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April 2007

Why lawyers love hourly billing

One of the issues, which is repeatedly overlooked in the discussion concerning hourly billing, is the fact that many law firms prefer it. Think about it. Hourly billing is the perfect vehicle to obtain the first retainer check from a client. An average retainer ranges between $2,500 and $7,500. The hourly billing model allows the lawyer to focus on determining whether or not the client can come up with that initial retainer check without discussing:

  • What results might be achieved in the matter;
  • Whether the client will receive any real value from the legal services;
  • Whether the client can afford the next payment of money beyond the retainer;
  • What the plan or strategy is concerning the matter;
  • What the client’s goals are in the matter.

Hourly billing is the perfect model for avoiding any real substance concerning the client retention conversation. Many lawyers don’t know answers to many or any of the questions implicated above. It’s not that they are not smart enough to think of answers in formulate opinions. But it does take work and effort to define the legal project, set a budget and fully understand and appreciate client goals. The hourly billing method allows lawyers to be lazy. All they need to do is confirm that the client can come up with the initial retainer and sign them up to an hourly billing system based on the single premise that "I’m a lawyer and you’re not."

The best benefit provided by value billing is that it forces lawyers to not only think about the above issues but also define them for the client and obtain agreement and consensus with the client. Value billing shares the risk between client and counsel putting them in a partnership on the specific legal matter at hand.

Can you think of other reasons why lawyers love the hourly billing system?

What is Value Billing?

Value billing is a phrase which is often used in relation to professional services such as law. Value billing means different things to different professionals.

We are at a stage in our firm’s growth where hourly billing is becoming less and less apart of our model. While many of our legal projects are purely flat fee, we continue to do hourly billing on a modified and "value" basis. We always talk about and obtain approval on monthly budgets from our clients even on those matters where we are billing by the hour. On many matters, we agree to a maximum spend by the client or charge the hourly fee, which ever is less. This maximum budget or hourly fee approach ensures that the firm has the proper incentives to get the job done efficiently, but also caps the cost to the client for the services. A key part of this approach is documenting the tasks and deliverables, which are going to be performed by the firm on the front-end. Setting the client’s expectation by documenting those expectations is a key feature of our billing system.

The next step for us is to move more of our work into a pure "value-billing" system. This involves defining the client’s subjective goals, analyzing the value of obtaining those goals from the client’s point of view and putting a correlated value on the legal services driven by client value. Essentially, the client agrees to pay a flat fee over a period of time for a given project irrespective of hours. While this sounds traumatic to many law firms, let me assure you it is both achievable and preferable. It results in benefits for both the firm and the client.

When law firms start talking about hours and start focusing on results, good things happen. Lawyers can document and define legal projects upfront, measure the value to the client for those defined services and charge a defined fee for performing the same.

For those interested in taking a look at our firm's current "value-billing" statement, it is set forth below:

Value-Based Billing Policy

Some of Traverse Legal's customers prefer to be billed on a time-based system, where hours are tracked and billed to the client at a specific hourly rate.  Some cases are best suited for time-based billing.  Unlike most other firms, Traverse Legal does not bill for every activity and task associated with the handling of a matter for a client. 

The following is a list of items that we do not charge to clients:

·       Transmittal letters which do not contain significant legal analysis or recommendations.

·       Short phone calls that do not lead to immediate legal work.

·       Update or general information calls to or from client.

·       Any activity that does not add value to client’s immediate matter.

·       Any activity which deals with general information about the client.

·       Any activity which does not work towards resolution of the client’s problem.

Things that we do bill for:

·       Any activity which provides specific value to a specific client problem.

I would be interested in comments concerning this billing statement from the audience, please.  Does this statement comport with the billing model of your firm? 

Talking Value with Clients

One of the many evils and pitfalls of hourly billing is our tendency to talk to clients about hours. Clients don’t care about hours. Clients don’t care about hourly bills. Clients will never understand and appreciate the hourly billing system. The uncertainty of the hourly billing method is a big part of this perception. When a client doesn’t know what the bill is going to be until it arrives, the client is almost always left with sticker shock and the anxiety which comes from the unknown.

We project monthly budgets for our clients and get their approval ahead of time. This removes the sticker shock factor. It also means that the client has already bought into a monthly spend before the month begins. Many projects in which we handle are purely on a flat fee. Thus, there is no sticker shock because the price was set up-front.

With any billing model, we as lawyers need to learn to talk value rather than budgets and time. Subjectively analyzing the value of your legal services for any particular client is critical. This process involves understanding the monetary and non-monetary benefits that would come as a result of your involvement in the client’s problem. While we often dabble in such discussions, lawyers need to learn to prioritize these issues in virtually every conversation with the client.

By talking "value" with the client at every opportunity, you not only create a set of expectations but reaffirm the value of the services that you are providing. The moment this conversation becomes difficult, is the moment you should realize that you may not be providing the value which makes sense from the client point of view. This is the same moment you should revisit the project with the client and discuss whether or not your involvement continues to make sense.

One of the real detriments of the hourly billing system is that it drives the focus and terminology of law firms. The entire culture of the firm becomes "hourly billing." This makes it extremely difficult to instill a culture which focuses on the value proposition to each and every client of the specific services which are being provided by your firm.

Vacation Elation

Vacation Elation

I am back from my 11-day vacation in Florida with the family. My firm has been growing and expanding so much these last six months that several changes have occurred. As you know from previous posts, my brother Mark has joined the firm. He is now starting his second month. This has been a huge relief. I needed another "me" in the office in order to handle demand.

But for five months, I was being pushed beyond maximum capacity. This vacation was long overdue.

You never realize how bad you needed a vacation until you come back from one. My calmness and focus are at a completely different level than pre-vacation. It makes me realize how important it is to get away from the office, not only from a personal sanity point of view, but from a client service point of view.

How can we expect to service our clients if we are overworked? The pressures of being a worker at any level eventually build up. From our staff on up, vacations should be a key component of any firm’s client service model. Managers should be responsible for ensuring that their workers get the appropriate time away from the office in order to stay balanced, refreshed and motivated. In order to get 110% out of your team, you must ensure that everyone gets away on a regular basis.

Al, that means you buddy. We need to get you scheduled for a week vacation sometime soon.

Michigan Threshold of Death

One of the fascinating things about having a website that has high traffic is seeing the search terms that find their way to your site.  For instance, I noticed the other day that the website logged number two on Google with this search query: "Michigan threshold of death." 

I don’t know whether to be shocked, amazed or proud.  Regardless, these types of oddball search results remind us that (1) content diversity is important on our web sites and (2) the power of Google is truly staggering. 

We should never underestimate that many people find our websites as a result of putting in non-obvious and even strange search terms.  We should never forget that content is key.  We should never forget that the diversity of search words is as important as the density of obvious key words.  You aren’t blogging if you aren’t generating lots and lots of vertical content. Get blogging!  Ignore my message at your peril; I am the Michigan threshold of death!

What are your strange keyword results?