Beyond the billable hour: alternatives for you and your clients

Hourly billing is the norm for most lawyers, but there has been a growing call for change. Clients don’t want to be surprised by their legal bill. Moreover, billing by the hour seems to favor quantity of work over quality, clients say. Even many lawyers, faced with high billable hour requirements, are ready to trade for an alternative.

Mark A. Robertson and James A. Calloway, authors of Winning Alternatives to the Billable Hour, third edition, discuss the trend toward new billing methods and share steps to help you examine whether the billable hour is working for your firm.

How did hourly billing become the norm for the law profession?

MR: Hourly billing wasn’t always the norm. Abraham Lincoln didn’t keep timesheets. Up until the mid-1960s, most lawyers didn’t either.

Two things happened: a study done at the time showed that lawyers who keep track of their time made more money and the Supreme Court ruled that minimum fee schedules were an unconstitutional restraint of trade.

Other professions were billing by the hour, and the technology of the day—pegboard time slips and rudimentary billing systems—made it easier to track hours and bill accordingly. It became easier for business clients and their accounting departments to measure the work performed. The rest is history.

Why should lawyers consider alternate billing methods?

MR: Clients will drive the change to alternative billing. There is a great pressure by individual clients to have their lawyers tell them what something will cost. The value to the consumer is the results obtained, not the time it took to get those results. Businesses, particularly those with sophisticated in-house counsel, are trying to do the same with their outside law firms. It’s just harder to do in complex transactions or litigation.

For large firms, their clients are typically driving them to look at alternatives to the billable hour. In-house general counsel is constantly under pressure to reduce outside fees. The firms that can be creative and provide alternatives to the hourly rate and still provide value are going to win the business

JC: While I agree that clients will drive many of these changes, smart lawyers and law firm managers will see immediate benefits in certain areas. All businesses need to continue to make improvements in this competitive marketplace. When you are tied to an hourly billing model, anytime you streamline a process or make it easy to do something more quickly, you have a corresponding reduction in the fee charged unless you raise your hourly rate. Let the law firm and the client share in the benefits from time-saving improvements.

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It sounds like technology has influenced the movement toward alternative billing.

JC: Things that used to be considered exclusively lawyer’s work several years ago are now being done by automated processes and legal assistants under a lawyer’s supervision. Technology allows us to do some information-based tasks much more quickly today than with tools of yesteryear.

Document preparation is one of these areas. The fact that a document was prepared by relying in part on a document assembly process or software does not lower the value of a document to the client. In fact, building a great preparation system may result in better quality documents. But it does lower the lawyer time involved in creating the document.

We are going to see the time involved in the actual creation of documents shrink. But statutory and regulatory changes, and other changes, will make the lawyer’s time spent negotiating, counseling and understanding the implications of a transaction more valuable.
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What are some of the obstacles to change? Are lawyers afraid their profitability will decline? How can lawyers ensure profitability when switching to a new billing method?

MR: Lawyers are often their own worst enemy when it comes to change. From law school on, we are trained to look backwards—at precedent—not forward in resolving problems for our clients.

Some lawyers are breaking the mold and being proactive in figuring out ways to provide the value the clients are demanding and still provide a livelihood for themselves. The book has numerous examples of these creative alternatives to the billable hour, where it is a win–win for lawyers and clients. Done properly, there needn’t be an overall decline in profitability.

JC: The biggest obstacle to change in larger law firms is that there are so many things tied to hours billed, including compensation, bonuses and progression of associates on partnership track. Viewed with the blinding glare of hindsight, those items should have been tied to fees paid and received for reviewing a lawyer’s productivity, factoring in write-offs and uncollectable accounts.

Since almost everyone working at a law firm is very busy, the idea of finding time to reorganize so many aspects of the firm is understandably intimidating.

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What are some of the alternative billing practices to consider? Are there any that are new to the profession?

JC: Some lawyers hear alternative billing and think flat fee. They then want to talk about the uncertainties of their practice area. Instead, lawyers should think of billing for each task or project. It is very difficult to quote an entire fee for a large project. But it is much easier to formulate codes for particular tasks. The number of these tasks may vary with the particular circumstances. When something unexpected happens, we take a cue from the construction industry and have change orders proposed and agreed to by the client. If you are truly charting new ground, the change order may have to be reverting to hourly billing for one unusual aspect of the project.

MR: How does your client measure of value? That is how you establish an alternative fee arrangement. It may be a fixed fee for doing an estate plan or setting up a business or it may be a contingent or success fee with a percentage of the deal if the transaction goes through or a percentage of an award in litigation. We have a number of examples and case studies in the book that illustrate this point.

How would a lawyer go about finding the best alternative billing method for her practice and what are the factors in determining how much a fee should be?

MR: Practice areas differ widely, so it is impossible to offer one method to determine an alternative way to charge for legal services. But, there is a systematic way to approach what a lawyer does in a particular type of case or transaction.

We recommend that a lawyer take a little time and look at the last 10 or 15 matters handled in a particular area and see what time went into each component of that matter. Can standard forms be developed? Can a system be developed? Can certain parts be delegated to an associate, paralegal or assistant? While not every matter is identical, probably 70 to 80 percent could fit into a modified system where a fixed or alternate fee might be charged while still retaining or increasing profitability. If you are a real estate lawyer, should you be charging by the lot or per square foot? After all, that is how your client measures value.

Setting alternative fees is as much an art as a science. If you have done 10 of something and your charges have ranged between $1800 and $2100, I would guess that a fixed fee might be $2000 and you can check what efficiencies you can build into a system to drop your costs to make it profitable work. If the other four law firms in town are charging about $2500 for the same thing, perhaps you should consider charging the same or perhaps charging a little bit less to create some value for your clients.

JC: Everyone has to feel comfortable with their business practices. But I think many lawyers are not entirely comfortable with the present hourly billing model. Whether you look at the entire project or break it down into the component tasks, just spending the time thinking—and hopefully reading—about this area is very thought-provoking.

Done correctly, this is not just about the money. It frees the lawyer to delegate where appropriate and spend quality time on the overall direction of a legal matter. Prioritization and delegation are two skills successful lawyers need to hone and develop. Reviewing the work of your subordinates is a critically important practice and yet it often looks like padding on a time sheet. Senior partners have often found themselves doing more managing than practicing law. A middle tier lawyer within the firm may also find herself doing more “quality control” tasks, reviewing work produced by staff or computers, than in the past. But she also may find herself doing more interesting and challenging work benefitting her clients as she frees herself from some of the drudgery.

How can lawyers evaluate whether a new system of billing is working?

JC: If your revenues stay the same or continue to rise, that’s obviously one good sign. Some of the benefits may be hard to measure at first. Hours investing in streamlining systems look like lost productivity now, but can provide benefits for years. Try just one practice area or type of matter first and then you can use that experience as you convert other aspects of the practice. One of the benefits of a new system may be clients who like the simplicity and directness of the new method.

MR: Keep track of your time–it is a measure of cost. If it costs an attorney $83 per hour to pay salary and overhead requirements, don’t establish an alternative billing method if you can only collect $75 per hour. After you have tried an alternate billing method, review it to determine whether you are covering your overhead costs. If you are not, either push more work down to paralegals and assistants or increase the fee arrangement.

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