@taxgirl on twitter “If I read one more piece about "demise of the billable hour," I’ll scream. BigLaw is reactionary, sure, but I don’t expect dramatic shift.”
That tweet the other day made me smile as I’ve been thinking of doing a post on “billable hour”, I mean it’s a written rule for a legal blog right? But I couldn’t quite get my thoughts straight on it, something didn’t quite fit. I mean are the clients of law firms really crying out for fixed fee’s or do they just want lower fees? Or are they even crying out at all? And if they aren’t then why would a business radically change a model that has generated it lots of money?
Also it’s not that new, some work has already shifted to fixed fee or pre-packaged work. Firms like Optima Legal have business models built like this. But will biglaw step into this arena in a big way or just leave it to the niche production line firms?
I’m going out on a limb and guessing nothings going to change anytime soon and the billable hour model is here to stay for the majority of medium and large firms.
I know this goes against a lot of legal bloggers, but it was an example I was trying to pull together for an argument for abolishing the billable hour that drew me to this opposing conclusion. Let me give you the example, I was thinking of when you service your car (or any garage visit).
Say you’ve a VW Passat standard model nothing fancy. There are thousands of this model on the road. It’s a 40,000 mile service and the garage you are taking it to has done this service hundreds of times, and if it’s a VW dealer then most likely on this very model. The cost is estimated at about £170. But it’ll depend on what needs doing.
At 5pm you pick up the car and get the bill:-
- 67GDHS67- Oil Filter x 1 – £40
- 888GH28 – Aero wiper blades – £10
- 89897DH – Duckhams Hypergrade – £35
- Replace oil filter (1hr) – £20
- Replace wiper blades (.5hr) – £5
- Oil replacement (2hr) – £40
- Check brake fluid – £20
- Check timing belt – £25
- Miscellaneous service labour (2hr) – £40
- Total service cost – £235
The next day someone else will take their Passat into the same garage and will get charged just £170 for the service as it didn’t need any extra work.
As a client of the garage do I want them to charge me a flat rate? Do I want to know exactly how much it will cost?
My immediate answer is yes of course, but then I think about it more and start to change my mind. In fact I conclude, no not really. I started to think that for the garage to charge a flat rate they’d have to manage the service a bit like a project, they’d break it down into components, estimate risks of extra work and add float for these possible risks. Basically if I was the guy who paid £170, I would probably pay a flat fee of £190 to ensure that everyone’s bill was also £190 (the garage moving some of the costs of the possible extra work around).
As the other guy, having had years of experiencing how the garage used to charge, I wouldn’t be too happy with this new model. In that I’d effectively paying for all the other people’s extra work.
There’s always the “project tensions” to consider when working to fixed price. When you try to bundle up a piece of work (or project) it requires you to manage the three tensions: Time, Cost and Quality. Time in most cases would be critical to ensure customer service and to manage the throughput of work in the garage, therefore if the flat fee is fixed and too low to cover the work then naturally your quality will drop. Customers aren’t going to be too happy about this.
So after some thought on this example, I thought “you know, if I was a law firm client I think I would want to see the full breakdown and I think I’d accept sometimes I’d pay that bit extra on difficult jobs to get my work on time and of a consistent high quality.”
So if the client isn’t too concerned about changing the model, what about from a lawyers perspective? The recent AmLaw 100 stats show that although the PPP (Profits per Partner) has dropped in this recession the average is still over $1m. So is the crunch so bad that radical changes will be in order? I don’t think so.
And that draws me to my conclusion stated earlier, the billable hour is here to stay!
BUT, what I do think will change is that law firms will look at the hours billed and see how internally they can gain more profit from each task on a case. Are there tasks that can be done more cheaply? Using junior members of the team, outsourcing some work, using technology better etc? Can they ensure that all the time is billed and not missed.
Also from a clients perspective. If I think back to the garage example, I too would be looking at the hours billed and thinking. Why can’t that be sourced cheaper, why is that dealer charging X for labour and this one charging Y. In the legal world the client relationship should mean the client can start to encourage better/cheaper ways.
But all this requires the visibility of a breakdown of the bill, not an overall flat fee!
