Why it’s time to say goodbye to the billable hour and embrace value pricing
The billable hour lies at the heart of most law firms. The concept is simple: clients are charged by reference to the amount of time it takes to provide the expertise they require. An hourly rate, which reflects the level of expertise a lawyer possesses and their firm’s position vis-à-vis its competitors, is applied. Lawyers have to record their time, often in six-minute units, to ensure their time can be converted to cash.
I’ve been in the legal industry for 13 years and, during that time, the billable hour and most people’s hatred of it has remained constant. Clients and lawyers both recognise the fundamental flaws that it presents, yet a seemingly insurmountable challenge prevents its demise: not knowing what to replace it with.
So, what makes it so unpopular? First, let’s look at it from a lawyer’s perspective.
Typically, lawyers are measured by reference to the number of billable hours they do in a day, week, month and year. A utilisation rate is generated, providing visibility of how a lawyer is performing in comparison to their target and their peers, and this metric often directly impacts the progression opportunities made available to them.
You might be wondering what’s wrong with this approach? Well, firstly, junior lawyers have little control over their workload and are generally fed work by their senior counterparts. The better your face ‘fits’, the more work you’re likely to be given, The opportunities they encounter for progression are therefore directly linked to someone else’s ability to generate work and the extent to which you fit the mould; not exactly meritocratic.
The pressure to meet billable hour targets acts as a deterrent to sharing work with colleagues, with individuals instead choosing to hold onto work to give them the best possible chance of meeting their target. This results in an unequal distribution of work in a dysfunctional team, where the best interests of a client are deprioritised over a lawyer’s need to record enough billable hours.
Working with a client on an hourly rate basis is challenging. When a client is paying for every minute, they understandably want to see some justification for every minute, but clients often fail to appreciate how long it can take to do something that might, on the face of it, appear straightforward. The result can be lengthy conversations explaining how the time has been spent, and why it was a reasonable amount of time. Oftentimes, these conversations lead to time being written off and not charged for.
This leads us onto looking at the billable hour from a client’s perspective, and why it’s also problematic.
Clients want to know how much something is going to cost them before they press ‘go’. It’s not an unreasonable expectation, yet it’s not an expectation that’s easy to meet when we charge by the hour. Why? Because every lawyer is different, and even if you have two lawyers with equivalent experience, it’s highly unlikely they’ll spend exactly the same amount of time completing the same piece of work.
When we look at the factors affecting our ability to complete a piece of legal work, our expertise is only one of them. Often the work we’re doing requires deep-thinking, and if we’re tired, stressed or repeatedly interrupted, it’s going to take us longer than if we’re well-rested and relaxed with no distractions. These aren’t variables that a client can control, yet a client is the one picking up the bill for them and having to manage the uncertainty that they create.
Ultimately, the billable hour rewards inefficiency. There’s no incentive for a lawyer to be efficient because the longer it takes to complete a piece of work, the more they can charge for it. From a client’s perspective, the lack of cost certainty created by the various factors impacting what they will finally be asked to pay, make it a very unappealing proposition.
So, what’s the alternative? Value-based pricing: a fixed price determined by reference to the perceived value of the services to the client, meaning we no longer take into account the cost of providing a service, or how much our competitors charge for a similar service. We focus on output, instead of input; value instead of time.
Unfortunately, there’s no magic formula for value pricing, which means considerable thought and effort needs to go into the overarching pricing strategy and each individual price given to a client. Having the data to support the pricing strategy is essential, as is a consistent approach across every part of the business. It requires a shift in mindset, a new way of working and a willingness to experiment and make mistakes.
At my law firm, we’ve committed to moving away from the billable hour, which includes all time recording and associated targets. Whilst much of the work we do is already fixed price, we still use the hourly rate for some types of work and we’ve decided, for all the reasons above, that it has no place in a modern legal profession. A departure from the hourly rate and billable hour is therefore central to our strategy, and I’m looking forward to a future with happier lawyers, happier clients and a scalable and sustainable business model that represents how I believe legal services should be provided.