Fixed Fee Pricing: Has time run out for time billing?
by David Vilensky
The Australian Corporate Lawyer, June 2012
For most of my professional life I have billed my clients in six minute units. From the time I started out as a solicitor in the early 1980s, time billing was such an assumed part of the landscape that it barely merited discussion. Expressing reservations about it were regarded, if not as heretical, then certainly as futile. Time billing was the way it had always been. If the system was to be abandoned, what possible alternative was there?
I had first hand experience of the increasing commercialisation of legal practice during the early part of my career. How the role of the timesheet moved from being a method of cost accounting, to the very inventory that lawyers sold. How the legal profession itself grew in scale, sophistication and profitability.
No doubt time billing contributed to the ascendency of the legal profession in general, and more particularly to the fortunes of my firm Bowen Buchbinder Vilensky (BBV). But our concerns about the system continued to deepen for a great many reasons. These were captured by the Chief Justice of Western Australia, The Honourable Wayne Martin, during his groundbreaking, if somewhat provocative, address to the Perth Press Club at the launch of Law Week last year.
I quote just a selection of the compelling reasons he gave, in no particular order:
Disadvantages of Time Billing
Conflict of interest – Time billing creates an inherent and irreconcilable conflict between the interest of the client to achieve an expeditious resolution, and the interest of the lawyer to bill time.
Client bears all the risk – Time billing transfers all risk to the client. The firm takes no risk whatever for unforeseen circumstances resulting in more time being spent, ineffciency, or duplication of work.
No upfront price – Most people would find it unacceptable for a plumber or electrician working on a house extension to bill by the hour, rather than for a fixed fee agreed upfront. Why should legal services be any different?
High levels of complaint – When 80% of complaints received by the Legal Services Commissioner relate to charges and the charging method, this is surely a sign of a systemic problem?
Focuses on hours, not value – Time billing rewards efforts, not results; quantity, not quality; repetition not creativity and hours expended, not value to the client.
Encourages over-servicing – Four lawyers might attend a meeting where one would do. Teams of lawyers go to court, some just sitting and watching.
Penalises technological advances – There is little incentive for law firms to embrace technological developments because their utilisation reduces profits by reducing time spent on tasks.
Prices by the service, not the customer – Unless hourly rates are discounted, the biggest corporation is charged the same price as the smallest business.
Creates random cost subsidisation amongst clients – When new legislation is introduced, the first client requiring services will pay for the firm’s acquisition of knowledge in that area, while subsequent clients will get the same benefit at no cost.
Discourages communication between lawyer and client – There is a natural disinclination to communicate with your lawyer when clients are aware that the cost increases every time they do.
Encourages timesheet padding – There is an incentive for lawyers to pad time sheets. Short telephone calls may be recorded as having taken six minutes. Clients may be charged for the lawyer thinking about the case while driving to work or while showering or shaving.
Discourages professionalism – Time billing discourages activities which are not billable time, but which are important, such as continuing professional development and education, community projects, professional organisations and the active and detailed supervision of junior staff.
Encourages the hoarding of hours – High level practitioners within a firm, ambitious to fulfil their quota of targeted hours, can undertake low level work, which is ineffcient and costly to the client.
Reduces quality of life – The emphasis on the production of billable hours creates a working environment which discourages professionalism and reduces work satisfaction to unacceptable levels. Clever young lawyers are leaving the profession in droves and high levels of depression and substance abuse have been detected among lawyers.
As it happened, the timing of the Chief Justice’s address couldn’t have been more prescient for my colleagues and me. Only a few months earlier I had been introduced to the work of Ron Baker, author of The Firm of the Future and founder of the VeraSage Institute in the US. A credible and enthusiastic advocate of value pricing, Baker went where others hadn’t gone before in offering a robust alternative to time billing. Not only was there a precedent for the transition to value pricing, he argued, a great many accounting firms had already gone through exactly this process, and more and more law firms in the US were making the move. The advantages of doing so were also becoming well established. Adopting a value pricing method would go much further than simply removing the negatives associated with time billing. It could also create fresh opportunities to make clients happier, colleagues working lives more fulfilling and one’s firm more profitable.
