BY ALAN G. BADEY
Much has been written over the years about the death of the billable hour. As law firms struggle to maintain profitability, if not their survival in the current economic climate, the debate over the almighty billable hour has been renewed.
While according to a 2011 Thomson Reuters survey hourly billing still accounts for some 68 percent of firm revenues, there’s no doubt that many clients are forcing their law firms to explore alternative billing methods. And it’s not just about saving money. It’s about clients seeking value and accountability for the fees they are charged.
Another reason why alternatives need to be considered: Rival law firms may be using their alternative billing methods as a marketing device to steal away clients. There’s some evidence that boutique firms have used this strategy to take away business from larger firms.
Just as the billable hours billing method has its benefits and drawbacks, alternative billing methods may solve some challenges while creating other issues for both law firms and their clients. Here are some billing options to consider:
Fixed/flat fees: Perhaps the most popular of alternative billing methods, fixed fees are favored by clients because they know what they are going to pay in advance. It works quite well with simple transactions such as real estate closings, wills, employee contracts and corporate filings and many law firms already use this method for these types of work. In fact, when law firms have a good handle on what it takes to perform this “standard” type of work, it’s possible that they’ll realize revenues in excess of their hourly rates.
Bids: The New Normal? This economy has created a new “normal” within many industries. Bids or matter-oriented RFPs may not be widespread, but they have gained some ground among corporations looking to cut costs. In-house law departments are realizing savings when they ask law firms to bid on well-defined projects. The downside, though, is that these companies are losing out on strong client-firm relationships that are sometimes hard to value in dollars.
Discounted hourly billing rates: If alternative billing methods can’t be agreed upon, and clients balk at the billable hour method, they may find a discounted hourly rate more palatable. For clients who insist billable hours inflate costs by “X” percent, a matching discount may prod them to move forward. While corporations may feel that they’ve negotiated a concession, law firms that believe in the fairness of the billable hour may be made to feel like they’ve admitted a problem exists with billable hours.
Value-based billing/incentive arrangements: Value-based billing is a hybrid billing system, which is likened to a mix of tying the traditional hourly billing and overall cost of representation to service quality and results. Many law firms believe that the worth of their counsel and services is of much more value than can be discerned by the number of hours put into the project. An attorney may develop a legal strategy in a short timeframe that translates into large money saved or made by a corporation. In these cases, law firms may bill for the value they provide as opposed to the time spent developing the solution. The value bill is based on client satisfaction. Similarly, incentive or success-based billing arrangements have caught the attention of corporations and law firms alike. A base fee structure is established and varying levels of success – agreed upon prior to an engagement – are rewarded accordingly. When all parties are acting reasonably and goals/success are well-defined, value-based or incentive-based billing works and eliminates criticisms associated with billable hours.
There’s no secret method for evaluating which billing methods work best for an individual firm. It’s a combination of what works best for you and your client.
Alan G. Badey is the managing partner of Citrin Cooperman’s White Plains office and also leads the firm’s law practice. He can be reached at 949-2990 or via email at firstname.lastname@example.org.