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Alternatives to the Billable Hour

An examination of the growing trend amongst law firms, American firms in particular, away from billing clients by the hour and how certain alternatives would suit legal practice.

In today’s challenging economic and legal environment, it has become more important than ever that lawyers align their fees with client perceptions of value. Will the recession finally kill the billable hour? Before we can embark on a fair evaluation of alternative billing methods and their relative merits; we must beg the question whether the billable hour contributes to or undermines the profession’s avowed mission which is to provide clients with the best legal services possible.

Many believe that the legal profession’s current woes are the result of the permeation of the billable hour model. The constant unending drive to clock up billable hours has led to dysfunction in work-life balance with negative impact not only on family life and personal relationships but also on the public service role that lawyers have traditionally played in society. The erosion of discretionary time has taken a toll on professional development, workplace interaction, mentorship and collegiality within the workplace. And the profession is paying the price - disaffection with practice is best illustrated by the increasing number of associates who leave practice every year. It is not surprising that the billable hour has come under intense scrutiny and re-examination.

A 2002 Report by the Commission on Billable Hours instituted by the American Bar Association (‘the ABA Report’) delivered the most damning commentary of the billable hour - it concluded that ‘the billable hour is fundamentally about quantity over quality, repetition over creativity. With no gauge for intangibles such as productivity, creativity, knowledge or technological advancements, the billable hour model is a counter-intuitive measure of value ...’

As its core message, the report challenges the profession to look at value over cost when it comes to determining fair payment for services rendered; and to adopt innovative billing methods that provide an accurate measure of value to the client while making the practice of law more fulfilling and enjoyable for the fee earner.

Progressive law practices open to alternative pricing arrangements with its clients are developing varied approaches to pricing that enhances the overall goals of the profession beyond mere profitability considerations. There are several different methods based on the concept of value that can be used as an alternative to hourly billing. These include fixed or flat fee billing, capped fees, relative value, task-based billing, blended hourly rate, retrospective fees based on value and relative value method. Some of the more innovative methods deployed by law practices are discussed in this article.

Under a value billing arrangement, there is a subjective determination of value, based on the client’s understanding of what services the lawyer provides. Under the value billing system hours and rates remain important but are not the determining factor. In order to assess the value of the service, the client may take into consideration the effectiveness and efficiency of the lawyers work, urgency of the engagement, complexity of legal issues, predictability of results and the effect on the client on exposure to loss.

In order to implement value billing successfully, there must be effort to communicate the basis of your charges to the client, including:

1 The billing schedule and the client’s right to request changes to the schedule if desired;

2 The fee earners assigned to work on the matter;

3 Performance of certain tasks by the practice’s paralegal or legal support department under the lawyer’s supervision;

4 Advising the client that junior associates may be assigned to the matter for understudying purpose as part of the practice’s associate mentoring / training programme;

5 Advising the client of regular case progress updates and meeting schedules; and

6 Advising the client of likely disbursements and other related expenses.

One significant benefit of value-based billing is that it compels both lawyer and client to communicate the client objectives and the resources required to meet those objectives; as well as ongoing assessment of initial fee agreed upon at the start of the engagement as the matter progresses. Value billing can therefore operate as a reality check whereby the client is compelled to undertake an assessment of his expectations with ample opportunity to make commercial decisions at every stage of the matter.

Some alternative billing methods considered by the ABA Report include:

1 Fixed or Flat Fee

A predetermined price charged for defined services. It may be the entire fee for the engagement or may apply to segments of the total services. The benefit to the client is budgetary certainty. ‘Unit Fee’ is a sub-species of the Fixed Fee model in that the fee earner charges a fixed amount for a specific service, regardless of the actual time spent in providing that service. This approach is like a cap on fees and normally combined with hourly billing for services not included in the unit billing. For example, a lawyer could have fixed charges for each letter, phone call, and deposition. This method encourages efficiency and requires a clear explanation of what the unit charges will be.

2 Blended Hourly Rate

This is a hybrid of the hourly rate. Instead of specific hourly rates for individual fee chargers, one rate applies to all hours billed on a matter. One of the primary values of this method is that it encourages more efficient usage of individual skills in the firm, and can encourage delegation to those with lower hourly billing rates.

3 Fixed or Flat Fee Plus Hourly

In this hybrid method, the portions of the services that have a definable scope are charged on a fixed-fee or flat-fee basis, and the portions of the services that are not capable of being defined because of variables or uncertainties are charged on an hourly or a time-rate basis. The primary value of this method is that it provides the client with some predictability of fee but also gives the lawyer some leeway to charge on an hourly basis on matters that are uncertain in the case.

