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Value Pricing and reaction to Lord Neuberger’s suggestions

Pricing experts seem to agree that implementing value pricing successfully can result in an increase in profits of between 10% – 30%.  Supporters of value pricing also maintain that this approach helps improve the quality of lawyers’ lives by, ultimately, ending the ‘tyranny of the billable hour’ and the need to bill and record an ever increasing number of hours each year.  Moreover experience in the USA shows that clients also seem to like the value pricing approach as this helps improve pricing certainty and billing transparency.  Why then the negative reaction by many lawyers to the recent request by Lord Neuberger for greater consideration to be given to value pricing in English Civil Litigation?

One possible reason is the assumption which seems to be made by Lord Neuberger, and apparently accepted by those who have been quick to comment, is that value pricing acts as an automatic force to lower litigation costs and, by implication, law firm profits.  Not necessarily so. If the focus is kept on providing – and increasing – added value to client’s why should they pay less for this? The concept of value pricing is not about a race to the bottom of the barrel regards fees.  It is about supplying value and extracting a fair price for the value delivered.

It seems that many of the comments recorded so far result from poor understanding about how value pricing can be made to work in practice.  Although not without risk –  which can be managed and mitigated –  implementing value pricing does require some hard work, careful thought and judgement on the part of lawyers.  But I am sure lawyers can cope with hard work the exercise of professional judgement.

Value pricing refers to assessing the value of (legal) work to be performed and then pricing that work accordingly.  Ultimately it is for the clients to verify the value assessment is correct by agreeing to pay for the services quoted.  Interestingly, some of the online comments posted following Lord Neuberger’s speech are along the lines of ‘the market will decide’ and that ‘clent’s can take or leave my firm’s hourly rates’.  Well yes, up to a point but the commentators are missing the collaborative nature of the value pricing process.  By fully engaging with (prospective) clients during the value assessment process lawyers should find that clients themselves will indicate what prices are acceptable for the range of services on offer.  This process is much more subtle than the ‘take or leave my hourly rate’ approach.  Besides, I find it hard to believe that arch-proponents of the billable hour have never had cause to either reduce their rates and / or write off hours recorded.  So who, exactly, is doing the taking and leaving?

Writers such as Ron Baker promote a step by step guide to implementing value pricing, and it looks something like this:

  1. Understand the Client (identify requirements and scope the work)
  2. Develop Pricing Options
  3. Present Options to the Client
  4. Document the Arrangement (Fixed Price Agreement –  FPA)
  5. Manage matters being worked on (‘proper project management’)
  6. Manage Scope Creep (apply change control – more project management)
  7. Review and Refine the process

Greater sophistication can be added to this model by setting up a Value Council and / or making senior appointments with explicit responsibility for pricing, which seems to be an increasing trend at some of the larger U.S. law firms.

One of the most prevalent themes in the comments to date about Lord Neuberger’s suggestion is that it is difficult, if not impossible to scope and therefore price legal work.  It is a very common objection, and the answer is now no less common but apparently not especially well known or understood as it should be.  There are in fact a range of techniques which can be adopted for scoping work, beginning with reviewing past similar cases, preferably with reference to recorded data, and then moving towards applying well known heuristics for project estimation in the absence of, or low confidence in, recorded data.  Estimation becomes easier when projects (including legal cases) are split up into chunks and (within reason) the smaller the chunk the more accurate the estimation is likely to be.

Another oft stated objection lies in the difficulty of assessing ‘value’ to existing and prospective clients.  To be fair, this is difficult, and this is where value pricing becomes more of an art than a science.  The real value placed on an engagement by a client is usually less reflective of the core legal work required – competence in this is expected – but reflects other things such as the flow of communication and interaction with the individual lawyer and firm concerned.  However all these things – and other intangible aspects of dealing with a law firm – can be worked on, and be improved, over time.  The perceived difficulty and effort required to improve them should not of themselves be a bar to giving serious consideration to value pricing.  After all, law firms need to work on client care issues constantly in any event, regardless of the pricing method used.

Another concern, if not a real fear, is that once a fixed price has been quoted, then lawyers will be bound by it come what may, and so may end up making a (perhaps significant) loss.  Leaving aside the fact that (as alluded to above) many lawyers routinely write down their hours or standard charge out rate before billing, this concern can be alleviated by the use of Change Requests.  The FPA should refer to the existence of a Change Request procedure, whereby if something unforeseen arises during matter progress, work stops and a change request is raised with the client.  The change request should propose a revised fixed fee to take into account the further additional, or revised, work required from that point onwards.

There is no doubt that, in operational terms, competent project management is the key to making value pricing work.  Indeed, when you think about it, this competence is also needed to deliver legal services effectively regardless of the pricing method chosen.  Personally, I think there is enormous scope for value pricing legal services in a business-to-business environment, where the client can be expected to assess the commercial value of proposals put forward and all parties can appreciate the potential for the development of a closer long-term working relationship.  I also think value pricing is likely to be appropriate where clients are individuals who can truly appreciate and assess the value on offer as well as the risks surrounding the proposed legal work; relatively well educated and high net worth individuals may be good candidates for value pricing.  I am less convinced about its appropriateness where individuals are less sophisticated, probably less educated and in immediate need of legal advice to help them achieve a specific, short-term objective. This type of client is unlikely to want an on-going, ‘value’ relationship with their lawyer.  They are likely to want a one-time solution to an immediate need and I suspect that other forms of pricing (and funding) may be much more appropriate here.

Given the current capacity for surprise and innovation in the English legal services market, it is clearly impossible to predict with certainty how the competing merits of hourly rates and various AFA’s will play out.  Nevertheless it should be hoped that a greater display of open mindedness, along with a willingness to consider a range of pricing and billing mechanisms as potential alternates to the chargeable hour, will emerge in response to the rapidly changing nature of the English legal services market.

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