WINNING ALTERNATIVES TO THE BILLABLE HOUR

WINNING ALTERNATIVES TO THE BILLABLE HOUR
Strategies That Work (Second Edition) By James A. Calloway and Mark A. Robertson
American Bar Association $149.95, $129.95 for Law Practice Management Section Members
7 X 10 paperback, 287 pages with diskette; ISBN 1-59031-117-5 (2002).

The laudable purpose of this book is to encourage lawyers to change from hourly based billing to an alternative billing system that is beneficial both to the lawyer and the client.  The book explains how to implement different billing methods and argues that lawyers can gain a strategic advantage over others by using a more flexible approach to billing. 

The authors do an excellent job of presenting and explaining the pros and cons of various billing alternatives, including:

Fixed or flat fees;
Contingent fee;
Hourly fee;
Blended Hourly Rate;
Fixed or Flat Fee Plus Hourly Rate;
Hourly Rate Plus A Contingency;
Percentage Fee;
Task-Based Fee;
Retrospective Fee Based Upon Value;
Unit Fee;
Relative-Value Method;
Lodestar Method;
Statutory or Other Scheduled Fee System;
Availability-Only Retainer; and
Retainer as a Deposit Against Future Services.

The book is written for lawyers in all firm sizes. I'm pleased that solos and small-firm lawyers are given special treatment with a chapter written specifically for them and a highlight in the Introduction suggesting which chapters would be most beneficial to this group of lawyers. I am also pleasantly surprised by how many alternative-billing practices I've used over the years.

The book explains that for billing on anything other than an hourly basis, the first thing that must be done is to know the cost of producing legal services. Cost is only one factor. The authors suggest that price is also defined "as the amount of money that a well-informed client (the purchaser) is willing to pay for the value of the services of the lawyer (the seller)."

In order to better determine price, a "value curve" is examined which depicts clients' views of the value of various legal services. The "value curve" is divided into four segments:

Unique: Work that is absolutely critical to the client.  This work represents less than 4% of the available legal market.

Experimental: These are high-impact or high-risk matters for the client. For this work, the client must have personal confidence in the lawyer. Approximately 16% of the work in a given market is experimental.

Brand Name: This is routine but important work for a client. This work will go to lawyers who have established a brand name and reputation for handling these types of cases. This makes up around 20% of the work available.

Commodity: This is work that clients believe any reasonably competent attorney can handle. This is the routine stuff and makes up about 60% of the market. This work tends to be quite price-sensitive.

The authors believe that in order for alternative billing to be successful, lawyers must understand the "value curve", review each potential case to determine where it falls on the value curve, analyze their practice and decide which areas where innovative billing might be appropriate, determine which clients might be receptive to alternative billing methods, examine closed files to come up with what fee might be appropriate from a cost accounting perspective and effectively communicate the billing process to the client by emphasizing that the client is a lawyer's most precious resource.

If all this sounds like a lot of work just to charge clients something other than the typical hourly rate or contingency fee – that's because it is. Unfortunately, that is also why the hourly rate is the norm – doing anything else requires a close analysis of your legal practice and a great deal of thought about fees in each and every case.

In essence, the authors argue that in order to seriously implement innovative billing, a lawyer or law firm must perform a detailed self-assessment, must look closely at objectives and goals, should examine present and future market trends, review present billing methods and have a willingness to try innovative billing. For many lawyers, the effort required for this appears overwhelming. It is much simpler to just quote an hourly rate and move on to the next issue.

Until clients demand a change in the way that lawyers bill for services, the hourly rate will reign king for a very long time.

Comments

[Mark A. Robertson]

Thanks for the kind and accurate review!

[Jim Calloway]

I would like to make one additional point. Businesses constantly need to improve and perfect their processes. The billable hour stands as a demotivational factor in that regard. Why should one develop a document assembly process for preparing a set of documents in a matter if the only net result is to decrease the hours billed from say, four hours to thirty minutes and reduce the income? If, on the other hand, the set of documents is billed at a flat rate of $400, then there's motivation to streamline the process of production. With improvements, the work becomes more profitable. The client may benefit with a better work product as a result of a better process and the law firm lawyers & staff are freed from some uninspiring routine work to do more creative things.

[Al Nye]

Jim, thanks for your comments. I agree that flat rates work for lots of standard documents and think that many lawyers use them. Typically, however, these flat fee services count for only a small portion of a lawyer's income. It's the other things -- the "creative things" -- that lawyers revert back to billing for on an hourly basis.

Al