My point is that when legal-market pundits complain about the standard billable hour charging model and its defects but fail to notice that there’s a lot more to the bargain than what shows up on the invoice, they just don’t get it.
I like cars and when I think about this subject, I can’t help but imagine myself as a kind of auto-racing impresario. You’re the client but if you have ordinary needs, then get ordinary solutions – you don’t need me. You need a fleet of Ford Tauruses, so get Ford to lease them to you, hire a fleet manager and that’s that. If you have more exotic requirements then I’m your man. You want to hire an auto racing operation? You need me to get you the whole apparatus – drivers, mechanics, cars, pit crews, transportation – several times over? OK. But you don’t want to invest; you want to rent the whole deal? It isn’t just a hobby though, right? Winning is very important to you. You get to decide when to press for a checkered flag and when to drop out of a race. The racing calendar (contrary to fact) is unpredictable so you and I never know in advance just how many teams will be working at any moment or how long any race or any series will last. If you don’t like the results or just on a whim, you can tell some or all of my teams to pack up and go away and you can go and hire someone else.
How do I charge you for this? Given the variables involved, I can’t risk charging you just for wins. We might arrange for a bonus scheme as a reward for winning but I can’t pay my expenses on that basis. With all the uncertainty and all the moving parts I can’t charge you an annual or even monthly lump sum. What if we need an extra car?
The answer is that, given the idiosyncratic nature of the deal, I charge you the cost of the inputs with a mark-up to cover my investment cost, to pay my management fee and to compensate me for the risks I bear that are inherent in the relationship. I can tinker at the edges of this model – bonuses, penalties and other risk-sharing arrangements in a small way – but I can’t come up with a better model for remuneration in these circumstances.
Admittedly the deal is not without risks for you, apart from the risk of losing races. I may be overstaffing to inflate my earnings or the staff I’ve hired for you may be shirking which costs you in expense and performance. As a check on this, your own experience tells you approximately what most tasks and projects ought to cost and you can engage in a certain amount of oversight and monitoring. My competitors are hanging around your door telling you stories about how they will get better results for less money. In the meantime, our interests are closely aligned. I want to keep you as a client and I want our teams to win races for both our sakes.
Let’s leave the race track and get back to lawyers and their clients. What is clear is that the standard billing model has been remarkably robust both over time and across different degrees of clients’ reliance on their legal service providers. That is because billing is just one part of a more extensive arrangement that is full of benefits for the clients and risks for the law firms – a deal that balances the interests of both.
Not by any means a Euclidean proof of the necessity of the billable hour but you see the point.
Richard Rapp
Richard,
I couldn’t agree more. The “billable” hour is not an ill in itself. It is fundamentally a measure of the input costs. How the firm then charges is a different question, but it is hard to come up with a model that sets the fees charged without reference to the input costs (i.e., hours) without an unacceptable level of risk to the firm.
It would be interesting to think about other possibilities for mitigating this risk – could self insurance be an option as law firms hit mega scale? I am thinking of the Big 4, who have captive insurers for professional indemnity claims. At $20+ billion in global revenue that is feasible – not at current law firm sizes. Could the same sort of structure be used to cover the risks associated with alternative pricing models? The problem of course is that any such model requires an upside as well as a downside, and as you point out, the client is looking for a deal without the upside…
Looking forward to reading more of your thoughts,
Chris
Well said, but let me add a couple more to the list of things clients want (or get):
– we have been given, by courts, malpractice insurers, and in some cases the state bar, the benefit of the doubt in fee disputes and the power of the threat of a counter-suit in the event the law firm sues to collect its debt. (a change in this policy alone could reduce legal fees by as much as 25% because, whether its talked about or not, those that pay their bill are paying for those that don’t).
– if we enter into an alternative billing arrangement, I don’t want you to benefit too much from economies of scale, experience, or efficiencies. In the end, I measure the reasonableness of the fee against an hourly rate (unlike the milk company, whose profit structure I don’t understand or necessarily care about).
For what it is worth, based on considerations very much like these, time-and-materials is the industry-standard model for billing in consulting engineering. We ordinarily estimate in advance, in a task-based structure, what the total charge is expected to be, and set an explicitly estimated value, “Not-to-exceed-without-prior written agreement.” The proposals are subject to negotiation, of course, so if Client thinks we have overstocked Tasks 2 and 3, we can work it out.
