The Hourly Billing Myth: Time is Not Value

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Personal Productivity for Lawyers

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I reject the idea that the time it takes me to do work is necessarily a good measure of the value of that work. My firm uses hourly billing only in very limited circumstances. Instead, we define the work the client wants and decide a value, instead of leaving both those things uncertain, as happens in the average hourly fee representation.

Here is why—and how—we stopped hourly billing.

Time is not intrinsically valuable

Should you be paid more for something that takes a long time? Only if you are both good at doing that thing, and efficient, too. Should you be paid less for something that takes a short amount of time? It depends entirely on what you deliver. A poor product delivered quickly is no better than a poor product delivered after a lot of work.

Hourly billing makes a firm’s slowest, most dim-witted lawyers its most-valuable assets. Not because they produce the highest-quality work, but because they bill the most hours. Firms may endeavor to cull the ranks of such employees, but there is a wide gray line between efficient attorneys and the good-but-slower attorneys who rack up the most hours. Somewhere on that line are the all-star billers.

How much should you charge for a contract you spent 20 minutes adapting, if it took you 20 hours to draft it for a previous client? The second version is probably worth more, but if you use hourly billing, you cannot bill your client for that added value. Should the first client have paid more for version 1.0? (I am aware that, in this situation, some firms switch to “value billing” and write down a “more appropriate” time for the product delivered. That is not value billing; that is unethical unless the client knows and consents.)

The value of the work you do generally increases as you can experience, but you cannot increase your hourly billing rate enough to make up for that increase in value. Can you realistically bill the first client $150 per hour while you draft version 1.0 of a document, and then bill the second client $1,000 per hour for version 1.1? (No.)

Hourly billing devalues quality time

How much could you have billed while you watched your daughter’s soccer game? Your son’s piano recital? Dinner with your wife? Volunteering with your church? When you count your money by the clock, every moment away from your desk becomes a cost-benefit proposition. I never want to consider my wife or daughter as a cost of doing business.

Fixed fees encourage a big-picture, quality-centric approach

Hourly billing encourages myopic thinking—this case, this motion—instead of looking at the bigger picture. It encourages lawyers to reinvent the wheel with each new project. Flat fees, on the other hand, encourage big-picture thinking.

For example, we sometimes handle a motion where the work involved would far exceed the hourly value of our fee. We do it because the motion will result in forms and a memorandum we can revise and re-use in the future. The motion—or the case—becomes a loss leader, but time saved in future cases more than makes up for it.

Thinking of each case as additive encourages your firm to acquire institutional knowledge, and to improve every matter by building on the last one. This not only saves time, but it increases the quality of the product the client receives.

How to estimate value

Despite everything I have just said, it probably makes sense to start estimating value with reference to time. I do not mean that you should pull out your last timesheet, though.

Consider the task you are trying to set a price for. If you start the project in your forms folder so that you can re-use as much of your work product as possible, how much time will it take, on average, to repeat the task? Make that a dollar figure, and take the following into consideration before you decide that is the right number.

Are you likely to repeat the task, or is this a one-off project? If it is a one-off project, you may not be the right lawyer for the job, no matter how you do billing. You may want to use a contract lawyer with the forms and experience to do the project more efficiently. I did this, recently, for a business matter. It was easier—and cheaper—to hire another law firm to do the work, but we handled the bill and kept the client.

Finally, consider whether the average time is a good measure of value. For example, is a non-disclosure agreement you basically print out for a client worth 5 minutes of work, or is it worth $500, in light of the peace of mind you are giving your client, and the liability risk you are taking on yourself? In litigation, you may be able to dispose of a matter with a single motion that you can adapt with an hour’s work from a previous case. Is that worth one hour, or is that worth something greater, in light of the value you are delivering to the client?

Go forth and be valuable

When you buy a sandwich at the deli, you do not pay for the time it takes to assemble the sandwich, plus the cost of materials. Well, you do, in a roundabout sort of way, but those don’t tell the whole story behind the price, and you don’t care about them, anyway. You just pay $7.50 for a sandwich, which is either worth $7.50, or it isn’t.

Time is simplistic. It is one component of value, but not the whole measure. Think beyond time. Your clients do.

