The mantra that “the billable hour is dead” has long been spoken about within legal circles, and the reasons for its survival and forecast demise have been the subject of many debates. Still, despite being “unloved” by most clients and subjected to significant pressures for many years, time-based billing has refused to die. Those involved in legal billing on a day-to-day basis still see this method as the primary billing arrangement for most legal work completed by mid-size and large commercial law firms. Their corporate clients have grumbled about the billable hour for years, and alongside other factors, it receives blame for high rates of burnout and stress in the legal profession. Many agree that charging by the hour is inefficient and non-transparent, yet it remains the mainstay of how most law firms charge clients for their work.
Here, we will look at why organizations still use the billable hour, what other ways law firms can charge for their matters, and what is holding back firms and clients who want to embrace alternative fee arrangements. Although many in-house legal teams ask their law firms to suggest different ways of charging for their services, we believe that hourly billing will continue to be part of a wider portfolio of methods.
What is Time-Based Billing?
Before looking at different charging models, we should review what hourly billing means and how it has such a firm place in the charging of legal services. Historically, the charging for legal services by the hour is not that new, especially considering how long lawyers have existed. In fact, before the 1950s, lawyers based their fees on considering such things as the nature of the matter, an agreed scale of costs, and/or the ability of the client to pay. However, from the mid-1900s, time recording became widely used, initially to monitor efficiencies within the law firm and review whether work was profitable. From then onwards, time recording increasingly became the way to bill clients.
With the advent of computerized time and billing systems in law firms, lawyers began to record their time in (mainly) six-minute increments – or multiples of this – (i.e., 0.10 of an hour) along with a narrative of the work done and often a code to define the task/activity undertaken. This is multiplied by an hourly rate to give a cost or charge for that item of work. In addition, many US and UK firms utilized time recording software designed to capture activities completed by lawyers exclusively based on their time spent completing that work.
This focus on time makes it difficult, if not impossible, for firms to capture the value of the work based on any other measure. The current legacy PMS (practice management systems) are not flexible enough to offer, manage, and track different fee arrangements.
Why is Hourly Billing Still the Dominant Charging Method?
Management Reporting. As well as recording lawyer efforts based on time spent, legal practice management systems produce reports for senior partners and the finance function to show the productivity of the fee earners and the chargeable work undertaken. Often US, Canadian, and UK law firms (in particular) have focused on resources, billed hours, and cost recovery rates. Targets, budgets, and rewards get set by reference to the time expected to be charged and paid for by the client.
Time and value. Generally, law firms are traditional organizations and have developed cultures that often expect fee earners to spend long hours in the office. Employees intuitively understand that to receive a reputation as hard workers, they must put in the time. Whether this “time equals value” culture will change post-Covid, and what the recent working-from-home experience has shown will have to be seen.
Reward structures. For many firms, there is a belief that “the more you bill, the more that you are worth.” When linked to legacy billing systems and the focus on time, this has often led to fee earners being rewarded according on how much work they do, or instead, the hours spent doing it. This will inevitably lead to a belief that hourly rates and the billable time spent on the work are essential, if not vital, to success.
What Are the Alternatives?
Some commentators have said that it is misleading to talk about “alternative” charging methods, as though hourly billing is the “norm” and anything else is an alternative to this. In fact, we should probably include hourly billing alongside other methods of charging for legal work – as some of these methods existed long before organizations used time-based billing.
Fixed Fee Arrangements
One increasingly used billing method is described as “Fixed Fee.” This is when the law firm and the client agree to a fixed fee for a piece of work and where both the client and the law firm accept an element of risk for any cost variances. This charging method is oft used for repeated transactions, where the amount of work done does not vary too much, and both parties are comfortable with the agreed fixed fee for every transaction. In this case, cost differences (either lower or higher) are shared between the client and the law firm and accepted as a low business risk.
Fees Based on Value
Another method of charging comes based on the value the client believes it will gain from having the work done – and if the law firm agrees to deliver this work, either advice, documents, or a transaction, for the “value” given to it by the client. This solution does rely on a good working and trusted relationship between the parties and a discussion taking place before the work commences. It also depends on both parties agreeing on what the delivered “end product” looks like and should involve a process for any changes to be resolved along the way.
Caps and Extended Fees
A further model now used is for the law firm and client to agree on a fixed or capped sum to be paid for the legal work done over a given time period – often 12 months. Again, both the law firm and the client accept a degree of risk for any changes over time, but the client has the benefit of the certainty of quality legal advice being available for a known cost and the law firm the certainty of fee income for a year.
Hybrid Charging Method
Finally, there is the hybrid charging method – which is part time-based and part fixed fee. Ideally, the law firm will use the standard UTBMS (Uniform Task-Based Management System) phase/task codes to identify the initial stage(s) of a transaction where time-based billing might be appropriate and can scope the rest of the work needed to complete the matter. Both parties can agree upon a fixed fee. Electronic invoicing (e-billing) lends itself to this model – where both parties can easily see and agree on the work done and at what phase or stage of the transaction it applies.
Onit’s European legal spend management solution BusyLamp can fully support all the current methods of charging for legal work. Whether the law firm is importing their work-in-progress and invoice information as LEDES (Legal Electronic Data Exchange Standard) files or submitting their data directly into the system for the client to review, the product works with hourly billing, fixed fee, or any of the other models in use. In addition to the traditional e-billing functionality, the solution provides a comprehensive range of features to the legal procurement and billing process, and this includes support for the request for proposal, matter budgets, resource planning, matter project management, and in-depth reporting. Click here to learn more.
Many people working in the legal world believe it is unlikely that time-based billing and the billable hour will ever completely die out but that there will be a revision of this billing method from being the primary method used to the acceptance that it is just one of many. As clients look for different approaches to billing and more innovative fee arrangements grow, partners of commercial law firms need to meet these demands. Interestingly we may see a return to the pre-1960s approach to client billing, specifically, to one where lawyers use a more client-focused or value-based approach and consider the client’s requirements. Using newer technical solutions, including AI, machine learning, workflows, and advanced data analytics, will help us move away from the billable hour and towards fixed fees, value charging, or capped prices.
Request a demo of BusyLamp eBilling.Space today.