Moving Away from Hourly Billing

How do you do it?

Moving Away from Hourly Billing

Clients are demanding more price certainty and law firms are responding slowly with alternative fee arrangements, but the traditional mindset of billing by the hour is limiting any significant change. Law firm profitability models are based on getting lawyers to record ever increasing amounts of recorded hours, which are then passed onto clients as billed hours. The more recorded hours, the more profitable and the more revenue that is generated for the partners. This is a lot of inertia to overcome, if there is to be decisive movement away from the hourly model. This article will touch on some strategies that can be implemented to move away from hourly billing.

Some firms have gone to great lengths to develop sophisticated technology to predict how much time will be required to complete a complex project, then perhaps round up a little and lock in a price. This is a partial solution, but it does not deal with an overarching issue that legal costs are becoming higher all the time and technology is producing alternative solutions to creating streetwise legal help that often bypasses the lawyer.

It is time to step back to explore if there are better ways of delivering legal services. What follows is an approach that is good for clients, good for lawyers and good for law firms. It starts with a determination that you will embrace change because it really requires a fundamental shift, which necessitates firm-wide effort.

If you are not going to price based on hours spent (in effect a cost-plus method), then how should price be determined? Two other approaches are based on market prices or value delivered. Most law firms already use market pricing for standardized projects, such as incorporations, conveyancing, undefended collections, estate planning, and corporate annual maintenance. Even complex matters have certain market ranges, such as M&A transactions, drafting employment agreements, and bankruptcy proceedings.

Value pricing requires strong listening skills as value is not determined by the lawyer but rather by the client. You need to probe into why is this project important; is timing critical; what if the project was not completed now; what is the economic impact of a successful or unsuccessful outcome; and why is it important to the prospective client for your firm to carry out the project? If you listen intently enough by being “interested and curious,” you will develop a clear understanding of the value your client sees in you handling the project.

What is important to appreciate is that if you are not billing by the hour, your profit is affected by the efficiency in which you deliver
the services. To be successful, you should institute the necessary management tools so that you create a continuous learning loop. Your efficiency will improve over time and the firm will become more profitable. Tracking billing realization rates will give you a good idea of which files are more or less profitable. It will be key to learn from these results and adjust your delivery of legal services to reflect what you learned.

Over time, you should become better at pricing, enhance your precedent system and improve your allocation of resources to your projects (i.e., paralegal/lawyer breakdown of time). This is where the cultural shift takes place. It is no longer how many hours are recorded; rather, it is how good are your precedents? How did you tackle that project? Who did the work and could this be altered? Should you adjust your pricing for future similar projects?

Eventually, the question won’t be whether the file is profitable, but rather what did you learn and how are you going to incorporate the learnings as you move forward? Getting paid will be much easier as there should be no questions as to how many people worked on the file and if their time was all good time.

Lawyers get to work in an environment where more than time establishes their value to the firm; clients get price certainty; and law firms are rewarded for sound practice management.