(Photo credit: http://flic.kr/p/4YEDue)

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  • David McLeod

    I hate having to track time. There is a lot of slippage. However, my practice is exclusively litigation. The uncertainty of what is ahead is too big a factor to allow for flat fee billing. A colleague of mine says “We’ll fight on principle till your last nickel is gone”. His point is that people are a lot less litigious when they are paying to fight about every issue they raise. They get reasonable about focusing on the war and not every small battle. With a flat fee, the clients get myopic. Most lawyers I know never bill for all of the time they spend. I don’t charge for getting up to speed on an issue where my memory has grown rusty. Likewise, I do charge a reasonable amount of time for reusing previously created work. On the cases where I can reasonably estimate the work to be done and charge a flat fee, it is a relief to be unchained from tracking time.

    • Our practice has been exclusively litigation for five years, and we don’t bill by the hour.

      I find that litigating on flat fees encourages lawyers to reach the same result more expediently. You can still make the client feel the sting of excess litigation by charging extra for more than the anticipated number of motions, more for trial, etc. Flat fees are more flexible than just setting a single fee for the whole litigation.

      Also, I find this to be highly suspect: “I do charge a reasonable amount of time for reusing previously created work.” If you are charging by the hour, you cannot arbitrarily boost your bill for “value” without the informed consent of your client.

  • David McLeod

    Sam, do you find it “highly suspect” that under an hourly billing agreement that I don’t charge for all of my time? I certainly wasn’t looking for an argument with my post. Maybe you weren’t with yours but, the “highly suspect” language kinda smacks of an accusation. It would be instructive if you would provide some examples of the step up flat fee arrangement in a litigation matter. Say a contract dispute where, with intervenors, there are six parties to the suit. I represented the Defendant and the others were Plaintiff’s or intervenor Plaintiffs. Pleadings filed were over 3000 pages. Five lawyers against me. I honestly enjoyed your post and it will get me thinking of better ways to be more creative with the flat fee structure.

    • If you and your client agree that time is to be the measure of value, I don’t think you can change the measure of value for a particular document. If you want to save time by re-using a document, good for the client. Unless the client knows what you are doing, I don’t think you can add time based on some other notion of “value.” That may not be what you are doing, but there are attorneys who switch to “value” instead of time when it suits them. I find that practice to be disingenuous and—yes—highly suspect.

      You can set a flat fee for any case, and there are a number of ways to do it. I’ve discussed a couple above, and I’ve walked through a lot more in my alternative billing webinar, which is available for replay. The bottom line is that there are a lot of different ways to work with flat fees. You can create a retainer agreement that suits you, the client, and the case.

      • Jim Hartle

        Interesting discussion; thanks for putting it online.

        Sam and David, I think you may have been talking past each other respecting the “reasonable amount of time” quote.

        If I’m reading David’s first post correctly, it’s just saying that David charges how much time it actually takes him to do the work (maybe a little doctoring of the language of the previously-created work). That’s as opposed to “reasonable amount of time” meaning something akin to “a good amount of time”, which sounds a lot more like hour-padding. Perhaps David charges, say, six minutes x his hourly rate for the six minutes the doctoring of the work takes.

        Then again, I could be misreading David’s original post.

    • Having said that you can charge a flat fee in every case, I do think that—sometimes—an hourly-fee arrangement may be the best fit. For example, we offer to negotiate for consumers in debt collection lawsuits. We charge by the hour, with a minimum fee for administration. That’s because negotiations are often unpredictable, even though we deal with the same debt collectors again and again.

      I’ve said that I reject the idea that time is necessarily a good measure of value, but it can be the best measure in a particular case.

  • Fabrice Talbot

    Sam,

    I could not agree more with you! As a business owner, I frequently interact with lawyers. I’ve never liked the fact that I had to pay for time spent on a task.

    As you mentioned, certain types of legal services add value to my business (counsel, review client proposals) when others are pure commodity (ex.: legal document template).

    By offering flat project fee, legal firms are telling clients “I’m here to create value for your business” – isn’t it the best way to build lasting relationships?

  • Hi Sam:

    I enjoyed this post. I am a divorce lawyer/mediator in MA and have been using fixed fees for a couple of years for non-litigation work. For 2011, we are rolling out some additional fixed-fee mediation packages, as clients really seem to appreciate them.

    Recently I presented to two local bar groups about fixed fees. Your point about flat fees encouraging big-picture thinking is a good one, and something that I had not really considered, but it makes a lot of sense.

    Thanks, I enjoy the site.

    Take care,

    Steve