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April 13, 2005

Relating Billing to Something the Client Can Understand

The difference between billing by the hour and billing on a fixed fee should result in the same cost to the client and same income to an attorney. In the aggregate, both billing methods produce the same monetary results, the big difference being who takes the risk. In billing by the hour, the client takes the risk that the job can be well bounded and executed efficiently. Conversely, the attorney takes the same risk in a fixed fee scenario. However, over the long run, the amount of money that changes hands is exactly the same.

The provocative Melody Wirz brings up an excellent point that an attorney’s honesty is the key to the billable hour. I completely agree with Doug on that point.

However, I think the fixed fee has some intangible benefits to the client.

The client understands that a patent application may cost $8000 (for example). They understand the value of the patent and how they are going to use the patent in their business. In general, they have almost no understanding of what it takes to create the patent document. The only know that $8000 gets them a patent and they are comfortable with the value they receive at that price. If you break down the $8000 into actual hours spent, the dollars per hour rate is absurdly high, probably $250-400/hr. Granted, this reflects years of education and experience in a very specialized field, mahogany paneled walls, blah blah blah. But the client cannot personally fathom $400/hr.

Other than to compare different attorneys, clients do not personally relate to $400/hr billing rates. A talented upper level manager of any size company may be making an equivalent of $50-60/hr. An average Joe inventor with a good idea may be making considerably less.

The problem arises for the client when a short 15 minute telephone call with the attorney produces a bill for $100 at the end of the month. Because the rate is so high, incremental billings like the phone call often leave a bad taste in the client’s mouth because the client does not see the value.

The client does not see the value because the price is a function of time, not value. The bill says that they must pay $100 for a 15 minute phone call, regardless of the value of that call. The average client cannot personally relate $100 to 15 minutes a month later when he is looking at the bill, even if those 15 minutes were the summation of all the experience and painful, costly lessons learned by the attorney and those lessons prevented the client from making a very costly mistake.

If the bill says $8000 for a patent application, they can better understand and can relate the value for what they received. In the end, the client does not care how many hours you spend on their project, they only care that the project was done professionally and competently and gives them the best coverage possible in the situation. My making the price a function of value rather than time, the client is apt to be more satisfied with their bill, even if in the end they wind up paying the same amount of money as being billed by the hour.

Posted by krajec at April 13, 2005 07:40 AM

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Posted by: Douglas Sorocco at April 13, 2005 02:15 PM