Four Reasons Billing by the Hour is a Competitive Disadvantage

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Clients expect much more than a resolution to their legal problems. They expect gold-class service and value. Unfortunately, the billable hour model is handicapping your ability to do this for the following four reasons:

1. The Billable Hour Destroys Innovation

For a while now, clients have recognized that a shift away from the billable hour would increase efficiency and the quality of legal services. Lawyers have been slower to embrace the concept.

Until last year, the vast majority of the family law firms in my local bar turned over disclosure via mail or hand delivery. (And the vast majority of those firms where charging their clients copy costs and paralegal rates to make the copies.) Digital copies of pleadings and documents to clients were the exception rather than the rule.

This only changed because our bar association mandated electronic service of documents.

The billable hour guarantees every hour that you spend on innovation takes away from your income. After all, you only have twenty-four hours in a day. And if you allocate time away from billing clients to innovation and technology upgrades, you will be decreasing the total value of your case under the billable hour.

Investing time and money in a top-notch online collaborative portal? Since it saves time, you would actually decrease the total value of your case because your paralegal wouldn’t need multiple hours to organize, copy, and sort disclosure records.

Thinking of using your firms collective knowledge to create a form bank with automated document creation using document assembly software? The billable hour penalizes you for building such firm assets because they decrease the amount of time needed to execute a project like drafting documents. You could have the collective wisdom of a hundred lawyers in your firm’s knowledge bank that automatically generates 95% of a pleading from the click of a few buttons. These pleadings could be superior to your competitions’ pleadings and you could create them in a fraction of the time.

But doing so would only devalue your case under the billable hour, because it would take you less time.

2. The Billable Hour Does Not Capture Value

Creating a knowledge bank that generates automated forms does not work under the billable hour because the billable hour fails to capture value.

The billable hour simply measures time. But value in the eyes of your client is completely unrelated to time. And while you can increase your hourly rate, you are still pricing your services on time, just with a higher dollar amount per minute.

Sam wrote here about staying up late thinking through a case, before finally falling asleep only to dream about the case. Gerry Spence talks about keeping a notepad by his bedside, only to wake up to hurriedly scribble out ideas for a case.

You can’t bill for dreaming. Yet for many lawyers, it is the constant mental tinkering with the problem that leads to striking gold — to having the brilliant “ah-ha!” moment that redefines the structure of the case.

Oddly enough, you will bill more for the time it takes to tell your client about your brilliant new strategy than for the time it took you to come up with the idea itself.

This is a problem.

Clients want value. Whether you are servicing businesses or customers, the best clients will pay you handsomely as long as you can deliver value that exceeds the money you charge.

3. The Billable Hour is an Atrocious Measure of Performance

My firm tracks billables and rewards performance when lawyers meet hourly goals. Much better measures of performance exist; we just don’t have time to worry about them.

Yet I wonder where we would be if for the last couple of years we measured:

  • Turnover time: Many clients’ goals include minimizing the time of their case from start to finish. Measuring the turnaround time for the distinct phases of a divorce case would align with this goal and indicate that cases are moving and deadlines are being met.
  • Client happiness: Happy clients refer more cases. More cases are good for business. Surveying your clients’ satisfaction is an effective way to measure client happiness. The Net Promoter Score (NPS) is a simple one-question survey that will generate a high response rate and assign a quantifiable number to measure happiness. Moving the score up on a monthly basis is a much better way to recognize achievement than counting hours.
  • Unilateral client calls: Related, how about measuring the number of calls lawyers make to clients just to check in and see how they are doing?

My firm has been working on implementing the three measures outlined above. It has been more difficult than anticipated because the culture of the firm relies on the billable hour. For example, we would lose the goodwill received from our clients if we billed them for calling just to see how things are progressing. Yet it is difficult to tell a lawyer whose compensation is tied directly hours billed that we need them to call clients every Friday afternoon and mark the call as non-billable.

If your clients are not getting great service, they will let the world know it with their fingertips. The firms that will be successful in the future will care about their customers so much they will measure and reward their people who care the most. The billable hour impedes those measurements.

4. The Billable Hour Causes Tension Between the Client and the Lawyer

Most painfully, the billable hour causes tension and erodes trust between you and your client.

When you are billing by the hour, the client assumes all the risk. That may sound good at first but it impedes your ability to establish strong client ties — the kind of ties that make your clients “customers” for life and motivates them to tell potential leads what an amazing lawyer you are.

