For a very long time the legal profession has operated with time at the core of its business model. One of the key reasons lawyers struggle to offer true alternatives to hourly billing is that many believe that what they are selling is time. This is the disconnect: time is not what the customer is buying; time is what the customer is paying for, because the bill is calculated on time.
If your lawyer offers you a fixed fee, chances are the fee is based upon a calculation of the time a similar task or transaction has taken in the past multiplied by their (or the teams’) hourly rate, with a bit of ‘fat’ added for any potential overrun (read more on this in an article published in the Legal Affairs section of today's The Australian). Don’t get me wrong, it’s not an entirely bad thing (provided there are no backflips and uplifts) because it gives price certainty.
But offering fixed fees (which are based upon time) as an alternative to hourly billing is not a true alternative. Simply put, fixed fees based on time is still essentially time based billing.
What customers really want
In the ACLA survey released last month, 52% of in-house counsel surveyed believed that time charging was not ideal, but they still accepted it because they were not being offered alternatives.
When firms focus on the time it takes to do something, they drift away from what buyers are actually engaging them for –intellectual capital, outcomes and the value that they can provide. Customers aren’t overly concerned about how long it takes to draft a document, they want the document.
The gulf between the risk and the relationship between a firm and its customer can be unbridgeable when the relationship is based upon time. But when the relationship is centred upon the customer’s perception of value, the incentive shifts from capturing increments of time to focusing on the outcome and its value to the customer. The lawyer deserves to be rewarded accordingly.
Why time is firmly entrenched in law firms
Because the legal profession has centred itself around time for so long, time has permeated nearly every aspect of the business of law – people management, software and profit. This can make it difficult for a firm to move away from timesheets and the billable hour.
The first thing that practice management software will highlight in its sales literature is the ability to capture time more easily, and ironically, how it can save time. Banks may include a covenant in a firm’s financial arrangement relating to the level of unbilled time entered into a firm’s system. The list goes on.
A key mechanism used in performance managing a staff member is his or her time ‘in the system’ – billed or otherwise.
So it becomes quickly ingrained in the mindset of a lawyer to the extent that words such as ‘billables’ and ‘units’ are part of the vernacular when referring to one’s monthly performance.
Negative flow-on effects of time-centric business models to both individual lawyers and the profession are numerous. The high rates of depression among lawyers are well-known and I have no doubt that the focus on time is a key component. There’s the pressure of the internal time budget, the justification of the time billed with the customer, and the time with family and friends sacrificed in order to ‘hit’ budget.
All of these factors combined culminate in management discussions focusing on how time can be used to increase profit. How? By lifting rates, making sure that every minute is captured and then driving all of these minutes to be ‘billed’.
Unfortunately, even if it makes it to the table, talk of value, repeat business and an outcome for the customer is secondary.
I wonder if anyone measures the time it takes to enter time?
A fundamental shift
To offer true alternatives to hourly billing will require a complete mentality shift in the minds of lawyers and a fundamental change in the way a firm manages itself and its staff. For these reasons, hourly billing will stay for the foreseeable future.
For the sake of my firm I selfishly hope it does remain; for the sake of the profession and the individuals within it, I hope hourly billing becomes the ‘alternative’.