Taxi for the billable hour …

Much has been written recently (and not so recently) about the shortcomings of the law firm partnership model and in particular the hourly billing approach. I don’t intend to repeat too much of it here and indeed it would be a struggle to add anything of value to Law firm partnership – the Grand Delusion, a most informed and authoritative piece on the subject from Stephen Mayson.

It seems to be broadly accepted in the modern legal marketplace that the hourly billing model is under pressure from clients, commentators and new (and some old) legal practices. The general conclusion is that it drives the wrong behaviours within a firm by defining success in terms of hours billed in preference to value provided to clients. As Lord Neuberger MR (as he then was) summarised in his speech to the Association of Costs Lawyers’ Annual Conference 2012, it confuses cost with value.

But the real damage is done not necessarily by hourly billing in itself, but by the way in which it is too often applied: a misguided aim at the infamous “billing targets”, driven by the need to compensate for the inefficiency of the underlying financial model of the business. With this comes a failure to (or even attempt to) recognise the difference between the hour as a basic raw material and the billable hour as time spent productively in producing an output of value to the client.

For many years I have seen barristers’ fees charged on a time-spent basis. However, the difference in the chambers environment is that no-one is incentivised to spend or charge any more time on a case than is necessary. Quite the contrary, in fact. First, as sole practitioners, barristers tend to have a busy and varied workload and they simply need to get each job done as quickly as possible in order to be able to deal with the next, or risk missing an opportunity. (Of course, doing so without compromising quality is paramount and this balancing act is one of the key challenges facing the busy practitioner).

Secondly, billing is managed by clerks, who are in a unique position of knowledge and understanding about the levels of fees charged throughout the Bar as well as how much a particular piece of work ought to be worth, bearing in mind all the relevant factors. A clerk’s job is to ensure that however much time is spent, a barrister charges a fee which is both fair and proportionate. This kind of scrutiny ensures that even though time-based billing may underpin charging methods, the overriding incentive lies in offering value and thereby staying competitive.

I am not aware of any chambers or indeed any barristers who have hourly billing targets. I suspect this would be counterproductive, as those adopting this approach would stand out from the crowd as expensive and be rejected by the market, resulting in the rapid drying up of instructions. In fact, in most cases these days barristers have to work to fixed or capped fees based on what is acceptable to the market. It is important to add here that in the vast majority of cases “the market” to which I refer is of course made up of solicitors. The irony hardly needs mentioning.

The end result of the chambers approach is the evolution of an effective value-based billing process, even though the means of achieving it may not appear on the face of it to be terribly scientific. Most importantly, it results in proportionality and fairness to the client. It answers Lord Neuberger’s concern by keeping input cost out of the equation. It results in true value.

Of course, the market seems in any event to be moving overwhelmingly in favour of a fixed fee approach.  Indeed, a recent Legal Week Client Satisfaction Report showed that almost 70% of a large sample of corporate clients favoured fixed fees.  In this context it is no exaggeration to say that for a legal practice to be able to survive in (at best) the medium term it will need to be able to adapt rapidly to a fixed fee model.

As I have illustrated above, the Bar is very close to achieving this in its current approach, if not quite already there.  Not bad for a “traditional” profession.  I suspect more fundamental change will be needed by many law firm partnerships.  Any who think they can solve the problem simply by reverse engineering hourly rates will be exposed not only by the Bar, but also by more efficiently structured new market entrants.

The challenge couldn’t be clearer.