Being on the clock – it’s a term that lawyers know all well. For decades, attorneys have maintained that legal work is too unpredictable to price on a project basis. That’s why the by-the-hour billing structure prevails.
However, clients have called the billable hour services scheme everything from “needlessly punitive” to “inefficient.” In some cases, we can’t even repeat what clients say about it! Now, clients are beginning to push back against at the hallowed time increment. Clients insist on gaining value for their payment, and they are also looking for predictable fees and service efficiency. For example, Rachel Barrett, chief legal officer of IEX in New York, had this to say about the billable hour billing approach, “We know how much it costs to draft a brief. We knew how much the last 50 mergers cost, so certainly we can figure out how much the next 50 mergers are going to cost.”
Majority of Firms Offer Alternative Fee Arrangements
As a result of client demand, law firms are embracing a variety of non-hourly billing models that fall into the category of “alternative fee arrangements.” In fact, two-thirds of America’s law firms now say they are collaborating with their clients on these creative alternatives to hourly billing.
When leadership at American Lawyer top-rated firm Fenwick & West noticed that some clients, especially those using the firm’s Technology Transactions services, were taking their business elsewhere, they found traditional billing was a shared complaint. The former clients were looking for alternatives to traditional by-the-hour billing model that would be more predictable and manageable from a client perspective. In response, the firm created FLEX by Fenwick, a novel billing arrangement, that enables clients to pre-pay for blocks of legal assistance or even reserve a specific attorney for a pre-determined number of days per week. Fenwick reported that demand for FLEX, which adds predictability to legal fees and enables attorneys to better balance their work lives, doubled in its first two years.
The scrutiny on the billable hour model resembles a similar trend in the healthcare industry that revolutionized how services were delivered and billed. Under the “cost plus” model, healthcare providers billed the actual cost of the service plus a universal mark-up. Large corporations and insurance companies, the organizations that paid for healthcare services for their employees and insureds, replaced the “cost plus” method in 1983. The large payers banded together to insist on replacing the old model with a capped reimbursement approach that adds predictability to healthcare expenses. In this new billing arrangement, large organizations set the annual amount they will pay for healthcare services for their employees as insurance companies do for their insureds. Payment amounts can be renegotiated annually.
Will legal’s billable hour model go the way of cost-plus reimbursement in healthcare? At this point, no one knows but with more than half of the country’s law firms entertaining alternative billing, it’s more likely than not. If a client hasn’t asked for such an arrangement yet, you can expect to have that conversation soon. Are you prepared to answer in such a way that demonstrates your value without putting your bottom line at risk?