There have been some very good comments in reaction to my piece Monday on Value-Based Billing (VBB, a/k/a AFAs — and I just couldn’t resist three acronyms in a row here).

Acronyms and Alphabet Soup

Susan Hackett raised a question about the use of acronyms. Microsoft was a place where TLAs reigned (three-letter acronyms, and that really was the internal term everyone used). People joked about it, but acronyms have interesting sociological implications:

• They are used, like jargon, to establish a community, a commonality of discourse.
• Like jargon, they can be exclusory, creating “us” v. “them.”
• However, like jargon, they can serve as shorthand for complex ideas that everyone in the group understands.
• They also serve to extract an idea from its origins and bring the idea itself into the mainstream of a conversation. Anyone remember what radar and sonar and scuba are acronyms for¹? It doesn’t matter, because the technology — the “mechanics” — isn’t relevant to the discussion.

If people are talking about “VBB” rather than “value based billing,” that will mean that the concept has gained broad acceptance. I think that’s a good thing, should it happen. Of course, it’s not pronounceable, but vabab or vababill seems rather ungainly.

What Is VBB?

The more interesting question is, what does VBB include?

Clearly, it includes fixed and flat fees, meaning an agreed fee for a specific matter and an agreed fee for a “book” of matters, whether that book is a specific number or a year’s worth. There’s still confusion of which is “flat” and which is “fixed.” Folks such as Jeff Carr (FMC’s GC) and Paul Lippe (Legal OnRamp) have tried to attach these terms to one or the other of those concepts, but it’s not clear that the definitions are sticking yet.

I think VBB also includes success or completion bonuses, where the client pays additional money above an agreed minimum for a particular result — a “win” however defined, or early completion, or completion for delivering at less than predicted cost. At some point the line blurs; if you deliver for 95% of predicted cost and get a 2% bonus, is that really VBB? Still, any incentive that aligns the fiscal interests of firm and client is in my mind a good thing.

What about contingent fees? Though we tend to think of these as plaintiff’s-bar specialties, they do align fiscal interests to a significant degree. At the extremes — all or nothing — they are absolutely value-based, though there is a middle ground where interests can diverge. Consider the plaintiff suing for $1MM who is offered a $200K settlement and has a 20% chance of wresting the larger award from a jury. The plaintiff may well be okay with a guaranteed $100K-$140K net, but the attorney may prefer (fiscally) to gamble on the large payoff. No system, of course, is perfect, but to me contingent fees represent VBB.

I’d define VBB as occurring when the firm has skin in the game² for the duration of the matter. I emphasize the duration of the matter — or of a given phase of a matter — to eliminate pre- or post-billing write-offs, which represent not VBB but inefficiency or good client relations.

The Balanced Diet

I don’t think the world of applicable matters will ever be all VBB all the time, but I’m convinced it’s not going back to nothing-but-hourly.

I say “applicable matters” to exclude work that is commonly fixed-fee — patent prosecution, immigration applications, and so on — or pseudo-piecework such as e-discovery. That still leaves a whole lot of litigation, contracts, and so on that could go either way.

I think the way it will go is increasingly — but not entirely — VBB. That said, I expect to see even corporate-client hourly work increasingly have some sort of bonus attached to it to help align fiscal interests and get that skin in the game.

Seen from the standpoint of economics, it makes simple sense. And cents.

—————-

¹Radio detection and ranging, sound navigation and ranging, and self-contained underwater breathing apparatus.

²A term supposedly used first in a financial sense by Warren Buffet, meaning that the participant has her own capital — money, corporate standing, etc. — at risk in an endeavor.