Excellent points. Bottom line: Clients want to understand and manage costs. They can do this within the billable hour – and that’s what they are currently doing. Although some clients talk about flat-fees, even then they evaluate costs by hours and rates. The flip-side mentioned in your post is also relevant – as law firms will be working concurrently to maximize their return on those same hours and rates.
Great post. In my experience the hyrbid models work best. It all depends on the case/scenario/client. For certain types of clients/matters (where it’s easy to estimate the outlay and variables) flat fees seem to work. For litigation it’s much trickier.
Most of the anti-billable hour is just generalized talk. When you get down to the details (as you did in your post) it’s a lot more difficult to implement fixed fees and other alternatives.
Many business owners don’t like the billable hour based model for two reasons: (1) difficult to estimate costs and (2) they don’t feel like they can just pick up the phone and chat – every move they make increases their bill.
Either way, great post, I agree, this topic gets a lot of lip service, it’s nice to see a dissenting voice on the other side and some thinking that doesn’t automatically assume that the billable hour is evil!
Good blog. Having recently interviewed various partners and lawyers for a seminar, I totally agree the billable hour isn’t going to disappear. Lawyers are however under more scrutiny to deliver more for the hour and provide accurate project costs (because project based work boils down to being billed by the hour). My guess is that going forward lawyers will need better tools to predict their costs and will need to improve their processes and project management skills to identify how they can utilise their resources better and give the client better value for the hour.
Interesting post. When you’re talking about ‘fixed’ fees, you’re right – there are few matters that will be amenable to fixed fee billing where every client is charged the same fee for the work performed. But the move away from billable hours doesn’t require that every client be charged the same fee – especially when the work performed for different clients is, in fact, different.
In your example of the auto repair, both customers were not charged the same fee precisely because, as you point out, the work that was performed for each of these customers was ultimately different. Although each came for 40,000 mile service, the first customer’s vehicle required additional service for replacement of various parts, etc.
In the legal context, the way that this would be handled would be by specifically defining the scope of the matter to be handled and then using change orders if additional work needed to be performed. Essentially, this is what the auto repair shop did when itemizing the bill for the first client to show them the additional services performed and the cost of those services (although I recommend that the client be advised of the additional services and the cost, and that the client’s agreement to incur those additional fees be received BEFORE the work is actually performed).
While I agree that the billable hour will last longer in large and medium sized firms, I think that’s more the result of entrenched thinking and lack of flexibility than it is the ability to provide clients with fixed fee alternatives that work for both the lawyer and the client.
Time is one of the costs to the lawyer in providing legal fees, and it needs to be taken into consideration when determining the price to be charged to a client for work to be performed. However, it shouldn’t be the sole determining factor in setting the price. Additional services performed provide additional value to the client, and the lawyer is certainly entitled to charge for those services, even under a fixed fee billing system.
Clients care about outcome, results and service. The number of hours the lawyer spends on their matter isn’t important unless the lawyer makes billable hours an issue, or if they don’t understand the value of the service that is being provided.
Thanks for all the comments!
I must say though, the one thing I can’t stand is the call from the garage with the additional work, after all most of the time this needs to be done so I haven’t a choice. This “addition” leaves more of a bad taste for me than just an itemised this is what we did. Maybe personal preference though.
Some of the comments are for not necessarily a “fixed rate for all” but a rate where there is a set cost for a specific piece of work. I can perhaps see this and that the project management skills would be required. But this would require some very good budgeting process and I can only see this happening if there were a new role created in law firms, the legal case project manager.
Any more thoughts?
Jason:
I think you’ve hit it on the head — and I think clients are going to be looking for better ‘project management’ on all of their files in the future, regardless of the billing method used. Whether that will require new positions to be created within law firms or whether project management skills and training will be needed for the attorneys and partners themselves may depend on the firm and its clients.
Just curious – do you think your reaction to the ‘additions’ would be different if you were told up front that the specifics of what was and wasn’t included in the quoted fee, and what the likely or common ‘additions’ might be? Some customers might be annoyed that they were charged $xx for replacing the wipers, when they could have done that themselves for less.
The reason I recommend that the additions be explained and agreed to ahead of time is that sometimes those conversations lead to different options that could be explored and an opportunity to review the client’s most important goals. Sometimes the work HAS TO be done, but sometimes it doesn’t – and the client needs to be involved in that decisionmaking.