Billable hour – exaggerated rumors about its death

Those sounds we’ve been hearing since the deafening implosion of the economy are lingering protests over the hourly rates bubble charged by some law firms. Now, more than ever, there’s renewed interest in alternative billing models shifting away from billable hours to fixed or value priced engagements. Noted articles in mainstream media such as the New York Times, and countless posts in the “blawgosphere”, are now trendy. But the debate about the value of the billable hour is not new. A 2007 article by Scott Turow as well as others before him, foresaw its demise over the years. It seems that this time it could be different. The shock waves hitting the legal trade may actually change the way law firms charge for their services. But are we burying time billing a little too fast? Let’s look at a different industry for some clues.

As a CEO of a knowledge management and technology consultancy, I often tell my legal clients that our business model is not that different from theirs. In order to help clients, consultants, like lawyers, charge for knowledge, advise and research time. Although it has always been pretty standard for firms in our industry to charge by the hour, clients have asked that consulting firms will shoulder some of the risk, and provide ‘fixed price projects’. For a period of time, fixed price engagements were all the rage. There are however certain complex engagements that are virtually impossible to estimate up front, so consultancies had to build into their ‘fixed price’ high contingencies in order protect themselves. More recently we’re swinging back into a more rational mix of fixed price, ‘gated’ deliverables, and hourly billable models that suits the tasks at hand.

My consulting firm for certain activities, can offer some services as a fixed price model, with some cost overrun protection built in. In other cases, it makes sense to bill by the hour, but also to cap expenditures based on deliverables and other such goals. The client retains control over costs, ensuring the latter will not spiral out of control. This, by the way, works well for both parties, not just the client.

Inevitably the issues that must be addressed when discussing billable hours are how much to charge per hour, how long will the work take and the mix of legal resources on the file. In our industry, no one charges $1000.00 per hour. It’s simply the rules of supply and demand. Where we, as a consultancy have an obligation to our clients, is to staff our engagements (the equivalent of ‘matters’ in law firms) with a healthy mix of expertise and ensure that younger consultants provide good value for their time, and do as much as the work as it makes sense, while limiting the time senior consultants are used for.

In order to consider such models, firms will need to develop more sophisticated estimation and matter management practices. One of my clients, a large law firm here in Toronto, developed a model that allows lawyers to to price their engagements more effectively, using advanced spreadsheet, which is in turn connects to various systems in the firm. They can now provide their client with target fees, which enables them to then measure their progress as the matter progresses. This level of transparency is great for all parties. The firm controls costs, the client benefits.

It’s all common sense really. Looking around, law firms will find that other professional services organizations already dealt with this issue. There’s no need to ‘kill the billable hour’. But instead find ways to provide different types of service models that will serve the client, their specific needs, and the different types of engagements. Billable hour will be one of the arrows in the firm’s quiver.

(P.S. Ron Friedman posted a succinct reply to my post, and I was just told about Lance Godard’s blog post discussing this issue back in January!)