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Why it's time for value based billing

Why it's time for value based billing

By Adam Wakeling

Planning Time Management Wellbeing Workplace 

Most lawyers accept time-based billing without question. But we would think twice before becoming the customer of a dentist, a car mechanic or a real estate agent who charged by six-minute intervals and was working towards a target of billable hours. History and benefits Time-based billing only became common in Australian law firms in the 1970s and 1980s. Before that, firms charged based on fixed-fee schedules or estimates of the value of the work done. The billable hour was therefore intended to provide clients with more transparency as legal work became more complex. It also allocates risk better than fixed-fee charging as the cost of one client’s matter taking a lot of time need not be borne either by the firm or by all the clients collectively. Consequences Time-based billing had a number of consequences, intended and unintended. For a start, it allowed firms to charge more. From 1980 until the GFC in 2008, Australia’s large commercial law firms saw significant revenue growth. Since then, firms have struggled to maintain their revenue as clients have sought cheaper alternatives. Lawyers, too, have sought alternatives to escape from the billable hour. Thompson Reuters estimated that, between 2005 and 2015, in-house lawyers increased from 10 per cent of the legal profession to 35 per cent. The employer gets the guarantee of paying the lawyer a fixed salary, and the lawyer has every incentive to do the work as efficiently as possible. Other lawyers have gone to boutique law firms offering alternative business models or into consulting, risk or compliance roles. Criticism Time-based billing has come under criticism throughout the profession, both in Australia and overseas. The Australian Law Reform Commission called for the profession to move away from time-based billing as early as 2004. The Chief Justice of Western Australia Wayne Martin gave a speech in May 2010 on “Billable hours – past their use-by date”. Legal regulators in different states have found that up to 80 per cent of their complaints relate to fees. Various legal associations, including the American Bar Association, have commented on the consequences of timebased billing for the wellbeing of lawyers. There are many criticisms of time-based billing. It creates uncertainty over fees, an inherent conflict of interest between firm and client, a disincentive for efficiency and innovation, and a preference for quantity of work over quality. Also, one client can often end up subsidising another. For example, the first client to ask for work on a new Act will bear the cost of the research, and subsequent clients will share the benefit. The most serious consequences of time-based billing are probably borne by lawyers, particularly junior lawyers with no control over their targets. To bill six hours a day, a lawyer usually needs to work around 10-hour days. Additionally, sixminute internals mean that a lot of time is directed to administration. While being a lawyer is demanding, research by the Black Dog Institute has shown that a more significant risk factor for mental illness is a combination of a demanding job and a low level of control over that job. If employees are micro-managed but at the same time are held to tight targets, they will be put under unnecessary stress. Psychological factors 8, 9 and 11 of the Tristan Jepson Memorial Foundation Guidelines address employee involvement, workload management and work-life balance respectively, all of which are potentially set back by requiring junior lawyers to work to a high target of billable hours billed at close intervals. Alternatives A persistent response to criticism of time-based billing is that there is no workable commercial alternative. And while establishing an alternative business model is a challenge, a number of large and small firms around the world have managed to do so. Large American firm Bartlit Beck Herman Palenchar & Scott does not use time-based billing but works out fees in advance with the client which are fixed and certain over the duration of the engagement. M&A specialist Wachtell Lipton Rosen & Katz, consistently ranked as America’s most profitable large law firm, has never used time-based billing. Major international UK law firm Eversheds does not use time-based billing, but instead allows its lawyers to work out individual fee arrangements with each client. In Australia, firms that do not use timebased billing generally use value-based or fixed-fee arrangements, or event billing, based on events such as filing a claim. Catherine Brooks is a partner at Moores, which uses this model. “Value pricing allows us to agree on a price with our clients upfront, which is great for the client as they know what the cost is going to be and great for the lawyer because they are being paid based on value and not just time – which is a poor reflection of our skill-set,” she said. Billing on value is more complex than billing on time, but Moores has found it to be not only commercially viable but also successful. “Our clients and referrers love it and we have reduced our debtors by over 80 per cent. This is because our clients know what the bill is going to be, they can budget accordingly and pay on time as there aren’t any surprises at the end of the month. This has greatly improved our client/ referrer relationships and boosted the self-esteem of our lawyers because if we win the work from a client, we can then just get on with doing a good job and we don’t need to worry about further discussions about money.” Ms Brooks said that, in addition to being good for clients, the new model is also good for the firm’s employees. “We have noticed an improvement in the mental health of our lawyers because we work as a team to achieve our budgets, which can free up junior lawyers to learn, carrying out business development activities and research tasks – without feeling demotivated by not billing the big bucks in a particular month.” Moving to an alternative billing model, like any other big business decision, involves risk as well as reward. “When you change how you bill, you also change your business model, so it was a brave and scary step we took but we’re glad we did it,” Ms Brooks said. With the legal profession constantly changing, it may be time for more firms to develop alternative billing models. ADAM WAKELING is a senior compliance adviser at State Trustees. He is 2016 co-chair of the YL Editorial Committee.

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