Graeme Johnston / 24 February 2023
This is the third post in a series of five. It covers the benefits and problems of time-based billing and why change is so difficult.
The fourth and fifth posts will explore their implications.
As in my second post, I’m focusing on England & Wales and on the United States.
1. Benefits of time-based billing
1.1 For client
- Lower transaction costs
- In the economic sense, including time
- i.e. you can focus on the work required without spending major time and effort on scoping, pricing, controlling etc
- All you need to agree is hourly rates then, possibly, challenge the amount of time billed if it appears excessive
1.2 For client’s agent (e.g. in-house lawyer)
- Lower transaction costs – as above
- Though reviewing time records is a pain – and practice appears to fall a long way short of ebilling industry theory
- Easy-to-apply metrics
- Comparing hourly rates across firms is an easy-to-apply metric
- Lends itself to easy benchmarks (e.g. % discounts, shadow billing) when using AFAs (see the second post in this series for these terms)
- A significant part of the history of shadow billing appears to have been in-house lawyers demanding time records even when they had agreed to a fixed price
1.3 For legal services vendor
- Lower transaction costs
- Some time required in filling in timesheets, reviewing draft bills and sometimes arguing over the amounts billed – but typically less challenging than having to scope and price up front
- The cost of that time is mostly externalised to individual lawyers, as there are typically no limits on their working hours
- Can be highly profitable
- Because of the incentives
- If the client is likely to pay without serious objection, no need to think really hard about whether to do something or how to do it
- Can be stable
- Your costs are largely time-based, so tying your revenues to that as well can be helpful – assuming you can shed people and costs (e.g. real estate) not generating the required sums
- Clients can be contradictory
- They may say they want value-based billing and innovative structures but in practice that’s quite difficult to execute, at least to the same sort of profitability you’ve become used to
- Provides clear data
- For tracking contribution and rewarding / promoting people internally
- For improving processes and pricing
1.4 For individuals delivering the service
- Lower transactional costs
- Though timesheets are a pain
- Can support high profit shares or salaries
2. Problems of time-based billing
2.1 For client
- Can lead to excessive legal bills
- Can lead to skills, process and system deficits
- Project management and process improvement skills never being developed, or being undervalued
- Cultural / change problems faced by legal operations people
- Dependency on external providers
- Illusory nature of transaction cost ‘savings’
- Offset by having to pay staff (and sometimes consultants), and possibly ebilling software (often charged as a % of bills) to mitigate the inefficiencies
- Hourly rates and shadow billing benchmarks are of limited benefit and can positively mislead while not addressing key issues
- Can incentivise over-working and over-complicating
- For example, over-elaborate contracts, unnecessary litigation applications
- All of this tends to cause delay, and to multiply costs and risks of various types
2.2. For client’s agent (e.g. in-house lawyer)
- The problems in 2.1 are real and the metrics mentioned in section 1.2 aren’t hugely relevant
- After years of experience of them, this is now widely recognised
- All of this may leave you personally exposed
- For example, when the organisation’s management becomes fed up and decides to take action e.g. to outsource work to a managed legal services provider or to run the in-house function differently
2.3 For legal services vendor
- It can make it harder to build project management and process improvement skills, and related processes and systems
- Because the absence of a pressing need makes it harder to justify investments
- You may even struggle to get people to attend training or engage in new ways of working, because you’re effectively incentivising them just to bill more hours
- Relatively high fees resulting from time-based billing can lead your clients to look for other options
- Over time, this may lead to your work become more specialist and ‘big ticket’
- These things may make you fragile if and when the market changes
2.4 For individuals delivering the service
- Temptation to work excessive hours in order to meet and exceed billing targets and obtain bonuses, promotion etc
- This can be unhealthy, and there is significant evidence of a real problem here in the legal sector
- Risk of failure to build skills relevant in the future
- Because of the lack of immediate need
Challenges in moving away
There has been talk about these issues for decades now, but things never seem to change as fast as predicted by those who think they should.
Why is that?
- One factor, so far as I can see, is that there’s just a lot of legal work to be done –
- The decades-long continuation of high economic activity supports a lot of legal work. The precise nature of it changes with economic and political events, but it doesn’t go away. Volatility can even increase it.
- Legal complexity continues to increase and technology thus far seems to generate legal complexity and cost faster than different types of technology can help to manage or mitigate it.
- A lot of work at the less-complex end has in fact moved away to less traditional forms of delivery in recent years, it’s just that there’s an awful lot left.
- A particular challenge for legal services vendors in moving away from time-based billing is that doing so rapidly will likely impair profitability and, in a firm of any size, lead to departures and risk a ‘death spiral.’
- A challenge for many clients seems to be that it’s hard to get established vendors to move for the reason just mentioned, and the unhappiness often expressed only translates to a limited extent to moving to less-established vendors.
Nevertheless, many organisations are already making real changes on both sides of the market, and individuals are doing so in all sorts of ways, actively or voting with their feet.
Moreover, I would say there is a building frustration with the disappointments of past years, and a growing body of people determined to change things.
The broader economic, social, technological and market contexts are also changing.
Big questions, therefore, are whether change will be more significant in the coming years; and what that means for those who can’t or won’t change significantly.
The next post will consider the factors that I think will most influence this. The fifth and final post will draw some conclusions.
- Sloth photo by Javier Mazzeo on Unsplash
- Title of article inspired by Macbeth’s time soliloquy