The Truth About Client Budgets

I received a recent comment on this blog which suggested that budgets are a bad thing for clients and are somehow a fraud. It was unclear from the comment in what way budgets could possibly be bad for clients. It was also unclear in what context under which a budget would be a fraud. I can certainly think of situations where law firms provide budgets for clients and then don't operate within them. It would not surprise me if law firms set budgets with clients as a carrot and then used the bait and switch in order to increase billings. But, I can't imagine working on any legal matter with a client without discussing budgets. Much of my work now is done on a non-traditional hourly/max fee basis. In matters where I can't get enough information in order to do it on a flat fee, I will simply indicate that we will do it on an hourly basis consistent with our value billing model but in no event shall the fee be any greater than the max budget. Of course, the project is defined in enough detail to be able to determine what is included and what is not. In terms of the hourly billing, we do it consistently with our value approach in which we never bill for any activity that doesn't provide value to solving the clients legal problems. Examples of our value based billing model include:

• We do not bill for administrative or transmittal activities. Anything under ten minutes of time which is better classified as "busywork" shows up as an activity on the client's bill, but at a zero rate. Further, we do not charge clients for any phone call under ten minutes or any phone call, no matter how long it is, which involves update or general information.
• We do not bill for reviewing activities, for example, reviewing motions by the other side. We would bill for marking up the motion as a .pdf and embedding thoughts and analysis into the document. This is a good example of the distinction between an activity and an activity which adds value to solving your client's problem. Often times, lawyers simply read things and apparently keep those thoughts only in their head or make a short memo and send it to the file which they never review. We tell our virtual workers that they are not allowed to bill for any activity where they are not only analyzing the matter, but recording that analysis for the client or another attorney to review.
• We do not bill for defining projects or making proposals to clients about projects, including obtaining and reviewing basic information. In short, when a client comes to us with a problem, the billing clock does not start until they accept our proposal and fee structure.

And, every step of the way, the client is involved in budget discussions. When I first started this firm, I was very hesitant and uncomfortable with these discussions based on the false premise that clients did not want to have those discussions. I could not have been more wrong. What I have learned over this past year is that clients are extremely comfortable having discussions about legal budgets and in fact appreciate that as much as anything. At other firms in which I have worked, budget discussions were avoided at all costs, as though they might somehow pin the law firm down in terms of the total amount the client could be billed.

I would be interested to hear from anyone who has a real world example of a budget discussion which went awry or was somehow anti-client. Because, I think that legal budgets are a cornerstone of any law firm which hopes to achieve innovation and client relationships in its practice. I think it is important to analyze and discuss. Thank you in advance for your input.

Comments

[GAL]

Ah but Moe, as noted above, we do bill for these activities when they are meaningful, when we can actually prove that they provided value. Our system is desinged around all the best prinpiples of capitalism and incentives.

If I or my staff take the great strategic thoughts from our heads and capture them in a meaningful way (typically pdf mark-up for all to review and see, and to refresh my memory down the line), then as clearly stated above it is billable. What we don't charge for is thinking about things and ...well.. simply thinking about things like too many lawyers do. We don't charge for simply reading, since that is hardly thinking and provides very little value to the client in and of itself (contrary to your premise). How much brain power does it really take to read a transmittal letter with something you already know about? Can you really justify billing a client for so little brain power?

We all have way too many things going on in our life to remember hardly anything we thought a month ago. And even if it were engaged in very smart thinking, such thinking is meaningless unless it is captured, re-used and leveraged down the line. A thought, no more how good, is worthless if it is not shared with your team, including your client. And that thought’s worth to you in handling the case lasts only as long as you remember it. Will you deduct it from your bill when you can no longer state your great lawyer thoughts again exactly as you thought them and identify exactly where they came from and where they belong?

I would suggest that you are providing meager value with thoughts that are never documented or, if they are captured, sent to a file somewhere where they are rarely reviewed. But my guess Moe is that you do mark-up your documents most of the time. You sound like a good attorney. So my guess is that you do leverage your previously documented thoughts as part of your process. If you never charged one of your clients for reading without capturing knowledge, my guess is that you would still capture most of your time Moe. But if you adopted the smae policy as our firm, you would also be a better lawyer because you would have created an incentive to increase the amount of meaningful, as opposed to merely billable, work you do on a file.

Many lawyers charge huge sums for reading discovery responses, or reading and taking notes which they never refer to again. And even if they do take notes, one has to wonder whether those notes are really available to everyone else on the team? If not, there are of far less value that the lawyer is billing to the client.

We have created a billing system that encourages smart, strategic thinking and mandates that it is documented in a meaningful way, which can be captured, easily viewed and easily reviewed. This is where technology (knowledge management tools) can improve on the paper file method of working up a case. I can find any document and see any thought I had about it within seconds (or at most minutes), without leaving my desk. I can access them while I have the expert, client, other lawyer on the phone. I can do all this without needing or bothering my secretary. I can share every great and valuable thought I ever had about a document with my virtual law clerks and paralegals without any additional effort beyond my single billing event on initial mark-up.

I only ask, whose system creates the better incentives for workers? And whose system is really providing value to the client?