October 23, 2012

Making the Move to Alternative Billing

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September 2008 Issue | Volume 34 Number 6| Page 46

Making the Move to Alternative Billing

When the economy starts to tank and the incoming work declines, many lawyers want to just hunker down, hoard their work, fire a few associates and wait for things to get better. But is that really the way to attract and keep good clients? In a tough economy, clients want lawyers who will give them sound advice and help them get through the difficult times. But just as important, they are looking for value for their dollars spent. So why not consider offering them alternative billing options? Here’s a rundown on the whys and hows of moving past the billable hour.

Gauging the Value of Experience

Lawyers often forget that time spent isn’t always a measure of value received. The actual time personally contributed to a task can be almost meaningless when determining the task’s value. Here’s an example to illustrate the point (adapted from Winning Alternatives to the Billable Hour, 3rd Edition).

A specialized medical malpractice case might require dozens of hours of research, consultation with experts and careful drafting just to prepare a certain set of interrogatories. However, when the lawyer has prepared and tried four of these cases, preparing the interrogatories for a fifth case—based on the prior work product, with some customization to reflect the specific facts of the new case—might take less than two hours. Because experience improves the lawyer’s abilities and work product, would anyone doubt that the interrogatories in the fifth case would have greater value to the client than those propounded in the first case, even though they took less time to draft?

Traditionally, when experience allows a lawyer to perform tasks more efficiently and quickly, the response has been to raise the lawyer’s hourly billing rate. Therefore associates charge one rate, while junior and senior partners charge higher rates. Yet as many lawyers have come to realize, upward hourly rate adjustments are not always possible—and particularly in a down economy. So, if the medical malpractice lawyer in our example charged a total of $2,600 for the first interrogatories prepared (10 hours at $260 per hour), can he raise his hourly rate to $1,300 per hour for the two hours it took him to do the interrogatories in the fifth case? Or is it ethical for him to “pad” his time to reflect 10 hours of work when he only did two? One would tend to think that he would balk at such options.

Nonetheless, since the value to the client in the fifth case is as great or greater than in the first case, it seems reasonable for the fee to reflect that value, doesn’t it? Fortunately, raising hourly rates is not the only path. Looking at alternatives to hourly billing addresses what the client wants—value for dollars spent—and provides lawyers with ways to deliver that value without firing associates or making other short-term cost cuts that are detrimental to a firm’s long-term health.


Making the Case to Clients

Regardless of whether we charge by the hour or use some alternative arrangement, clients are going to be particularly sensitive to legal fees in tough times. Owing to that, should you shift to a new billing method, won’t clients think you’re just trying to increase fees through the “backdoor”? Answering questions about alternative billing essentially comes down to the value represented by your services in a particular type of matter.

So then, how does your client measure value? If, for example, you’re doing real estate transactions, is it better to determine fees based on the number of lots being developed or the amount of square feet being built or leased? In a securities transaction, does it make more sense to charge a smaller fixed fee to put the deal together (which comes out of the client’s pocket) and a larger success fee once the deal closes (which often comes out of the offering proceeds)? Matters like these are opportunities to structure fees with your client’s help based on the value to the client and not just the time involved.

If you can structure your fees based on clients’ measures of value, you are much more likely to get them to embrace an alternative to billable hours. Of course, some clients will remain reluctant to change from hourly billing to something else, and that’s okay—as long as you explain the alternatives and let the client decide. Your job is to give the client some educated choices in how you bill for services.


Calculating How to Get Started

Here are some important steps to take when you decide to look at alternative billing.

Data mine your old files and bills to determine if you can systematize any particular types of matters, cases or transactions—or components of them.

For each type of matter that can be systematized, consider whether you can reasonably estimate fees for the services involved on a predictable basis. For example, will doing “x” or drafting “y” take an average of 5.6 hours to accomplish 80 percent of the time, and what are the variables that aren’t within your control? Can you charge a flat fee or a success fee for most of this work that (1) gives value to clients, (2) clearly defines their legal costs before they decide to go forward, and (3) is a sum they’ll agree to pay? If there are variables, can you carve them out of the fixed or success fee and charge for them differently?

For the work that you’ve identified as amenable to alternative billing, create a system (whether using technology tools, manual forms or the like) that allows you to deliver your services using less of your time and more associate and legal assistant time.

Sell clients who need this type of work on the predictability of the fees so that they will know going into a project or suit what it’s going to cost and how this benefits them.

Finally, as you’re considering your choices, remember that hourly billing wasn’t the norm until well into the 1960s. Before that, fees were either measured under a minimum fee schedule or by the lawyer making a subjective judgment call at the end of the matter about the value of the services delivered to the client. Perhaps we should look back to move forward at a time when clients are sensitive about legal bills.

About the Author

Mark A. Robertson is a partner in Robertson & Williams in Oklahoma City. He is coauthor, with James A. Calloway, of Winning Alternatives to the Billable Hour: Strategies That Work, 3rd Edition (ABA, 2008) , as well as a former Chair of the ABA LPM Section and a Fellow of the College of Law Practice Management.