Great in theory, but could we pull it off? If BBV was to take the daunting step of throwing away the system which we’d followed our entire working lives I needed to be sure all my colleagues were on board. To this end, I closed down the firm for a whole day and had every single person attend a presentation by Ron Baker, who we brought out from the US, specifically for this occasion. The entire firm absorbed and discussed not only the principles of value pricing, but the very much more practical ramifications of how we could implement it.
We also took several clients into our confidence. How would they feel about a move to the fixed fee pricing we were contemplating? As it happens, a fair number of our clients are law firms, who refer work to us in practice areas outside their expertise, particularly in the Family Law and Wills and Estate Planning areas. The response from everyone we asked was the same – an overwhelming yes!
Which was why, less than two month’s after the Chief Justice’s speech, we began the 2011 financial year with strong resolve, some trepidation – and an unfamiliar sense of liberation as each day passed and there was – hurrah! – still no timesheet to complete.
Fast forward to today, and as we head towards our second, full year of fixed fee pricing, I can tell you that the benefits to both clients and our own firm have been significant and sustainable. With the exception of a rare few cases where clients specifically ask for it, we would never revert to time billing as the basis of charging.
So what are those benefits, exactly?
The Benefits of Fixed Fee Pricing – for Clients
Greater certainty and peace of mind – The fear of unknown and potentially escalating legal costs may not affect all clients, but it is certainly a source of anxiety to many. When clients know how much they will be charged for a particular matter, this provides peace of mind and the ability to budget accordingly. Our clients love fixed fee billing, and we continue to be very pleasantly surprised both by the scale and intensity of the positive feedback we receive from them. There has also been a notable increase in the level of client referrals over the past 18 months – always a sure sign that you’re doing something right.
More effcient – Fixed fee pricing instantly eliminates the ineffciencies created by time billing such as over-servicing, timesheet padding, rounding up the length of telephone calls and the hoarding of hours. While these are not usually visible to clients, they do recognise, and comment on the fact that instead of expanding, prolonging or delaying a matter, our team is incentivised to cut to the chase and deliver the most positive client outcome possible. Once the fee is agreed, we work closely with our clients to seek their desired outcome as effciently as possible. They can tell the difference.
Improved communications – Clients are not hesitant to call when they know they will not be charged for every point of contact. At first we were concerned that this change in billing system might provoke many needless client phone calls and emails. While we put in place internal processes to manage this, as a general rule the increased communication has had only a beneficial impact on our handling of client matters.
Fairer fees – We have found that most clients fully appreciate that complex or urgent matters attract higher fees than their more routine requirements. There is a sense of fairness when we charge on this basis.
Access to a wider pool of talent – In the past, when a matter was taken on, it very quickly became the focus of just one or two lawyers, who were responsible for seeing it through from start to finish. We found the decline in collegiality, noted by the Chief Justice, dramatically reversed when we introduced Fixed Fee Pricing, part of the process of which involves a wide group discussing each matter at a very early stage.
When a matter is discussed by a number of lawyers with many decades of experience between them, the result is a much richer and more informed strategy, the benefits of which can be considerable.
The Benefits of Fixed Fee Pricing – for the Firm
Potentially more profitable – According to Ron Baker the most profitable law firm in the world is New York-based Wachtell Lipton Rosen & Katz, a firm which has never used time billing. The idea that to be profitable you have to round up, pad out you timesheets or hoard your hours – in short, over-charge your client – is not only a myth it is an incentive to behave unethically, and most lawyers are relieved to be free of such pressures.
By contrast if your billing reflects the value of work to a client, not the amount of time spent on it, a firm has the choice of focusing on those clients to whom it can deliver high value outcomes. Fixed fee billing doesn’t treat all the clients as the same – which they never have been, in any case. Instead, the priority is to deliver high value work to clients who can pay for it. This is a commercial model which is potentially very much more profitable as it enables a firm to position itself within a particular market. Even in our first year with the fixed fee system, we have found that it is not only far more popular with clients, it is also potentially more profitable.
Significantly less stressful – It is a truism that sometimes we only know how much something means to us when we no longer have it. This certainly reflects the insidious and pervasive stress inherent in the time billing system. It was only when BBV formally abandoned the system that we experienced, first hand, the relief of not having every minute of the day dominated by the imperative of billable hours. The blind panic that used to set in when timesheets needed to be reported, targeted hours assessed, and the trajectory of many a legal career determined – all that was happily thrown out the window when we switched to fixed fee service.