Firm-fixed-price bids are rare, and typically more expensive than the T&M estimate would have been. Research, on the other hand, is always bid and paid on a firm price, strangely enough, given that the outcome cannot be predicted in advance.
Very large Clients (e.g., petroleum majors, the US Government) can dictate contract structures that may be attractive to certain types of engineering firms because of the opportunity to keep large numbers of juniors occupied. These contracts are not truly “consulting,” but rather much more like extension-of-staff: work that Client could hire people to do, but for which they do not wish to wear the personnel and overhead costs or obligations.
On the other hand, I had some time to waste in the Charlotte Airport last week, so I decided to get my shoes shined. When I hopped down, the fellow said, “Whatever makes you happy to pay.” Not a bad model, really. I was pleased with the product and how it was presented, and he seemed very pleased with his outcome, too.
Mark
It’s common knowledge that racing is a “rich man’s sport”. While most clients certainly enjoy watching the spectacle of your shockingly expensive Ferrari being tuned in the pits by a massive support team, those same clients can only afford (or choose) to drive a reliable BMW with 5 years of free service.
And BMW doesn’t make money on those cars by having teams of high-paid mechanics spend countless hours sweating over every possible detail to squeeze every last tenth of a horsepower out of the drivetrain.
Most law isn’t really F1 level is it? It’s BMW level, or really, to be fair, Toyota Corolla level work? Not very cost effective for a client to have your F1 team sweating away to infinity and beyond.
Back to the billable hours – you briefly mention a couple of risks of the system – overstaffing and shirking associates. Ah yes, those unfortunate few DLA Piper “bad apples”. You entirely fail to mention the fundamental problem with the billable hour system – the misalignment of the law firm’s interest with the client’s interest. Billable hours don’t *kill* client’s – high minimum billable hour quotas do. Which leads to even good people billing badly. It’s how they keep their jobs and how those PPP numbers keep rising.
Luckily for today’s clients, there are a myriad of better options now available for servicing your Corolla somewhere other than with the F1 Circuit. Oh, and they can do a better job with your Ferrari, as well.
You say “…but you see the point.” No actually, I don’t, because all the things you decry, and any more you may want to add, do not in any way justify a business model that has no theoretical justification. Time is not a cost. Time is a constraint, and one that is rarely binding. Arbitrary rates do not “measure” anything. Time accounting is a fiction, and not a very useful one at that.
With respect to your arguments, and using your analogy about cars, cost and servicing, can you riddle me this?
Why do all car services today get charged at fixed prices? How is it that when you buy a car service, they can tell you up front what it is going to cost? Based on your argument, you would rather be billed by time and the cost of the inputs. You would rather reward inefficiency or hope like hell you get the best mechanic in the shop doing your work.
Hope is not a strategy. When you engage a lawyer on a time based engagement, you are hoping that they will do your work really efficiently. What if they don’t? As Thomas pointed out above, the billable hour places the firm and customer’s interests in direct opposition. This is not healthy.
Keep driving the Taurus. I hope it doesn’t break down.
Apropos of lawyers not being able or willing to quote fixed fees for anything but the simplest transactions, I read a pithy comment some years ago to this effect: Why is it that a contractor can quote a fixed price for a building project that will require 20 laborers and 5 subcontractors working over a four-month period, but a law firm can’t quote a fixed price for a project that will take one person three days?
So the gist here is that legal work can have numerous outcomes which makes it difficult to price, so billing hourly is a simple method for lawyers to use. This is a lack luster excuse. If lawyers are not competent enough to bill in a manner their customers want they should find competent help. I would recommmend actuaries. If they can price insurance policies they can certainly price legal work.
The real issue with embracing alternative methods of billing is that the billable hour has become the metric that governs success in law firms aside from settlements or trial wins. Its like telling corporate clients to stop following your stock price and not to include it in your compensation systems anymore. Although it seems like a population notion, getting rid of the billable hour is a bit frivolous.
Clients really need law firms that can do the same amount of work on a much lower margin. That won’t come from simple billing changes. That come from working entirely differently and having a company built on lower margins. clients really need to look into new entrant firms like Clearspire and Axiom, which were built differently than traditional law firms. Only companies like them will provide the savings that they are looking for. Even if Law Firms had an AI thinking machine it wouldn’t lower the margins they need to support their business. They would have it do the same calculations a million times and still charge by the hour. New entrants are the ones to turn to in order to obtain drastic cost cuts. Old wine in new bottles just doesn’t work.