4 Retrospective Fee Based on Value

This approach differs from most of the alternative billing methods, in that the exact amount of the fee is not known to either the lawyer or the client until the matter is concluded. The amount of the fee should be determined collaboratively by the lawyer and the client. If applied fairly this system offers the best way to relate the fee charged to the value to the client. It should cut both ways with the fee being reduced when value is not achieved.

5 Relative Value Method

This involves creating schedules that separate the lawyer’s services by subject matter and by task, and assign a ‘relative value’ or multiplier to each. Each fee charger can be assigned a different basic rate or charge, which is then factored into the equation. Inherent in this approach, is a determination or judgment of the value of each component service or task. This assumes that tasks performed by a lawyer differ in value. This method clearly requires a determination of value in the production of legal services which may or may not coincide with the client’s perception of value.

Ultimately, delivering excellent legal services is about value and that means helping your client achieve its goals in the most cost efficient manner without sacrifice of quality. This may include packaging a work product, automating routine tasks or delegating it to the lowest cost provider, and using technology to eliminate unnecessary or repetitive work. It might also mean taking time to understand the client’s business and industry and to communicate legal strategies, not just delivering the work product.

Despite the criticism levelled against it, the hourly billing method adopted widely by lawyers continues to endure. There are several reasons for the entrenchment - a. the method is simple, easy to understand and familiar to both lawyers and their clients; b. the method serves well as fall-back when it is difficult to assess the value of a service. For the same reason, in-house legal departments may not encourage alternative billing methods as hourly billing alleviates the need for it to justify the bill on the basis of the value of the service rendered by the outsourced legal service provider which might reflect on the in-house departments own competence or oversight. Finally, the hourly billing method helps practice owners run their practice as it is a simple mechanism to correlate hours to price and ultimately to performance.

‘The most serious current problem associated with the billable hour is that most lawyers think that there are too many of them….’ Wendy Werner, ‘Alternative Billing Practices Beyond the Billable Hour’, ABA Law Practice Management Section.

Our challenge is to better structure the environment so as to make working life ‘within the billable hour’ more palatable. While the billable hour is not going to be replaced in the near future, here are a few ideas for changes to compensation and performance evaluation systems that law practices can adopt to avoid the worst excesses of the billable hour. Rejecting the most damaging aspects of the hourly billing system which rigidly ties compensation directly to the billable hour, consider instead:

1 Quality Evaluation

The practice’s compensation policy should emphasise clearly the importance of quality work over quantity. While productivity measured in billable hours is still primary consideration on productivity, however it is now coupled with work quality evaluation by supervising partners and senior associates working in the same team. While setting a minimum billable hour is a useful guide to the level of effort that the practice expects in order to meet its revenue and profitability goals, a practice that values quality and demands it, sends a message to its associates that the challenges of practice is in learning the skills and gaining the experience to become a better lawyer.

2 Mandatory Ceilings

To discourage fee earners from simply logging in more hours for more money, set a ceiling over which no additional compensation in salary or bonus will be paid no matter how many additional hours are logged. Couple this with rewards for non-billable time engaged in pro-bono, mentoring and business development activities means that fee earners are incentivised to work more productively within the ceiling while engaging in non-billable activities important to the success of the practice.

3 Credit for Non-Billable Activities

The aim is to encompass non-work output activities such as pro-bono and law society activities, CLE, client retention and business development, practice administration, in-house training and mentoring into the billable hour system without reducing (‘real’) billable time or discouraging a hard work ethic. There are several ways to achieve this - You can give full credit for assigned non-billable activities towards the minimum billable hour requirement or towards qualifying for salary increases; or you can offer a separate bonus program to reward distinguished service to the practice for such activities.

4 Policies to Encourage Accuracy and Integrity in Time Recording

This means that all fee earners are expected to be scrupulously honest in recording their time activities and record time promptly and in sufficient detail so that the client is not prejudiced through ‘padded’ or ‘reconstructed’ time records.

In this enlightened age when young lawyers are more interested in attaining life balance and work satisfaction than in climbing the corporate ladder, serious consideration of alternatives to the Billable-Hour based Compensation Systems may be timely to halt the talent drain.

Sylvia Low¹

Bizibody Technology Pte Ltd.

E-mail: [email protected]

References & Resources

1 ABA Commission on Billable Hours Report, 2002 American Bar Association.

2 ‘Burying the Billable Hour’ by Ronald J Baker for the ACCA.

3 ‘Analysing Alternatives to Time-Based Billing and the Australian Legal Market’ by Steve Mark for the Legal Services Commissioner of New South Wales.

Notes

1 Sylvia Low is a practice management consultant at Bizibody Technology Pte Ltd, a company specialising in legal
technology software and consulting. She may be contacted at [email protected]