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Managing

The Ditching Hour: Why Consumer-Centric Pricing Will Take Over Legal Billing

Financial realities will force law firms to ditch the billable in the very near future.

By Jared Correia

For years, legal analysts have been saying that the billable hour is dead. But killing the billable hour has turned out to be like trying to kill Rasputin. At the risk of falling on that same sword, let me curb the bet slightly and say the billable hour is dying.  But it’s dying in much the same way the NFL is dying: Everyone knows professional football will be relegated to a place outside of the major sports landscape, to be replaced by soccer — it’s just that nobody’s ready to talk about that yet.

Of course, for most lawyers, professional sports are divorced from everyday considerations like getting paid. But, like parents who feel the pressure to have their kids seriously focus on soccer, while encouraging flag football as a recreational activity, lawyers know there is increasing pressure to move away from traditional hourly billing models.

Why?

Hourly Billing Clashes With Modern Financial Realities

There are two major problems with hourly billing, which squarely challenge modern financial realities.

First, legal consumers are smarter than ever before, in large part because they have more resources at their disposal than ever before. If, as a consumer, you can throw a stone and hit a lawyer, you have the advantage in the relationship. You can use that leverage to seek out attorneys with more favorable pricing schemes, or put pressure on lawyers to revise their pricing options. Hence a continual downward pressure on fees, which aren’t outpacing inflation anyway. With respect to the billable hour, specifically, legal customers aren’t stupid, and every last one of them, from individual consumers to businesses, is rebelling against hourly fees for one simple reason: The vast majority of hourly fee arrangements are uncapped. The consumer taste for letting a lawyer “handle things” while billable hours rack up, entirely at that lawyer’s discretion, is waning. When consumers are willing to walk away from hourly billing, lawyers have to adjust. Those who adjust early acquire a distinct, competitive advantage.

Second, hourly billing does not reflect value. The base notion behind hourly billing is that every hour is worth the same amount. But everyone knows that’s not true. Making a phone call and staying on hold for an hour does not have the same value as deriving a complex litigation strategy or building a unique contract clause. It makes sense, then, for lawyers to choose alternative billing models that better reflect the nature of their work, including the value of that work from the consumer’s perspective. Flat-fee billing has always incorporated this notion. Lawyers creating estate plans know how to charge for the totality of their work, based on the product they sell (will, trust, power of attorney, health care proxy), and they bill the client just twice — once upon engagement, once upon delivery. That’s pretty straightforward and the clients know what they’ll owe ahead of time.

While the model does not have to be a flat-fee program, the notion that attorneys sell products, can assess value and can cap fees benefits law firms selling their wares in the modern consumer environment. And it does not inherently reduce the total amount you can charge. If you just purchased a document automation tool for your estate planning firm, which allows you to draft an estate plan in half the time, are you reducing your rate by half? Hell to the no.

It’s What You Value: Rate Setting in an Unsettled World

Lawyers have chafed at the notion of value billing for forever. There are a number of reasons why:

  • Lawyers love nothing more than tradition and hourly rates are how they have always billed.
  • Hourly billing is usually uncapped, meaning the billing can go on and on, so lawyers make more money.
  • Hourly billing is also easier to keep track of; and state ethics boards prop up the practice, which is identified as a simple system to audit.
  • Law firms are reticent and ill-equipped to define value. Since lawyers don’t effectively capture and analyze data, they have little to no idea what their time is actually worth.
  • Lawyers are risk-averse. Taking a stab at a flat or fixed rate might mean guessing wrong the first time, which could mean losing money. This ignores the fact that, over time, you’ll probably get the calculation right and make more money. 

Another funny thing about lawyers is that they routinely practice in gray areas while desiring nothing more than black-and-white lines. So, it’s a very lawyerly thing to divide the world between lawyers and nonlawyers (I prefer the term “muggles“).  Perhaps not surprisingly, then, lawyers have also divided the universe of fees between hourly rates and alternative fees being any fees that are not hourly. This is about as silly as drawing the lawyer/nonlawyer divide. There are a host of fee options that are not hourly rates — lumping them together serves the purpose of devaluing the various offerings.

Consider all the alternative fee structures you may deliver through your law practice. There are flat fees, sure. But there are also risk collars. Law firms can set up an arrangement where they receive a bonus for coming in under a set hourly threshold, or the client receives a reduced rate for any hours billed after that predefined threshold is reached.

There are retainers, evergreen retainers and classic retainers.

There are contingent fees. There are fee-shifting practices. There are limited scope representations, which are reduced to projects rather than hours. There are mixed hourly and contingent fees. Many lawyers are beginning to switch to subscription services, where clients pay a monthly or annual rate for access to the attorney. It’s like the Netflix and chill of law, ya’ll.

Set It Up: E-payments

Modern payment methodologies are supported by modern payment processes.

Don’t forget that it’s not just about what you charge, it’s about how you charge. You know that financial pressures bear down on your clients just as much as you. So, it’s important to consider the way you accept payments when you settle on payment models. If you’re a traditional law firm that takes payment by check (especially retainers), you might be pricing out some potential clients, who may not have the liquidity to write a $5,000 bank check. If you give clients the option to pay by credit card, you allow them to essentially “borrow” your fee, with the credit card company standing in the place of the creditor. If there is a default, it’s the credit card company’s duty to collect. Contrast this to the common situation where a law firm continues to extend credit to a delinquent client while incurring increasing collection duties and advancing the likelihood that the firm will never see the money it is owed.

If you desire to provide alternative rate structures, you must adopt modern payment systems.

There’s a reason the rest of the world has moved to regularly recurring subscription payments and it’s the same reason lawyers will move there too.

Eventually.

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Jared Correia Jared Correia

Jared D. Correia is CEO of Red Cave Law Firm Consulting, which offers subscription-based law firm business management consulting services for law firms, bar associations and corporations. Red Cave also works with legal vendors to develop programming and content. Jared is also COO of Gideon Software, Inc., which offers intelligent messaging and predictive analytics software built exclusively for law firms. A former practicing attorney, Jared has been providing services to lawyers and law firms for over a decade. He is a regular presenter at events and regularly contributes to legal publications, including his Attorney at Work column, Managing, his advice column for Lawyerist and his column for Above the Law focused on legal technology startups. He is host of the Legal Toolkit podcast and teaches for Concord Law School, Suffolk University Law School, Solo Practice University and Becker College. He loves James Taylor, but respects Ron Swanson.

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