Earlier this week I posted about the billable hour maybe not being all that bad, when viewed in the context of the other factors that curb its worst excesses
Here, I take aim at the idea that value-based pricing is the panacea / silver bullet / promised land
As context, it's worth noting that, on a long enough timeframe, value based pricing is the default for legal services
It's only over the past 40-50 years that the billable hour took hold - and it did so, in part, because it was seen as fairer and more transparent to clients
I think the perennial issue here is a lack of effective communication around pricing, regardless of the fee-basis. Or perhaps clients just don't like buying legal services! But let's park these for now
Unlike the billable hour, value-based pricing does not reward inefficiency because there is no financial reward for working on a matter for longer than necessary to achieve the desired outcomes
That is often taken to imply that it therefore rewards efficiency, but this is partially true - it's possibly more accurate to say it has a slight bias towards efficiency (rather than being completely for or against)
But what it more fundamentally rewards is optimising a practice towards clients that value them more, and away from clients that value them less, more specifically clients that:
are richer/have an ability to pay higher fees
are time poor or have limited appetite to shop around / DIY the issue
have legal matters associated with a higher value (e.g. the £20m M&A deal can bear higher fees than the £2m deal)
For an individual lawyer, or firm, this is all very sensible and indeed it's what I would generally recommend they work towards
But it has structural implications at both a firm and market level
At a firm level, it means moving away from certain service lines and sectors. We've seen this play out with "full-service" City firms divesting private client and real estate (esp. resi) service lines and gravitating towards more lucrative corporate M&A derived work
At a market level, you can't ignore what other firms are doing
If everyone wants to sell to the £20m+ M&A deals in the example above, the price of legal work on those deals will go down.
Just because everyone's doing value based pricing, doesn't mean you're immune to competitors charging 1% of a transaction value while you're trying to charge 2%
Ultimately the market will settle on an acceptable price for a given piece of work, which is also why hourly rate work is currently written off to meet those expectations
To reiterate the opening from my earlier post - on balance, I am for value based pricing and against the billable hour
But it is on balance, and the specifics of the given situation/firm could tip it either way
Increasingly, I think it's more important that larger firms work out how to best manage different pricing models, than to assume it's all hourly rate, or conversely should all be value based billing
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