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From the CEO: Billable hours on the way out

Cite as: December 2013 87 (12) LIJ, p.6

Fee for service could work well for lawyers. 

It’s particularly hard when you’re trying to change something that has been set in stone for decades and is widely regarded by many as “the right thing”.

But my recent experience at the International Bar Association Conference in Boston has left me in no doubt that as a profession we need to look at changing the way we bill our clients.

The billable hour has been a mainstay of the legal profession for decades and has served us well. But times have changed and so must we. I think we’ve moved past responding to an uncertain market with its associated financial pressures and now find ourselves in the midst of a new reality for legal services.

It is telling that, of the 1982 new complaints reported to the Legal Services Commission of Victoria in their 2012 annual report, around 40 per cent related to complaints about lawyers’ costs and bills issued. It is clear from these statistics that, on some level, there is a real disconnect between a lawyer’s bill and their client’s expectation. But it’s fair to say that some of these complaints may also reflect a degree of poor communication between some solicitors and their clients.

But even accounting for a breakdown in communication, there is still a push in some sectors of the profession to move in another direction – towards fixed pricing. Internationally, there is an increasing recognition that the current billable hour system does not necessarily lead to efficiency or genuine productivity and, if we’re going to see an improvement in client attitudes towards accounts, we need to start considering alternative pricing models that move the focus from hours to quality.

There are certainly areas of practice where a fee for service arrangement could work well for many lawyers, particularly in light of the increasing pressure of disruptive technologies and non-lawyer competitors in these areas. After all, shouldn’t the same task, performed at the same level cost the same amount no matter who is doing the work?

In Australia, we need to get ahead of the curve on this and develop strategies that deliver more effective pricing structures tailored to suit client expectations. Many consumers will be better served as a result and it logically follows that we may see a reduction in the number of complaints regarding the billing practice of lawyers.

However, while the billable hour can create friction in the client relationship, its detrimental impact on the personal and professional lives of many lawyers should also not be underestimated.

The pressure of a minimum billable hour quota has forced many young lawyers to focus more on clocking up hours instead of improving their skills – in some cases, at the expense of their mental health and wellbeing.

In 2009, the Tristan Jepson Memorial Foundation commissioned a research project with Professor Ian Hickey and the Brain and Mind Institute at the University of Sydney, where 2500 lawyers and law students were surveyed.

This research found that approximately 30 per cent of lawyers suffered from depression and some of the contributing factors for this were cited as the culture of “toughness” and the relentless “billable hours” system adopted by firms. For many lawyers, it is an ongoing struggle to balance the competing interests of their need to meet financial targets and maintaining a healthy work life balance.

At the same time, of course, any billing regime must still provide an effective business model for firms, so achieving a balance will not be easy.

Clearly, we need to break this connection between time and value to create a sustainable pricing model. However, this change, when it comes, is likely to be more evolutionary than revolutionary.

It may well be that firms will need to consider offering their clients a choice – providing a range of options from billable hours to fixed prices for certain services. Some of the more straightforward legal services might be a good fixed price fit, others less so. The challenge for all lawyers will be to produce an effective, efficient and profitable billing model in response to the increasing calls, from both clients and some in our own industry, for alternatives to the billable hour.

Comments

Michael Brett Young
Maria, Regarding the issue of conveyancers undertaking Sale of Business work, the LIV has been actively lobbying the Victorian government on this issue for some time and we continue to do so.
9/12/2013 10:39:36 AM

Michael Brett Young
The viability of the billable hour is not simply about abandoning it, but rather about responding to the changing market we operate in.
What we need is more discussion on the issue and it’s great to see this column is stirring up debate.
For some firms hourly billing will continue to be an effective mechanism. However, for others, the push to change to fixed fee billing will come not from within the profession but from clients demanding greater certainty and choice around how services are both delivered and billed.
9/12/2013 10:38:33 AM

victor tse
Well put, Maria. It is certainly unethical and greedy for the big end of town to charge excessive hourly rate for their work. But it is quite another thing for many people to glorify alternative but yet unknown models of pricing of legal service. The same people who now say hourly rate is fundamentally flaw has no answer to anything better. But of course, it does not matter to most of them as they make their money in different ways. We know democracy is not a perfect or ideals model but it is the only one viable. Instead of saying the obvious, I suggest the bona fide action is to contribute to the development of a better pricing model.
Finally the critics of hourly rates also do not seem to know lawyers are required to give costs estimates to their clients. So the often recycled complaint that hourly rate encourage unproductive and overcharging can only apply to lawyers not complying with the law.
6/12/2013 10:58:22 PM

Maria A E Schwartz
As regards issue of billable hours to be fazed out for fixed price. First, the pressure is really on young lawyers in large or medium firms. These larger firms need to determine how many staff they actually need rather than just relying on the young ones to keep up the billable hours. This may impact negatively on number of young lawyers hired. As a sole practitioner, I will always deal with costs on basis of billable hours, at it is very easy to just undertake work without proper recompense, and I always advise clients as to progress of matter. So, fixed price is a load of nonsense, there are so many unexpected contingencies that can arise, not being the lawyers fault, and the client needs to pay for same.
Further issue, I attended Southern Solicitors Group X-Mass party on 1 December 2013 and heard that LIV was doing nothing about move by Conveyancers to deal with Sale of Business. I think it is appalling that LIV didn't do anything about Conveyancers undertaking Conveyancing. Yes, all allegedly in name of competition - what non-sense, I don't do a lot of conveyancing, only for existing clients and charge probably double or triple of what conveyancing Agents charge - why do I so charge - not because I am greedy, it is just what I have worked out it costs to complete a conveyance, and I don't pay my staff a pittance. I have huge objection to Conveyancers undertaking Sale of Business work - there are many complex issues. Please regard this response as my objection to Conveyancers undertaking Sale of Business work and my request for the LIV to lobby and do something against this happening. If the Conveyancers want to do Sale of Business work, ask them to complete a law degree! As regards any argument regarding competition for benefit of the Public, lets all compete with the same qualifications and experience, and the market will see where the pricing goes. Let unqualified Conveyancers enter the market and you further allow dimunition of mainly sole practitioners (your main constituents and members of LIV) livelyhoods.Dont you understand that by allowing Conveyancers to deal with sale of Business, they move into dealing with Liquor Licence, Commercial Leases, varied commercial agreements and Sale of Business. What are you thinking. You don't get $ from them. Why not scrap the lawyers totally if LIV is on this path. Not happy and quite frankly appalled with LIV not protecting its main membership. Maybe we should reduce income of LIV staff at higher echelons - put it on a fixed price not including extra meetings and travel required from time to time to deal with matters in which LIV is engaged, and thereby reduce our membership fees. Don't think that sounds tempting or fair? Why not let members vote on policy issues that LIV should run with and scrap the rest. Quite annoyed for lack of LIV insight and concern for members. I have been a member for over 20 years. Not happy regarding above matters.
6/12/2013 1:05:19 PM


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