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“A story about time based billing” or alternatively “how to ensure your clients and staff are underwhelmed and unhappy”

The billable hour is a widely used and accepted mechanism for invoicing clients in professional services firms, and particularly in law firms. As will be apparent to those whose keen wit managed to pierce the subtlety of this article’s title, it’s my view that this approach cannot survive in the modern commercial world. In a period of stagnant demand for legal services, most firms have continued to increase their hourly rates at or above CPI rather than deal with the underlying issue – that corporate Australia is demanding better value from its lawyers. But all is not doom and gloom – it has been five years since Stephen J. Harper wrote his article in the New York Times “The Tyranny of the Billable Hour”, and there are more and more firms offering a sensible alternative.

The debate about time-based billing is not a new one and we have all read passionate defences of the status quo. Leaving aside the bias inherent in most of those defences (particularly given I must acknowledge my own bias towards value-based pricing), it seems obvious that it’s time for lawyers and legal services to be measured by quality, outcomes, collaboration and efficiency rather than the time spent at the desk. I should say that there are always incredibly intelligent and talented lawyers who will eke out great outcomes for their clients – but they do so despite, not because, of the antiquated method of billing per hour.

My Experience

Before I summarise some of the rationale behind value-based pricing on a theoretical basis, it is worthwhile detailing some of my own experiences (and feedback from clients) which first motivated me to explore more effective and client focussed business models when starting my own firm. How many of the following ring true to the lawyers and/or users of legal services that are reading this:

  1. “bill shock” - surprise at the quantum of an invoice when it arrives in your mailbox;

  2. spending an inordinate amount of time on the administrative task of recording and entering “time” which is then invoiced (with very little thought) to a client;

  3. a toxic work culture that rewards inefficiency;

  4. six lawyers attending a meeting where two would have been more than sufficient (perhaps because there is a “the other side had that many so we had to also” mentality);

  5. ten junior lawyers being assigned to review thousands (if not tens of thousands) of documents at $300+ per hour, where sophisticated technology can do the same work at a fraction of the cost; and

  6. smart young lawyers leaving the firm (or the law entirely) when they realise that efficiency and intelligence is rated as less important than hours billed to a client.

The above is just a glimpse of the internal inefficiencies in a law firm wedded to the billable hour and, based on my discussions, are remarkably consistent across the profession. However, if a shared and truly collaborative process is adopted by a lawyer with their clients, most if not all of the above issues disappear.

Selling Time vs Selling Value

There are many arguments against time-based billing, however the key concept is that the model creates a fundamental conflict of economic incentives. The law firm wants more (hours) whereas the clients wants less – where is the motivation for a law firm to actively seek ways to do things smarter, quicker, and more efficiently? There is no doubt that time is the easiest measurable in the delivery of professional services, but it is not an effective measure of outcomes or value, the two things that are at the forefront of every client’s mind.

A value based price has been defined by Ronald J Baker, the world’s foremost authority on value based pricing in professional services firms, as the price a given customer is willing to pay for a particular service before the work begins. The focus is on the perceived or estimated value to the client rather than the cost of providing the service (as measured by the time it takes). A range of factors will be relevant to a client’s perception of value (and therefore price - such as the amount in dispute, the impact and effect of the dispute on client’s operations, the urgency involved), but the focus should remain on the efficacious delivery of services towards a desired outcome. A value based system can include a fixed fee arrangement, ongoing retainer, or a conditional agreement (no win/no fee) with an uplift for risk assumed.

So why switch from a time-based lawyer to one who uses a value based approach? Because, like so many other in-house counsel and commercial clients, you:

  1. want an efficiently delivered outcome, not a certain amount of time spent at a desk;

  2. realise that a value based approach encourages open communication and collaboration between lawyers and clients;

  3. understand that a value based approach creates happier and more fulfilled employees (and by extension, employees who are more dedicated to finding and creating value for the firm’s clients);

  4. an perceive the greater alignment of interests when both client and lawyer are focussed on delivering efficient outcomes; and

  5. it changes the focus from time to quality, from process to outcome.

Now that you are all thoroughly on board with the proposition that value-based pricing is in your best interests, we should look to how a firm like Aptum can deliver premium quality legal services within a value based model. Aptum (as our name suggests) seeks to be flexible to the needs and desires of our clients, while always remaining focussed on achieving the desired outcome.

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