20
January 2017

The Billable Hour: Reduced Risk of Uncompensated Time or Impediment to Increased Profit Margins?

Legal fees are expensive. But that’s only half of the problem - inefficiency is the other half. The business model for traditionally-provided legal services, the billable hour, continues to be widely criticized as inefficient. Much of that criticism stems from the fact that by using the traditional billable hour, clients rarely know what they will be paying for in total legal services. Further criticism results from the fact that unlike hourly billing models in other professions, there are oftentimes neither limits nor estimates provided to clients at the outset of legal representation. And even when estimates are provided, they rarely come close to the actual, final amounts billed. But is the billable hour really all that inefficient when compared to the alternatives?

In the U.S., the cost of engaging an attorney makes legal services unavailable to many who are most in need of those services. In fact, it is estimated that 82% of the people requiring legal services in the U.S. cannot afford to hire an attorney. It has been widely discussed as to why the traditional billable hour is inefficient for clients. But what about for lawyers? Interestingly, and perhaps surprisingly, the billable hour model for lawyers can actually be very limiting. Because the model is solely based on billable hours, there is no incentive to create service efficiencies and there is no ability to leverage the main commodity that can never be increased – a person’s time – which is of the utmost importance to lawyers. The inefficiencies of the billable hour have given rise to the alternative billing models. Efficiency problem solved? Not necessarily.

There has been significant development in the (r)evolution to move to alternative billing models. However, only a small fraction of law firms/lawyers are currently employing alternative billing models. At the core of most alternative billing models is the need for certainty, for both clients and lawyers.Here, we quickly look at three alternative billing models, but do so in light of how they do and don’t provide certainty for clients and lawyers.

  1. Flat Fee - Fixed price for defined service(s)
  2. Provides certainty by: informing client of total price before starting and lawyer determines reasonable fee.
  3. Hinders certainty by: lawyer potentially underestimating the number of hours work will take, which, if that occurs, results in “free” work.
  4. Capped Fee - Defines maximum cost and bills hourly until maximum attained, if ever. Sometimes minimum cost defined too.
  5. Provides certainty by: informing client of maximum, potential cost. If lawyer defines minimum cost too, lawyer guaranteed that amount even if the work takes less time than estimated.
  6. Hinders certainty by: just as in the flat fee, potentially results in “free” lawyer hours if lawyer underestimates hours needed when establishing maximum or minimum fee.
  7. Contingent Fee - Lawyer and client split recovery amount, if client prevails.
  8. Provides certainty by: eliminating financial risk to client.
  9. Hinders certainty by: lawyer incurring full risk - win and get paid, lose and get no pay for hours worked, however many that may be.

So, are alternative billing models more efficient? In certain matters, the billable hour will be the most efficient model to remove the risk to the lawyer of uncompensated time, although what other business has that luxury? This risk, as in other businesses, is minimized by the experience of how much time a certain activity generally takes to complete. Any agreed upon flat fee, presuming the client feels they are receiving fair value and the lawyer can receive desired compensation, can be fixed (or capped) for the benefit of both parties. As a result, the client is able to manage costs by knowing what the fees will be and the lawyer is able to increase profit margins by discovering and implementing efficiencies within the delivery process.