Posted Nov 3, 2010 5:00 PM CDT
By Patrick J. Lamb
Editor’s note: The New Normal is an ongoing discussion between Paul Lippe, the CEO of Legal OnRamp, and Patrick Lamb, founding member of Valorem Law Group. Paul and Pat spend a lot of time thinking, writing and speaking about the changes occurring in the delivery of legal services. We hope you will join their discussions.
I conducted a webinar not too long ago on the subject of alternative fee arrangements. I explained how we conducted due diligence on matters to determine whether we wanted to accept the engagement and, if so, how we would price the arrangement. At the end, I was asked a series of questions that I find enlightening. While I don’t have a verbatim transcript, I have attempted to re-create the Q and A from my notes. The questions came from an unknown member of the audience, which was mostly, but not exclusively, law firm lawyers. The balance also was from law firms, but were nonlawyer marketing and administrative personnel.
Q. You mentioned that you do due diligence on matters before pricing them. How much time do you spend on due diligence?
A. It can vary from a day or a few days to a few weeks.
Q. Who pays for that time?
A. Well, on matters we don’t get or don’t take, no one. On matters we do get, we fold that into the overall pricing.
Q. How can you afford to not get paid for time on the matters you don’t get? Shouldn’t you charge for the time on due diligence?
It was at this moment that I realized the person asking the questions was stuck in law-firm world. So I asked a few questions in return.
Me: Do you do any marketing?
Other guy: Yes.
Me: Do you charge for your time when you go to a prospect’s office to try to get them to hire you?
Other guy: Of course not. They would never hire us if we did.
This was the “aha” moment. Not every hour needs to be paid for. This is, of course, taken as a given by real businesses. They have marketing departments and R & D departments and finance departments and so many others, none of which charge customers for their time. Can you imagine some guy walking up to the front of the line to order his Big Mac and being told there was a 2 cent surcharge because the accounting department was working extra hard that month?
Here is what people need to know: Revenue - costs = profits. There is nothing in that formula that requires revenue for every hour worked. The next step in the realization process is that not every hour is of equal value. When a lawyers goes to court and makes a winning argument at trial, is she providing the same value as when she deposed the someone who, as it turns out, didn’t know anything about the dispute? Of course not.
So if we realize that we don’t need to charge for every hour, and we acknowledge that not every hour is of the same value, why is it so hard to price in a way that doesn’t value every hour exactly the same? Business has solved this problem. Why do we have such a hard time with it?
Patrick Lamb is a founding member of Valorem Law Group. Valorem represents corporate clients in business disputes and is at the forefront of helping clients solve their business disputes and coping with pressures to reduce legal spend using nontraditional approaches, including use of nonhourly fee structures, coordination with LPOs or contract lawyers, joint-venturing with other firms and implementation of project management tools to handle lawsuits or portfolios of litigation.
Pat is the author of the the recently published book Alternative Fee Arrangements: Value Fees and the Changing Legal Market. He also blogs at In Search Of Perfect Client Service.