As many business owners have experienced, a simple 10 minute phone call to your lawyer to ask a few questions ends up showing up on the bill for hundreds of dollars. Many clients today feel underrepresented and over billed. The hourly bill promotes inefficiencies and ineffectiveness, and the long-standing tradition is starting to see a shift by some law firms to value-based billing for legal services.
Why Do Legal Firms Bill by The Hour?
The term billable hours refers to time spent by an attorney, paralegal, or other law firm employee on work for a client which is chargeable to that client. Many law firms still use hourly-based billing for the simple reason, “It’s always been done this way, so that’s why we do it.” Additionally, many law firms are reluctant to switch to fixed or value-based pricing as it seems difficult to implement, however, understanding the client’s goals and their perceived value in reaching those goals is an easy way to set value-based pricing.
The cycle is hard to break, especially for smaller law firms just following the lead of larger firms that use this type of pricing mode. As technology continues to change, it is making hourly bill less attractive to professional service providers and clients.
The Disadvantages of Hourly Billing
- Misaligns the Interest of Professional and Customer
From the start of a contract with hourly billing, a conflict between the professional’s interest and customer’s is present. Clients are focused on the hours taken to complete a project, opposed to the value, while lawyers are focused on the desire to bill time. Law firms typically want to maximize on the course so that they can run a profitable business, putting risk on the customer.
- Hourly Billing Fosters a Production Mentality
When you partner with a law firm, you want them to provide value to your business and accomplish something. The billable hour has caused professionals to lose sight of the all- important question, “what did we accomplish,?” And puts emphasis on the questions “how “many hours did you bill?”
- The Hourly Bill Focuses on Effort, Not Results
As a small business owner, would you buy effort in the marketplace? Hourly billing rewards inexperience and inefficiency- the slowest runner wins the race. When you a hire a lawyer, the results obviously matter. Intellectual capital, expertise, wisdom, judgment and the ability to synthesize information cannot be denominated in hours. Creativity and effectiveness is emphasized in alternative billing models, such as fixed-pricing and value-based pricing.
- Clients Are Prone to Surprise Bills
When running a small business, unpredictability and surprises is something small business owner’s don’t like. Hourly billing denies the ability to quote a price before work begins. Clients have no way to know for sure how much they will be charged at the end of the month, unless they request constant follow-up from attorneys, which might increase their hourly bill even more. Imagine purchasing a product in the marketplace without knowing the price, only to find out a month later? The hourly bill is economically illogical and does not benefit the client.
- Your Rate will likely Depend on the Seniority of Who Is Completing It
When law firms are billing by the hour, they are likely to charge premiums based on the seniority of the attorney completing the work. Although the same quality and same end product could be produced by someone of lower seniority, but same competency, you will be billed at a different rates depending on the person who completes it. Value-based pricing ensure that you are paying for the value you receive, not paying premiums based on how many years of experience the attorney has.
The Alternative: Value-Based Billing
Value-based pricing is transforming the legal industry, but transitioning engagements from traditional hourly billing to value-based pricing isn’t always easy. When value-based pricing is properly implemented, it promotes the following:
- reduces total legal spend
- increases predicability of budget
- Reduces billing disputes
- promotes law firm risk-sharing
- improves the productivity of attorneys
With value based pricing, the gaol is to pay less for the effort and more for the results. The law firm will share in the risk of the matter, unlike the traditional hourly bill model where the client carries the risk of a bad outcome. Value based pricing requires a fee structure that assigns the goals and incentives between law firm and client.
As we discussed above, the hourly billing process rewards inefficiencies. When law firms are required to become more efficient with value-based pricing, they put better focus toward attention to matter management, process mapping and ensuring the work is performed at the correct value-price point. The increase in efficiency translates to cost savings for clients around 20-40%. This savings can be significant, especially for startups and small businesses that are just struggling to get by but need outside counsel.
Exemplar Guarantees Value-Based Billing Only.
More hours doesn’t equal more work. Exemplar Companies was one of the first legal firm in American History to abandon the hourly bill over 15 years ago. We prioritize forming genuine relationships with the clients we serve, and genuine relationships don’t happen when you bill by the hour. We are dedicated to providing clients with practical and effective legal services with value-based billing, only. Please contact us today for more information.
CEO, Exemplar Companies, Pbc.
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