The Billable Hour Is Great For Legal Clients
If you care about legal innovation and legal technology, you have certainly heard that the billable hour is a relic of the past and is an example of lawyers’ generally archaic business practices. Worse, it’s an example of monopolistic behavior by the legal profession.
However, critiques of the billable hour may be built on flawed assumptions.
The Billable Hour Does Not Encourage Inefficiency
The central argument against the billable hour insists that the billable hour encourages inefficiency. The argument goes that if a lawyer is billing hourly then there is an incentive to take your time on projects, knowing that the longer things take, the more money you make.
This argument is flawed.
As a service business, legal practices live or die on how well they serve their clients. A lawyer who takes an inordinate amount of time to do work in a misguided effort to make a little extra money is not serving his or her clients. Legal clients are not dumb (they are smart enough to hire a lawyer in the first place) and while they may pay an inflated bill once, they will soon be looking for other counsel. Maybe a lawyer makes a few hundred or a few thousand more dollars by churning hours on an invoice, but they lose a client. That’s a terrible way to build a business.
Not only does the inefficient lawyer lose a current client, but they lose potential referrals and overall goodwill. It’s a short-sighted strategy that keeps lawyers who employ it in a cycle where they are constantly struggling to pay the bills…by overcharging clients.
And yes, this does happen far more often than it should. However, these unethical lawyers (look up “unconscionable fee”) should not be considered the baseline for understanding the incentives behind hourly billing.
The most financially sound law firms understand that the best way to build a business is to be efficient: quote a worst-case scenario price and then deliver for a lower price. This results in happy clients who send more work and tell their friends. A virtuous cycle that benefits everyone.
The Real Problem With Hourly Billing
The real problem with hourly billing isn’t that it encourages inefficiency. The real problem with hourly billing is that it can lead to unpredictable legal bills. This isn’t even a problem with hourly billing per se, but rather with the lawyer’s ability to communicate pricing and estimates clearly to clients.
I have had a number of experiences where a new client has left their current lawyer because of unpredictable billing practices. These clients would be surprised by their lawyers invoice and feel cheated. Rightfully so. It’s not even that they didn’t think the price was unfair or that they couldn’t pay the price — it was that they weren’t told ahead of time.
This may be why flat fee or other so-called alternative billing models seem to be offered as a solution to fix hourly billing. A flat fee eliminates the unpredictability of a bill based on hours.
How The Billable Hour Can Benefit Legal Clients
While there may not always be a direct link between a lawyer’s time and value provided to the client, time spent on a project is often a great proxy for value. It’s why hourly billing is used in almost every service industry, from legal practice to plumbing to accounting.
Ultimately, hourly billing can benefit legal clients. Hourly billing allows lawyers flexibility in billing clients — large projects may require more work and small projects may require less. Prices can be scaled to fit the needs of the client.
Finally, some projects can even be broken up into phases that can fit a client’s budget. Maybe we do a few hours of work this month, a few hours next month and so on. This helps clients to control cash flow and budgeting.
But Let’s Still Innovate
Don’t get me wrong. Hourly billing may not be appropriate in every situation. There are certain tasks that should be done on a flat-fee basis, rather than hourly and there are certain projects that might require a completely different approach altogether (our firm is one of the first to offer a subscription-based legal program to our clients).
My point is that real legal innovation comes from understanding why things are done the way they are instead of just trying blindly to disrupt (this is why I often say that legal innovators really need to understand how and why legal practice works). The billable hour is probably not going anywhere any time soon, but the way that lawyers use it can certainly be improved.
And if that benefits legal clients, that benefits lawyers.
