The (Slow) Death of Billable Hours
Law Firm Pricing
4 min read
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Clients need their problems solved. When they hire an attorney, they want to buy a solution, not a unit of time. And yet, this is what the billable hour is. Many client-centered law firms and clients are realizing that the billable hour is not always the best way to price services and help clients.
Jeff Houin realized that clients were hesitant to call him and get the help they needed because they were worried about the billable clock ticking. “[Clients] would think their question wasn’t important enough to get billed for, so they wouldn’t call. And I encountered situations where if I’d known their issue six months earlier, it wouldn’t have snowballed. We had to figure out a way to break down that barrier.” Read more about How Jeff Houin Ditched the Billable Hour.
Running a client-centered law firm should mean solving problems quickly and efficiently. The billable hour doesn’t encourage, or reward, either.
We know a young lawyer who found a way to automate his repetitive tasks. His managing partner, however, was not pleased. This meant that a task that would normally take 2 hours could be done in minutes and because they billed by the hour, they had no way to capture the value of that work.
In a world where innovation and technology are changing the way we work, law firms billing by the hour have little incentive to get on board and make their work lives easier.
Our head Lab business coach, Stephanie, needed to hire a lawyer to help her husband’s business obtain a license. At the time, their application had stalled, and they couldn’t move the business forward until it was approved. Stephanie had practiced law for 15 years and had a sense of what she’d be willing to pay to solve this problem. She felt they would likely spend around $2,500 to get this problem solved.
The lawyer she selected not only had a solid reputation but also had a good relationship with the administrator assigned to their case. After she hired the lawyer, he didn’t discuss value or pricing. Instead, he defaulted to billing them by the hour.
A lawyer herself, Stephanie knew the dangers of the hourly billing, and it freaked her out. She didn’t want their new business to face a stiff bill so she kept her calls to him quick and offered to reduce her own affidavit to reduce his workload.
In the end, Stephanie’s apprehension was unwarranted. In fact, she got the better end of the deal. The lawyer used his reputation and relationship to solve their problem quickly and they received their license after a few phone calls. When the bill came, Stephanie nervously opened the envelope (because, yes it was a paper invoice mailed to her) and was pleasantly surprised to receive a bill of just $748.
In this case, because the lawyer decided to bill by the hour instead of on value, he left money on the table. Stephanie hadn’t hired him for his ability to send out briefs; she hired him because he had valuable information and connections for getting their application approved—something she was willing to pay $2,500 for.
One constant in Stephanie’s story above is the fear and uncertainty she had throughout the representation. She didn’t know if she was signing up for $1,000 or $10,000. She actually felt fear opening the envelope containing the bill. All clients—business and consumer—appreciate knowing what they are signing up for and being able to plan and budget to pay their legal bills. This certainty generally means attorneys collect more of their fees. Every attorney who bills by the hour has a story of a client receiving an unexpected bill and never paying for it.
When a firm bills by the hour, the only way to make more money is to raise hourly rates or bill more hours. Every week, the business coaches for our Lawyerist Lab program hear lawyers complain that they’d like to make more money, but they don’t have more time to give or don’t want the burden of managing more people on their team. The billable hour keeps lawyers from most business owners’ dreams of working less and making more.
In the end, it is easy to see how the client’s objectives and the lawyer’s objectives often differ under a billable hour method. In today’s world, it is time for lawyers to be more thoughtful in thinking through pricing structures that help clients and the business.
Regardless of which pricing model you select, make sure you are intentional about your pricing and how it fits into your larger financial strategy. Your financial strategy forecasts revenue, expenses, net profit, cash reserves, and the value of your business. Your pricing model is an important level that can impact your firm’s ability to create healthy profits. Want to learn more about what successful firms do to achieve and sustain healthy profits?