The impending demise of the billable hour as a basis for charging for professional services and in particular, for legal services, has been anticipated in various media for some time. In support of this argument it is usually stated (often as ‘fact’) that this method of billing encourages inefficiency i.e. the longer it takes to do a job the greater the billable hours and the more lawyers can and will bill.
I have never believed it is as cut and dried as this.
While there are undoubtedly issues with time-based billing, it is a system which has worked reasonably well for lawyers and for clients, both of whom are good at managing the limitations so as to achieve a fair outcome.
Survey of in-house counsel:
So it was interesting to read of the results of the inaugural Compass Corporate Counsel Annual Survey 2011 (pdf) conducted by Mallesons, and reported on by Alex Boxsell (pdf with annotations!) in the AFR (26 August 2011) which indicated that:
- a majority of corporate counsel still use billable hours as a basis for charging – there was a broad preference for this;
- there may be criticisms and imperfections but it is still the core and staple system which has worked reasonably well for a considerable time;
- half the respondents stated that 90% of the work they have done for them is done on the basis of billable hours;
- almost all stated that more than 50% of their legal fees are billed at an hourly rate;
- 70% state that these percentages have stayed the same or increased in the past two year – nearly 70% are satisfied with billing arrangements;
- only 30% had reduced their use of billable hours in the past two years;
- hourly billing will continue to play a significant role while the jury is out on whether alternative ways of billing will actually deliver more value to clients;
- where alternative fee arrangement are used, they are usually based around fixed and capped fees.
I think that there are a couple of reasons why the billable hour will remain a useful guide to billing and possibly the main basis to billing in future:
- clients of course increasingly call the shots and as noted above, despite imperfections in the hourly billing system, its one they are comfortable with.
- clients have become increasingly sophisticated and many are staffed with highly qualified, experienced lawyers who know how the systems in law firms work.
- many clients grew up with this system and used it when they were in practice – they know the limitations and how to properly manage such systems e.g. by calling for weekly reports, quotes up-front and by insisting on variance reports;
- using time as a basis for billing does not invariably result in unfair results for clients:
- many practitioners use billable hours as a guide only and they still exercise judgement on what is a fair fee in the circumstances, notwithstanding what the time records may show;
- clients are more experienced as well and have a much better feel for what constitutes value and will usually not countenance fees based purely on time. If they are not comfortable they will discuss this with their advisers.
- in many instances the use of technology, access to knowledge-bases coupled with the experience of the practitioner concerned will mean that work that used to take say 10 hours may now only take 3 hours to complete. If fees were calculated only on time the practitioner may well be charging less than the value the client has received. This is why, whatever the billable hours may be, both clients and lawyers will still need to exercise judgment as to a fair fee for value.
- clients are mostly used to and comfortable with the billable hour which is the predominant method of billing. While it has its limitations and imperfections it has worked reasonably well for a considerable time;
- it is a system based on something that can be measured and recorded, and easily summarised and reported on, which can’t be said for many other bases for calculating fees such as ‘value’. The jury is still out on whether alternative billing systems, such as those based on value, do any better in terms of delivering value;
- there is plenty of good software around to facilitate this system;
- even for volume work where fixed fees may seem more appropriate it would seem to still be appropriate to maintain time records. Lawyers can then always furnish these as part of the discussion around what is and should be a fair charge for the legal work in question.