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LIV President's Blog 2012

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The hidden cost of time-based billing

The hidden cost of time-based billing

The perennial question of time-based vs flat fee billing.

The impact of Time-based Billing on work practices
A stressed lawyer. An out-of-control desk. Even the telephone and keyboard can hardly be seen for messy piles of files. You open one file. It is waiting for a response from the client. You open another file. Search documents haven’t returned from the ASIC. Another file is on hold because the client is in the remand centre and hasn’t yet decided whether to contest.

One can waste hours in this kind of shuffling, and time-based billing systems encourage it, because at the back of your mind is the comfortable, and often false, belief that if you have spent five minutes on a file you have done something of value. Even if nothing is charged to clients when this kind of thing is going on, the time is still thrown away. Your payroll is almost certainly the biggest expense your practice has to meet, and it can’t be deferred. The effect on your morale isn’t great either.

But wait - there’s more! Time-based billing directly impacts your ledger.
An important, and often overlooked, aspect of time-based billing is its effect on the Debtors’ Ledger, in terms both of write-offs and of speed of recovery.

Time-based billing encourages clients to dispute their bills
Time-based billing tends to be productive of a great many fee disputes. These result in many costs to a practice - the cost of write-offs negotiated, the cost of recovery action taken, the cost of having your money ‘out there’ for 90 days (no, Virginia, you’re not the only one) during which time your overdraft takes up the slack, the cost of billable time thrown away on chasing overdue debts. Fee disputes also impact the fee earner’s relationship with the client, affecting the likelihood of repeat business and referrals.

Perception is everything
The reason for the greater proportion of fee disputes in time-based billed clients is, I believe, a direct result of its effect on the client’s perception. Faced with an itemised, unit by unit bill, a client is almost invited to argue about it, particularly when the bill, as is so often the case, spills over many pages, and when there are a number of one-unit items appearing alone on separate dates. It is difficult, extremely difficult, to convince a layman that you really earned $50, when you only spent five minutes. A lengthy, itemised bill practically screams “dispute me”. 

A flat fee arrangement, on the other hand, aside from the beautiful enforceability of the amount agreed on up front in your signed engagement letter, has the great psychological advantage of holding no surprises. The client agreed to the amount, and he knows that he did. In all my years as a credit controller, the only cases in which I saw this type of bill disputed were those where a dispute arose about the work done.

What to do about it
In matters that permit it, a flat fee structure is ideal for swift, painless recovery and a healthy Accounts Receivable ledger. Not only is your liquidity enhanced, but it will be far easier to borrow money when you need to. Bank managers love a nice tight debtors’ ledger.

There are, however, some types of matter where flat fee billing can pose an unacceptable risk: for example large, complex litigations, where the amount of time spent may be largely outside the control of the fee earner. In such a case, if time-based billing is considered necessary, I believe a very substantial benefit could still be obtained by moving away from the 5 or 6 minute unit and adopting a thirty minute, or even 15 minute unit.

The bottom line
Time-based billing is on the way out. As the number of firms using flat fee structures increases, clients will be less likely to accept it. In order to stay competitive in today’s market, firms will need to shift their emphasis away from time-based fee structures.

Q. What have been your experiences with time-based and flat fee billing? Do you think that law firms need to move away from time-based billing in order to retain clients?

Tabitha Ormiston-Smith is a YLS member, a published author and self-employed editor, and worked for many years as a credit controller, both in the legal and accounting professions. *Opinions expressed are those of the author and are not reflective of the LIV’s position.

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