With growing pressure on law firms to bill with more predictability, clients would like to see such services more like a commodity instead of billed on an hourly rate. And firms have to adapt to this to be able to survive and attract clients.
It can be very positive for firms but it is really being driven by client expectations and the survival of the firm can depend on its ability to meet those expectations.
Clients are becoming more sophisticated and are demanding greater service from firms while still wanting to pay “reasonable” amounts. Traditionally, lawyers billed based on the time expended on the file, but alternative billing systems allow them to be a little more creative. They allow lawyers to get away from a computer printout of time spent on the file and the fee derived from that time.
Law firms have employed alternative forms of billing for a while but they may not realize it.
Smaller cases involving wills and real estate are often billed as a fixed fee as opposed to the hour.
In recent years, there has been a bit of a movement in the legal industry, based on demands from clients, to do the billing a little differently from the billable hour.
When a lawyer provides a quote based on an hourly rate many clients don’t really have a concept of what that means. They want to know, ‘What is this going to cost me?’ There is a bit of pressure on law firms to adapt to clients, who seem to want a fixed fee or a range of fees for services rendered rather than counting the hours up after the fact and sending out a bill.
Cosgrove Associates helps law firms become more efficient and profitable. We often suggest that lawyers transition away from a bill that lists all of the activity on the file — drafting letters, reading emails, making telephone calls, etc. — to prepare one that tells more of a story of the firm’s successes in working with the client.
What did the lawyer save the client in terms of fees for a lawsuit, for example, or what was accomplished substantively? That way, the client can actually see the value that the firm added to the client, rather than just seeing a billing sheet with an itemized list of individual tasks.
In fact, the bill itself can be a good marketing tool. It can reinforce what happened with the matter or the task that the law firm was retained to do.
Many of the younger lawyers in small firms are moving away from the billable hour while the larger, more established firms are a little slower to adopt alternative billing methods.
But it’s never too late to make changes and there’s no specific time of the year that works best.
January may be a good time to start planning for such changes, but at a certain point, a lawyer has to say, ‘All new clients will be on the new system,’ and within a short period of time it will be used for all clients.
In adopting new billing systems, law firms have to be careful not to underestimate the time it takes to complete a file.
Some people think that the advent of alternative billing means they have to stop entering their time on the files, but it really isn’t the case. Lawyers need to keep docketing on the files so they can see how they are recovering on these alternative arrangements.
In order to provide as realistic a quote as possible for clients, lawyers need to gather as much information as they can up front regarding a number of factors: the economics of the client, the details of the case and the client’s expectations. Knowing the client’s expectations early on will help the lawyer work towards them.
Experienced counsel often can estimate how long certain tasks can take, but newer lawyers may want to stick to the traditional billable hour for a while to help figure out how long things take. You have to make sure you understand what the realistic fees are for certain kinds of work. Sometimes you will be a little over and sometimes a little under but it’s important to make sure you get a good recovery rate and that the firm remains profitable.
There are times that cases will go off the rails and move in unexpected directions so it’s critical that it’s communicated immediately to the client. Perhaps at that point, the file needs to be switched to the traditional hourly billing method.
It’s also important that the engagement letter with the client sets out these specifics. This is usually sent out almost immediately after the lawyer is retained.