And because the client shoulders all the risk, few lawyers will spend the time and energy necessary at the beginning of a case to scope the anticipated cost. Family law attorneys in particular often decline to give estimates of legal fees due to the uncertainty in the amount of hours required to complete a case. This leaves your client in the dark. If the case spirals out of your control, the client has no choice but to foot the heavy legal costs or be left out in the dark.

This creates tension in the lawyer-client relationship.

At the end of the day, clients expect much more from their business vendors today than they did just ten years ago. This includes your clients. But while the billable hour may make pricing and profit forecasting easier, it is increasingly putting your firm at a competitive disadvantage. It makes you focus on the wrong measurements and metrics, and it takes away your attention from what the client really wants.

Featured image: “Clock with words ‘time a new plan’ on its face” from Shutterstock.

Originally published 2015-03-05.

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  • What a fantastic article! Thanks for writing it Christian.

    Compared to most other industries, where it’s literally innovate or die, there is hardly any innovation taking place in law firms. We’ve often talked about this and wondered why it’s the case. Why don’t law firms invest more resources into innovation and try to get ahead of their competition? I think you hit the nail on the head – it’s not just because lawyers are risk-averse and slow to adapt; it’s because of the billable hour.

    Billing for time is very different from billing for value.

    When firms start to think like this (i.e. where the objective is delivering value to clients as opposed to billing per unit of time) the incentive to innovate becomes incredibly strong. The more innovative firms have already begun and will continue capturing increased market share, while firms that proceed with business as usual will be left in the dust. So the earlier you start innovating, the better.

    Commit the time now to adopt technology, automate routine processes, and streamline operations. It’s counterintuitive for those with a billable hours background, where increased efficiency equals decreased revenue. But by minimizing the time required for you to provide legal services, you can maximize the value you provide to your clients. And that’s the recipe for satisfied customers, more referrals, and a thriving law practice in this rapidly evolving market.

  • rickkabra

    Excellent topic. And Lexicata makes a great point of need and motivation of law firms, specially small law firms to adopt technology, streamline processes and workflow as value based billing no longer requires counting how many hours spent.

    However, vast majority of clients we deal with do hourly billing. If value based billing is so compelling and win-win for all, why is marketplace not demanding it?

    • @rickkabra:disqus In certain segments, there has been a demand for alternative fee structures (or more accurately, to know what the price is “up front”). But hiring lawyers is not like buying a cheeseburger: For the most part, people hire lawyers when they need to hire lawyers. And if all the lawyers in a particular market for a particular services bill by the hour, people will hire an hourly lawyer instead of foregoing a lawyer entirely.
      But quite a few legal services are primed for alternative fee arrangements. And you can bet a good portion of the marketplace would prefer a fee arrangement that pushed some of the risk of the project back on to the lawyer.
      But even bigger than the pricing debate (billable versus this versus that) is the difficulty of aligning a focus on measuring hours with creating a better product. If your team is focused on cranking hours up, it can be difficult to also get them to focus on activities that might provide a better service but result in less total hours spent. Not impossible of course, but real tough.
      At the end of the day, most of us want to do great lawyering while making clients super happy. We have to examine everything from our pricing structure to our metrics to make sure we are optimized to that.

      • rickkabra

        @christiandenmon:disqus Understood. From my own personal experience, few times when I was involved in procuring legal services both for professional and personal issues – There was no way to estimate complexity of the cases @ the onset. Simple issues turned out to be ugly and ugly problems got settled in 1st conference. So, fully agreed that legal services procurement is not like buying a cheeseburger, but a mistake many make while looking for such services.

  • Jen Bacon Wojeski

    @christiandenmon:disqus have you been able to implement a non-billable hour structure in your litigation practice?

    • Dominique Harvey

      @christiandenmon:disqus I have the same question but in reference to a family mediation practice…

  • Paul Spitz

    This can be even more compelling for a transactional practice. I provide contracts and other legal documents for my clients, and there’s a certain subset that I use quite frequently. I spent a lot of time upfront developing the template, and for each use with a client, I may only spend 5 minutes customizing the template. If I billed by the hour, that would mean that I can only charge $250/hr times 5 minutes, or $21, for what may be a very important contract. But if the contract is really worth $800 or $1000, I should charge on that basis, rather than on the billable 5 minutes basis. This also allows me to scale, and to serve a lot of clients very efficiently.

  • captain_quirk

    I agree with the listed shortcomings of the billable-hour business model, but I can’t help noticing that while denigrating that business model, the author does not suggest any solutions or alternatives. :-/