punch time clock.jpeg

Time worked has no inherent value. The output of one's work can have value, as measured by the relative impact your work has on a client's situation, but how long it takes to produce that output is irrelevant to its value.

So, why do lawyers continue to sell, and clients continue to buy, time? Clients are reassessing the value of time, as evidenced by the declining hourly rates they'll now pay for it, but why buy time at all?

Colin Ritchie, an Australian law firm consultant with whom I've had many insightful exchanges in the Successful Small Law Firms LinkedIn group, recently asked the group, "What is satisfactory income for a full-time principal of a small law firm?" The discussion evolved to where Colin shared this:

The issue that I keep hearing is that clients want certainty with their fees and will often pay a premium to get certainty. I might be getting off the topic, but Richard Burcher presented a talk at the QLS Symposium where he showed examples of clients being presented a range of fees or an option of a higher fixed fee, and in 85% of cases they went for the fixed fee.

The Burcher example doesn't surprise me at all. For clients with limited or no experience buying legal service, hourly billing must seem like writing a blank check. Visualize dialog in a construction analogy:

  • "Mr. Contractor, how much will it cost me to build the house we discussed?" 
  • "Mr. Buyer, that depends. We'll charge $300/hour plus materials, billing you monthly. When we're done, the total is how much you'll have spent on your house." 
  • "Wait a minute, Mr. Contractor. You can't tell me how much the house will cost?" 
  • "Well, Mr. Buyer, it depends on how much time we have to spend building it, what the materials actually cost, and it will be affected by unknown problems, e.g., if we discover massive rocks underground and have to rent a special machine to remove them, or if there's a labor strike and we have to find a way to work around that, or if during the project the price of cement or lumber goes up, etc." 
  • "So, Mr. Contractor, you're telling me that in all the years you've been doing this, you haven't developed reliable estimating processes, you have no idea what the materials-price trend is, and all of the risk resulting from that ignorance rests with me?" 

Who would agree to such an arrangement? 

When I bring up this example, lawyers say, "Litigation and transactions are different. There are more unknowns." To which I'll reply, "Only if you haven't been capturing, compiling and analyzing matter data throughout your career."

If commercial construction companies can come up with cost projections for the thousands of components involved in the budget for a 50-story structure in Manhattan, and a process for addressing truly outlier variables encountered during the project, both of which are reliable enough that a bank will lend $100 million, then lawyers can reasonably be expected to come up with something better than "hours-plus."

The underlying flawed assumption in the hourly billing argument is that your time is worth money. It's not. The result achieved by the time you spend is worth money. How long it takes you to do it is irrelevant to the buyer. Hourly billing suggests there's value in the mere attempt; there's not.

Most seasoned lawyers want to be regarded by clients as a trusted advisor who possesses experience, judgment and wisdom, and the ability to understand the client's situation and apply those experience assets to it usefully. How do you reconcile that with your expectation to be paid by the hour like a laborer, and that the client should bear all the financial risk for your unwillingness or inability to produce a useful project estimate?

Much has been written about the disadvantages to clients. However, I'll argue that hourly billing is equally bad for lawyers.

The irony of hourly billing is that it rewards inexperienced lawyers by paying them for their learning curve. It penalizes true experts, who can resolve problems in a fraction of the time it takes a less experienced lawyer.

Years ago, this was demonstrated graphically in the Washington, DC area during the personal- and corporate divorce of the Haft retail family. In one of the Haft stories in its Business section, the Washington Post published an image from a top-tier DC firm's bill to the Hafts showing, say, 10 hours of research by associates about some issue. The client's public retort, shown in the Post sidebar: "Ten hours of research about X? [Name partner] should have been able to answer that off the top of his head."

I'm sure by now you've all seen the story in the New York Times and New York Law Journal, among others, about a client suing DLA Piper (subsequently settled) for padding bills. The only way that's possible is via hourly billing. Under a fixed-fee arrangement, inflated hours-worked reports only affect internal accounting, not charges to the client.

Do your clients and yourself a favor, and give yourself a chance to be ahead of the curve. Begin compiling data about how long it typically takes to complete recurring tasks in litigation or transactions. Yes, there will be outliers, but over time, the center of your bell curve will be sufficiently reliable most of the time, and you can develop a method to deal with true anomalies. Better yet, learn from clients whose businesses require them to have such capability.

Mike O'Horo

Meanwhile, until you have the data you need for complex estimates, there's a way to arrive at a pricing estimate that combines the knowledge of the client and outside counsel to produce a working estimate, and in which both parties share the risk.

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