Legal work is stressful enough without adding to it by using a charging method which only tightens the screws still further. Throwing off the shackles of time billing has been welcomed by every single one of our lawyers. While earning targets still apply, when the obsession with clock watching came to an end, a collective and heartfelt sigh of relief was heard. Even 18 months later, we all sometimes feel that glow of satisfaction in not having to complete another timesheet!
Performance not measured solely by hours worked – To extend the Chief Justice’s sub-contractor analogy, wouldn’t it be ridiculous if the electricians and plumbers who worked on your home extension not only demanded payment for their services according to how long it took them, but irrespective of whether or not the toilets flushed or lights switched on?
When billable hours are no longer the sole yardstick of performance, we are able to measure performance against a number of other criteria: does a lawyer delight his clients? Is she attracting and retaining new clients to the firm? To what extent does he contribute innovative solutions? Is she carving out a practice area and creating real intellectual property ownership of a particular legal services niche? These are the same criteria used to evaluate performance in other professional services firms and we have found it provides a far more rounded and balanced basis of performance evaluation – one which enables our different team members to flourish and to express their individual strengths and passions.
Greater flexibility in working arrangements – There are no prizes for being the last one to go home, or the first one in the offce at BBV. The jacket over the chair syndrome took time to lose its grip, but it did go, replaced with the recognition that there is no reason to give up on the idea of a work/life balance just because you’re a lawyer. Over the course of the past 18 months we’ve found more lawyers opting to take their laptops away to work on a report from home, in a comfortable environment free from the distractions of the offce. This flexibility reflects a significant shift in culture. One which focuses not on process but on what really matters – outcomes.
More supportive of mothers/parenting – As a direct consequence of this greater flexibility, the prospect of motherhood is not quite the career-breaker that it has been in the past. Our staff members who are mothers have found fixed fee billing far more conducive to child-minding than the inflexibility of time billing. Others who plan to become mothers, regard the prospect of returning to work as somewhat more manageable, given the very real opportunity to work from home, as well as the overall reduction in the systemic culture of stress.
Greater ability and willingness to spend time on non-billable work - When hours were freed up from rigid billing, we found our team members much more willing to engage in all those activities the Chief Justice identified as enhancing professional development. Again, it was a matter of individuals pursuing those areas of particular interest to them. Several of our lawyers have capabilities in the area of marketing which they have pursued since we moved to fixed fee billing. Others have focused on emerging areas of the law, flying to international conferences overseas and publishing papers in specialist media. The combined effect of all this is a working environment in which the individual strengths of our team members are more fully expressed, contributing to a more stimulating, multi-dimensional and enjoyable working experience.
Stronger collaboration between different practice areas – One of the most pleasing benefits of fixed fee pricing has been the way in which our team members are interacting in ways which would have been very unlikely less than two years ago. Back then we inhabited the silo culture that characterises so many professional services firms. Lawyers in different practice areas had limited professional contact, and even within the same practice areas collegiality was often accompanied by an undertow of competitiveness.
Free of the relentless quest for billable hours, a curious thing is happening: people are talking to each other! They are sharing ideas. Discussing client cases – and discovering other ways in which, as a firm, we can deliver more positive outcomes to clients. I have found them very willing to tell clients about each other – and clients, for their part, also seem more willing to listen.
Happier company culture – From all I’ve written, it should by now be abundantly clear that the overall impact of adopting fixed fee pricing has been a very much happier company culture. When our focus is on delivering the outcomes that our clients seek, rather than trying to find ways to create maximum billable hours out of each matter, we cast aside an invisible but very real deadweight created by an ever present conflict of interest. Life is still challenging, busy and at times very stressful. But doing the ethically right thing by our clients, it turns out, is also the commercially right thing to do.
Abandoning time billing not only removes an incalculable burden of stress it also liberates us to be more ourselves, to develop our individual professional capabilities and to communicate and develop closer bonds with our colleagues. In an unexpected and particularly rewarding way, I think it’s true that most of our people now have a much greater sense of belonging to a single team.
My colleagues and I were delighted when in October 2011 LawAustralasia, the international association of independent law firms to which we belong, awarded BBV the organisation’s highest award, the Pursuit of Excellence award, recognising the significance of what we have accomplished in moving to fixed fee pricing. I am sometimes asked if we have any regrets about introducing fixed fee pricing. As it happens we do. But just one. The regret that we didn’t implement it many years ago.