now, for a business to remain in business, income must be greater than or equal to expenditures. Setting an hourly rate is, in essence, a simple matter of estimating: the hours that can be billed to clients over the course of a year, the expenses incurred, and the desired profit (rate = (expenses + profit)/hours). I submit that the value billing attorney must perform a similar calculus when trying to establish value provided, after all there are a fixed number of “things” that can be accomplished in a year and a known amount of income that must be generated. So determining “value provided” is a matter of estimating: the number of matters handled in a year , the expenses incurred and the desired profit. However, not all matters are the same – a divorce may take longer than a real estate closing so we can’t say that value provided is simply (expenses + profit)/matters. No, we need to estimate how many of each type of matter will be handled in a year. Since any individual matter requires, on average, a fixed period of time to accomplish, an estimate of the total matters handled in a year is actually an estimate of hours billed to clients so for any given matter, value provided is (expenses + profits)/hours * time_required_to complete_matter. Which is a round-about way computing an hourly rate.

For those that assume that value billing means fixed flat fee, I would like to point out that value billing proponents are quick to suggest that should a matter expand beyond the initial basic scope initially determined then change orders can be used to establish an addition “value” (see: Ron Baker, Change Orders: What a Concept). So it appears that value billing is a way to establish a fixed minimum base from which additional “value” (perhaps this should be read as profit) can be added.

It is said that demonstrating the value provided is an opportunity to make the case for the reasonableness of a fee. This can be reinforced through status updates (a.k.a. bills) that document the services provided. It is suggested that because legal services are often intangible, the value billing attorney provide the client with information about how hard he worked and what was accomplished. The basic elements being the time spent on an action and a narrative description of that action. In Is Value Billing “Reasonable?” the authors note that a time record provides useful documentation should a client dispute the reasonableness of a value charge and that should a fee dispute go to arbitration or adjudication, it is likely that the reasonableness of a value charge will likely be determined by hourly metrics.

Perhaps I don’t get the revolutionary nature of value billing. After all, if I value bill, I still have to keep time records and I still have to determine my “value” in the same fashion as if I were to bill hourly. Regardless of my method of billing, I’ll still have to educate my clients as the reasonableness of my fees and I will still have to be able to meet the factors laid out in Rule 1.5. Perhaps it is easier to explain the base fee & change order concept to clients than it is $800+ per hour rates (see Cravath’s Presiding Partner: Time to Kill the Billable Hour), but that doesn’t negate the fact that the underlying principles are the same.

For additional information see:

• Hourly Billing Limits Profitability
• Alternative Billing for the “Main Street Lawyer”
• Value Billing and Lawyer Ethics
• Ron Baker & Price Sensitivity
• The Value-Billing Babysitter
• Value Billing or Venal Bilking
• Has the Billable Hour Met Its Tipping Point?
• Value Billing: Too Nebulous to be Effective?