On the Billable Hour or 'Make it Make Sense'

The billable hour has been the predominant way of billing in the legal market for decades. Over the past years, however, more and more voices raise criticism about the system – from incentives to fairness. Nevertheless, finding suitable alternatives is not an easy task.

Key words: billing, billable hour, value-billing, pricing

Image: Pexels/Oladimeji Ajegbile

The Billable Hour

The billable hour hasn’t always been the predominant way of billing clients in the legal market. Over the past decades, it however has established itself as practically the only way invoices are drawn up. Nevertheless, criticism about the billable hour is growing and the reasons it became the gold standard of billing (transparency, fairness etc.) are increasingly called into question. And while articles criticizing the billable hour are very much en vogue at the moment, no radical yet easily adaptable (and functioning!) solutions are presented in most of those articles. So let’s go through it…

Why isn’t it working – and yet still in Place?

During a keynote speech, Richard Susskind made an example to the effect of: “My daughter once asked me what she could do to earn some money. I replied that she could clean the kitchen incl. all cupboards etc. She then asked me how much money I would pay her for her work, to which I answered ‘GBP 5 per hour’. My daughter agreed to do the work, looked at me and said ‘but I will take my time then.’”

The earnings formula for Susskind’s daughter was Earnings = Hourly Wage x Time. She also realized the amount of work is a given, as is the hourly wage. The factor she could influence to maximize her earnings was the time she spent doing the (fixed amount of) work. So she decided to work slower (not necessarily more accurate though) in order to earn more money – which definitely wasn’t in her client’s (in this case her father’s) interest. So, here is the first criticism: the incentives are designed in a way that does not necessarily align the client’s and the lawyer’s preferences.

There is more criticism, e.g. the additional work that goes into writing down and (if no adequate software exists) remembering to write down the time spent on different tasks for various clients. Or the fact that it is easy to falsify (just add another hour of ‘research’). Or – and we will come back to this later on – the price just plain and simply does not represent the value of the output, service or product.

So why is the billable hour not only still in place but the predominant billing method by a very wide margin – apart from the fact that is factually mandated by some legislatures or professional oversight agencies? Well, first of all it is easy – easy to arrive at the final number, easy to calculate profits and set targets for partners and associates, and easy to manipulate (just strike some of the hours to make the client happy – which you probably shouldn’t do, as I explained in this article). The billable hour also seemingly facilitates the comparison between two associates or two partners. Why only ‘seemingly’? Without a correction mechanism, non-billable contributions (publication efforts, teaching, marketing, team-building, helping others out etc.) will get lost in translation. And probably most important of all: it is practically risk-free for the lawyers. The work takes longer than expected? Why bother, you’re paid by the hour.

Why would we want any Change?

Let’s come back to the main issue, which is that with the billable hour model it is not the output, the value of the service or product, which is charged, but rather the input. If done by the same lawyer, an hour of research in recent case law which might not bring any new information to light will be charged at the same rate as an hour spent on a very sophisticated restructuring project. And what about that great idea you had on your morning run? That mental breakthrough in the shower? Or the brainstorming on the commute? You can’t really bill that, can you? Some do, and they should (one BigFour partner once bluntly told me: “I bill my clients even if I just think about them”). Because whenever real value is created, it’s more than justifiable to add it to the bill.

In theory, charging according to value created seems like the optimal solution: clients pay only for the real output and efficient and innovative lawyers and law firms are rewarded. In practice the whole subject at hand becomes a little more complicated. What is value? How do you measure the value of your actions? Did your truly amazing ground-breaking work on a very difficult case, that despite all our first-class effort ended up being a complete loss in court create any value?

Change is hard, try the Middle Ground

One solution to this problem is to take past data, make some educated guesses and come up with package prices. This, however, only works for more commoditized work. Many law firms offer these services for company foundations or standard contracts. And while many expect these packages to be cheaper than the same work would be on a billable hour basis, they don’t have to be. This is due to the fact that in addition to the service or product at hand the client receives some sort of price insurance, or in other words, the lawyer might be able to charge a risk premium.

A lawyer friend, who was fed up with the billable hour, tried to completely overhaul her billing system – it didn’t work. Some clients weren’t willing to accept packages, others willingly accepted it, and ended up taking advantage of them to the point where they basically were calling in for every little problem, because they felt entitled to do so as they were paying for a package.

So what can you do? One less radical and easily applicable solution is to implement staggered fees, meaning a billing system where a professional has three (or more) different fee levels, e.g. 150 $/h for research or review work, 250 $/h for document drafts and 400 $/h for complex and brain-wrecking matters that require creative solutions and out-of-the-box thinking. This solution doesn’t get rid of the afore-mentioned problem of having to invest time in writing down the time spent on various clients and projects. It, however, gets closer to value-billing and therefore to a system that actually reflects the real value of the work that is done by professionals.