How To Reduce Billable Hours & Increase Profitability For Law Firms

Summary

The traditional billable hour is coming to an end as the legal industry is shifting towards creative billing strategies. More and more law firms are looking to provide their clients with a better understanding of the costs associated with legal services. Such strategies help law firms to develop more effective relationships with their clients and provide more value for their clients' money.


The traditional billable hour had been the norm for many decades in the legal industry, but as the market has become increasingly competitive, creative billing has become more commonplace. Creative billing strategies allow law firms to better identify and respond to clients' problems and needs, as well as to provide their clients with understandable and transparent pricing information.

One of the most common creative billing strategies is flat-fee billing. Flat-fee billing will likely appeal to the majority of law firms, as it is the most straightforward billing model. Flat-fee billing is a method where a law firm charges its client a fixed price for a particular service or task regardless of the duration of the task.

Another common creative billing strategy is value-based billing. In value-based billing, the law firm charges its client based on the value that the services provided offer to the client. Law firms must ensure that they provide their clients with tangible results in order to make a value-based billing system viable and beneficial for their clients.

Finally, technology has opened up the possibilities of creative billing even further. Technology has allowed law firms to track their time and ensure accuracy in billing, as well as providing improved transparency and insights into specific legal tasks.

The traditional billable hour is on its way out and creative billing strategies are in. Creative billing strategies allow law firms to better meet their clients' needs and provide them with more tangible value for their money. Flat-fee billing, value-based billing, and the use of technology are the most common strategies for providing clients with more understandable and transparent costs. Creative billing is beginning to dominate the legal industry.
 

The Evolution of Creative Billing

The billable hour has long been the standard way for legal work to be billed, but in recent years, there has been a shift towards alternative fee arrangements and flat fee billing. This shift has been driven by clients who are no longer willing to pay for traditional hourly billing and are demanding more flexible billing arrangements. As a result, law firms have had to become increasingly creative in how they bill their clients.
 

Benefits of Creative Billing

Creative billing can provide clients with greater cost certainty, which can help them to better budget for their legal fees. Creative billing arrangements can also help to align the interests of the law firm and its clients, as the law firm has a vested interest in working efficiently and getting the job done quickly. Additionally, creative billing arrangements can help the firm to differentiate itself from competitors and give it a competitive edge in the marketplace.
 

Popular Types of Creative Billing

One popular form of creative billing is the "fixed fee' arrangement, in which the client pays a predetermined flat fee for work carried out by the law firm. This type of arrangement provides the client with certainty, as they know exactly what they will be paying. Other popular forms of creative billing include "value billing', where the client is billed based on the value of the services provided, and "risk-reward' billing, where the law firm is rewarded for achieving a successful outcome.
 

Advantages of Flat-Fee Billing

Flat-fee billing is particularly popular with clients, as it provides them with greater cost certainty and prevent them from incurring surprise charges. Additionally, flat-fee billing arrangements can help to incentivise the law firm to work efficiently, as additional work may not necessarily lead to additional fees. As a result, both the law firm and the client can benefit from these creative billing arrangements.

Today Ms. Morris is a successful, healthy bankruptcy attorney with a thriving San Francisco practice. Her transformation from firm associate on a partner track to successful solo practitioner was not easy. But when she recalls the way she saw her fellow attorneys "churning files just to meet their numbers," and "pitted against each other, scrambling for work so they wouldn't get fired or so they'd get their bonus," she made a promise to herself. "I swore I would never bill that way."
 

More than 20 years later, Ms. Morris has kept her promise. Her current practice-primarily bankruptcy but with occasional estate planning and family law issues-is almost entirely flat fee. The flat-fee approach means clients pay a fixed amount for a bankruptcy filing, divorce, or most of Ms. Morris' other legal work. Ms. Morris prefers flat-fee billing because, she explains, "I don't like the idea of paying myself or anyone else by the hour. Humans are basically good, but I see too much of an opportunity for abuse" when people bill by the hour.

Ms. Morris is not alone. More and more law offices and their clients are beginning to explore creative billing options. These alternate billing practices can vary widely, but their common denominator is dissatisfaction with charges by the hour. Some lawyers, like Ms. Morris, have visceral reactions to the practice because young lawyers, forced to bill draconian hours, are faced with serious ethical issues. Others, like Sidney N. (Skip) Herman, Managing Partner with Bartlit, Beck, Herman, Palenchar & Scott, prefer alternate billing solutions because "it's a better business model." And still others feel alternate billing is much more conducive to cultivating "a long-term relationship," comments Julie S. Mazza, DuPont's Manager of Law Firm Partnering.

