Lawyers have become accustomed to billing by the hour: after all, “it’s the way we’ve always done things”. Or is it?
Truth be told, billing by the hour is a relatively modern ‘invention’ largely attributed to Reginald Herber Smith who by 1940 in his US firm Hale and Dorr, was using one-tenth of an hour to track activities on legal matters. The purpose of the timesheet back then was to measure internal metrics for matter planning and budgeting. It wasn’t until the late 70s billing by the hour was recognised as the industry norm around the world.
But even the ‘inventor’ of the legal billable hour could not have imagined how his system would dominate the profession today. And I’m not sure he would be happy given his original intent was to help manage the profitability of a matter, not price it.
(It might be timely here to point out most of the accounting profession, in their wisdom, ditched billing by the hour a number of years ago and – gasp – they have still worked out how to charge their clients, who still pay their bills, and they’re still in business (ergo, I assume, profitable). Consulting and strategy houses like McKinsey and many other professional services have also long been using fixed fees, agreed up front, for services provided. And importantly, many NewLaw and legal start-ups have never billed by the hour – why would they – their clients don’t want it!).
It’s time BigLaw faced up to the inevitable move away from those 6-minute increments determining their worth. Successful navigation of clients through legal issues should be value-based, not time-recorded.
Cost vs Value
Don’t get me wrong, the billable hour has had some glory days and for a while served its purpose.
But it has made lawyers lazy. Yep. I said it. In my out loud voice. Lazy.
It’s safe to say it doesn’t take a genius to set a billable hour pricing policy. If we know a given task will take a certain number of hours we just multiply that by an arbitrary hourly rate (in most cases subject to an annual increase) and just like magic we have the price we charge to the client. But there are a finite number of hours in the day we can ‘bill’, and surely a ceiling on the hourly rates clients are willing to pay?
More importantly – where is the value?
Shouldn’t we instead be thinking about what the value is of providing a well thought out and executed solution for our clients? After all, in the days before the billable hour, we really were “trusted advisors” and we charged an amount based on the value of the solution to the client.
Yes value-based pricing will take a little more work, however, I’m yet to meet a client who gives a toss about the amount of “effort” (aka hours) a lawyer puts into solving their issue.
What clients want
In my experience a client wants three things:
1. Good quality legal advice
2. Cost certainty
3. Their legal problem solved
Number one is a given, and any law firm worth its salt should be able to provide quality legal advice in their chosen field (we’re all in trouble if this isn’t the case!).
Budget certainty has become increasingly important in a cost constrained corporate world. In-house GC’s are themselves a cost centre and need to manage budgets; overspending on external legal services can be career limiting.
So what happens then, if you’ve priced a job you thought would take 50 hours and it takes 75, or worse, 100 hours? If you’re the lawyer, try having that conversation with the client and see how you go getting paid double the estimate. If you’re the client, you’d be forgiven questioning the lawyer’s skills, experience and potentially even their integrity (I mean they do this for a living don’t they? Haven’t they done these sorts of deals before? How could they have gotten it so wrong?).
And what is a lawyer without client trust….?
Making the Change
Cost certainty and the way you solve the legal problem at hand is where the differentiation occurs. Delivering a matter on time and within budget will keep the client (and the law firm finance team) on your side. All you need to do is collaborate on the scope, agree with the value of the solution with the client to provide cost certainty, assume some risk, innovate to improve internal efficiencies and maintain your margin, and deliver the deal. Win-win.
Client expectations are met and more importantly, internally the conversation shifts from “how many hours did you bill last week and how many will you bill next week” to “what will be of most value to the client? What are our objectives on this deal? What will help the client?”. And shouldn’t we all be focusing on the client, instead of ‘time’? On value instead of cost?
I agree with many others who have said this before: the billable hour turns the trusted legal adviser into a time-based commodity. Is that what we want for the profession in a tech-disrupted market?
The time is now to change our culture from one of cost (billable hours, rates, fee-quotes, time and estimates) to one of value (solutions, client-centred innovation, transformation, efficiency, price).
It won’t be easy – we might need to re-educate clients on how to value us without an hourly rate for comparison, we’ll need to change how we recognise and remunerate lawyers (and, down the track perhaps query the partnership model); we’ll need new pricing strategies, and a better way to calculate profit, and some internal systems will need a revamp. But just because it will be hard, doesn’t mean we shouldn’t do it…
It’s ‘time’ to ditch the billable hour.