Tuesday, July 14, 2009

Out with the billable hour?

I've welcomed the shift that, based on the media at least, seems to be providing clients with more choice than the billable hour model. As everyone recognizes, it’s a model that ‘can’ be fraught with conflict. However, I think we’re at some risk of throwing the baby out with the bathwater.

I’ve always been struck by the somewhat elitist tendency of lawyers to view their business model as unique. The reality is that we’re service providers like many others (except for unlimited personal liability, but that’s another story). We run a technology practice, and many of our clients are deeply involved in buying or providing complex services. They’ll apply different models depending on the circumstances – sometimes fixed fee, sometimes time and materials, often volume discounted, often with milestone payments. Many of their customers have strong preferences for either fixed fee or time and materials contracts – the former because they fear run-away services and want budgetary certainty, the latter because they fear the ‘premium’ that’s built into the fixed fee arrangement, and reckon that their vendor management skills are good. Service providers will often be reluctant to take a fixed fee deal because they believe the proposed project doesn’t lend itself to clear scoping, but equally sometimes may prefer a fixed fee transaction because they have confidence in their efficiency, or because they believe it necessary to win the deal.

My point is that there is no one size fits all, and that different models work well for different circumstances. The key to a good time and materials contract is that the service provider is incentivized to be efficient – like most service providers, many lawyers rely heavily on happy customers to act as reference accounts, and that incentive shouldn’t be underestimated. Equally, clients should be wary of situations where that incentive is diluted, for example in circumstances where the work is performed by a lawyer for whom the incentive is less critical, e.g., a lawyer other than the partner that owns the account.

All of which leads me to wonder whether what clients should really be asking about is the compensation structure within their service provider – does it provide customer-focused rewards?

1 comment:

William said...

Jeremy, I have just, with some trepidation, quoted a flat fee on an asset purchase transaction. This grew out of the client not wanting to do a deal where the transaction costs might represent proportionately too much of the total deal value. It was very interesting, to focus on, and communicate to the client, what assumptions were inherent in the flat fee making sense. But it was a collaborative process, too, insofar as the client was motivated to simplify. We'll see how it goes. Because it is an asset deal, I think there should be fewer surprises or permutations than in a merger, share exchange, etc. But we'll see. I've also just quoted another client a monthly retainer for which we will take care of x, y and z as they come up, excepting out financings, M&A events, and lawsuits. Anyway, I'm just wading into these waters and will look to your blog for further ideas. Documenting transactions as efficiently as possible seems to be a common denominator to much of this. Finding the right way to charge for judgment and perspective remains somewhat elusive! --Bill