The Current Fix of Billable Hours

In August 2002, the ABA released "The ABA Commission on Billable Hours Report: 2001-2002." [ available online at http://www.judicialaccountability.org/articles/ABABillableHours2002.pdf] The Commission was created because over the past four decades, it has become increasingly difficult for lawyers to commit serious time and effort to public service, either in government, for non-governmental organizations, or in pro bono work. "The villain," the Commission believed, "is what some call the 'treadmill'-the continuous push to increase billable hours. As one lawyer has put it, the profession's obsession with billable hours is like 'drinking water from a fire hose,' and the result is that many lawyers are starting to drown."

The ABA Report went on to note that in today's legal marketplace, "Most law firms bill the majority of their clients on the basis of the hours worked by lawyers and paralegals multiplied by their standard billing rates."

The problem, of course, is not with the practice of billable hours, but in the way-over the last four decades-it has spun out of control. In 1958, the ABA published a pamphlet called "The 1958 Lawyer and His 1938 Dollar." In it, the ABA asserted that there were "only approximately 1,300 fee-earning hours per year." In figuring that number, it assumed most lawyers would work a normal five-day workweek with time for non-billable activities and half days on Saturday.

Today it's not unusual for law firms to require their associates to bill 2,100 hours per year. In his article "The Death of an Honorable Profession," Carl T. Bogus noted that "a lawyer working six days a week needs to work 10 hours a day to produce 2,000 billable hours per year, 11 hours a day to produce 2,200, and 12 hours a day to produce 2,400." And that's a six-day workweek!

As one lawyer quipped, getting on that treadmill and staying on that treadmill is like winning a pie contest in which the grand prize is more pie.

Given today's exorbitant billable-hour requirements, is it any wonder that talented attorneys like Stephanie Morris are driven to the doctor's office, out of the profession, or worse?

Some Alternatives

Lawyers don't have to look too far back to find a time when billing practices were entirely different than charging by the hour. According to Professor Nikki Kuckes, "By the early 20th century, lawyers used a combination of billing methods: set fees for particular tasks, annual retainers, a discretionary "eyeball" method, and contingency fees, which the ABA approved as ethical in 1908. They rarely billed by the hour." ("The Short, Unhappy History of How Lawyers Bill Their Clients," September October issue of Legal Affairs: The Magazine at the Intersection of Law and Life).

While the 2002 Commission found that the majority of law offices still charge by the hour, they also noted that of the 100 large law firms it surveyed, several were beginning to use alternative billing solutions.

• 79% used partial or whole contingent fees
• 74% used flat fees
• 42% used result-based premiums
• 11% used retainers
• 11% used stock in exchange for fees

Reasons For Alternate Billing

The reason most often cited for alternate billing practices is the pain and anguish created by extreme billable-hour requirements. Even at 1,800 hours a year, Stephanie Morris' perspective, and ulcer, was not that unusual. And that, of course, was in the '80s. Today billable-hour requirements are hovering around 2,000 hours per year. It doesn't take a Ph.D. in agronomy to know those kinds of requirements cultivate a fertile ground for deceptive billing practices and lawyer angst.

But there are also excellent economic reasons law firms and corporate legal departments are forging new relationships and new billing practices. In a move that in 1992 seemed revolutionary, the DuPont legal department consolidated the number of outside law firms with which it worked from 350 to 34. Today it has 42 law firm partners.

"One of the criteria we used in making the selection was whether those firms were open to alternative billing arrangements," says DuPont's Julie Mazza. "We're currently using alternative fees in litigation, and we've reduced costs across the board."

But she's quick to point out that what has been good for DuPont has also been good for their law firm partners. Not long after DuPont began consolidating its law firms, a small group of Kirkland & Ellis lawyers broke away from the firm to create Bartlit, Beck, Herman, Palenchar & Scott. These lawyers recognized a weakness in fees based on billable hours. While it mattered whether they won or lost, it didn't affect their financial outcome. And they were winning much more than losing. These lawyers realized a different business model might be beneficial to both them and their clients.

Today, Bartlit, Beck has 50 attorneys, with law offices in Chicago and Denver. And, says Skip Herman, "95% of our billing is done on a non-hourly basis." The most typical case fee schedule involves a monthly fixed fee out of which the client holds back 10-20%.. Upon the successful conclusion of the case, the firm is paid the 10-20% held back. Additionally, if the outcome of the case is favorable, the firm gets paid a bonus-"a multiple" of the hold back fee. If the outcome is not favorable, the firm may relinquish both the hold back fee and its bonus.

"It works well for us if we keep winning," notes Herman. "Not if we don't."

One of the key reasons DuPont's Julie Mazza appreciates the alternate billing approach is that it fosters a "long-term partnering relationship" between the company and the firm, and it focuses on value, not hours.

"You become more of a partner," agrees Herman. Their flat-fee arrangement with a hold back bonus "takes out the issue of the client having to manage the number of people working on a case. It shifts the management burden from the client to us."

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