The old joke runs like this: a client walks into a lawyer’s office and asks how much she charges.

“Three hundred dollars to answer three questions,” comes the reply. “Doesn’t that seem steep,” the client asks. “Yes it does,” the lawyer says, “and what’s your third question?”

Even when bills are based on more reasonable parameters, fees are a frequent source of friction between lawyers and clients. In today’s efficiency-driven culture, value for money is a critical factor. While clients may believe the right legal advice is priceless, companies are always ramping up the pressure to deliver cost-effective service.

For some firms, the response has been to abandon time billing. Yet the issue may be more nuanced than simply swapping one billing method for another.

The six-minute rule

The dominant form of fee model since the 1970s has been time billing, according to Dwyer Consulting founder Ted Dwyer. Under this model, fees are based on how long a firm spends on each task, often recorded in six-minute increments.

Yet Piper Alderman chairman of partners Gordon Grieve suggests time billing may punish a firm for working effectively.

“Often conventional hourly billing tells against the law firm being adequately recompensed for providing important legal advice in a difficult and time-critical situation,” Mr Grieve says.

From the client’s perspective, time billing can also have distinct drawbacks, including a lack of transparency, Mr Dwyer says.

“Time billing, if done poorly, lends itself to ambiguity: ambiguity in how the work was done, who did it and how long it took. It’s uncertain for the client,” he says.

Amanda Bodger, head of people and operations for Telstra’s legal team, suggests this lack of certainty makes it hard for clients to plan their budgets. As a result, she believes time billing is best suited to small, straightforward cases.

“If the matter doesn’t have to be scoped because it’s not a big thing – just a few hours of expertise – I think hourly billing is very efficient,” Ms Bodger says.

Mr Dwyer takes a different approach, arguing that time billing can be justified in complex matters requiring niche legal expertise.

“If you have a massive dispute that may cost the company tens of millions of dollars, or which is highly complicated or high in risk, then you’re usually going to go to the top of the market,” he says.

“They are experts with specialists and they’re probably going to charge you by the hour.”

He warns clients may not appreciate being billed by the hour for services that are becoming “commoditised”. By this he means advice where competition or other factors have driven down its value in the client’s eyes.

“It’s where clients start to use price as the determining factor in who they should give the work to,” he says.

As an example he points to conveyancing, which was once offered by all major firms charging by the hour. Today, he says, conveyancing is more likely to be performed on a flat fee basis at small-to-medium firms.

A set menu

In response to concerns about the hourly model, some firms offer alternative fee arrangements.

They can include a retainer, fixed fee or capped fee, or a mix of the options.

Retainers can be useful where the client has a constant stream of work but the volume varies each month, Ms Bodger suggests.

“It gives certainty of income flow to the law firm and also [costs to] the client,” she says.

Some clients may be put off at paying on a “take or pay” basis, where a small amount of work may cost the same as a large volume, Ms Bodger warns. However, she believes a retainer can work where the peaks and troughs average out over the year.

Another option is agreeing to a fixed fee for a given task. Mr Dwyer suggests this involves the law firm taking on a level of risk – they commit to completing a quantity of work, but won’t be compensated if it takes longer than expected.

In some cases firms may even renege on the fixed fee if work exceeded the expected parameters, which Mr Dwyer warns is likely to undermine the client relationship.

“If the firm puts up its hand and says ‘we got the estimate wrong, we have to charge you more’, then the key criteria – the certainty, the predictability, the accountability, the transparency – immediately starts to become more opaque,” he says.

Ms Bodger suggests a fixed fee gives the client clear budgeting guidelines, particularly with complex matters.

“You can scope it, you can work to the budgets you inevitably have and see what would be the most efficient way to handle the matter in that budget,” she says.

However, clients may also be wary of overpaying if the matter proves less complex than expected. As an alternative she points to a capped fee, where the client pays time-based fees up to an agreed-upon point, but not for any excess.

“Of course, the capped billing method is better for the client, not so much for law firms,” Ms Bodger says.

Another option, Mr Grieve argues, is a success fee, payable only where the client wins the claim – but he cautions Australian legislation may not allow success fees in some circumstances.

“The freeing-up of the market in the UK may be an example of the way forward in Australia to the benefit of lawyers and clients,” he says.

Reinventing the model

In practice, fixed fees and time billing tend to be tied to time and effort. Indeed, Mr Dwyer warns that in some cases, a fixed-fee estimate is just hourly billing by another name.

“You have to be aware that a lot of firms, when preparing fixed fee estimates, are using time to do that,” he says.

Some industry players have encouraged firms to decouple billing from hours altogether. Maria Polczynski, head of group, legal at Bendigo and Adelaide Bank, champions a pricing model based on value rather than time.

“We don’t think that one of your hours is intrinsically worth anything,” Ms Polczynski says.

“If what you are delivering is worth a whole lot more [than the cost of your time], then we accept that and will pay considerably more than the standard hourly rate.”

Under the bank’s model, the price of legal services is evaluated on a case-by-case basis, judged on the value lawyers are able to deliver to the client.

Ms Bodger emphasises that value-for-money is a key consideration for Telstra when briefing a firm. However, she suggests “value” can have multiple meanings – a million-dollar deal is not always worth more to a company than a $10,000 claim.

“If what you mean is we’re always looking for value from external providers, absolutely,” she says. “But it’s not just a question of ‘the higher the value of the matter, the higher the fees’.

Sometimes small matters raise trickier legal issues and need additional expertise more than the run-of-the-mill bigger matters.”

Mr Dwyer suggests value pricing has failed to live up to its hype, as few firms have adopted it. However, he praises the discussion it has sparked around pricing models.

“I don’t think as a pricing method that it is proven to match the rhetoric,” he says.“But I do think it’s always valuable to have a discussion about it.”

Pricing a la carte

Given the trends, some observers have been quick to proclaim the demise of time billing. Yet what might actually be on its deathbed is the “one size fits all” approach.

Mr Grieve believes clients are increasingly demanding a greater range of billing options that suit their circumstances.

“We are frequently asked to think innovatively about how we price matters or transactions, contentious and non-contentious, and respond to clients who seek alternatives to hourly billing in order for them to appreciate the value of our services to them,” he says.

Although corporate clients rarely choose a lawyer based on fees alone, Ms Bodger acknowledges it is a significant factor. Clients will not necessarily pick the cheapest lawyer, Ms Bodger suggests, but the best expertise for the right price.

“It’s not how [the firms] bill, it’s the value they can provide for the agreed-upon fees, whether it’s time billing, capped fee or retainer,” she says.

“We have an obligation to make sure we’re very efficient in our briefing practises and we get the best value for the fees paid.”

Mr Dwyer encourages firms to differentiate their billing methods between different practice areas, and even services offered by those areas.

He suggests firms identify premium services where billing is less of a factor for clients, and commoditised services where cost is critical.

Overall, however, he believes prices must be set in conjunction with the client.

“Each client values legal services differently and pricing is a complicated, client-lead discussion, where firms need to be innovative and imaginative in coming up with solutions that respond well to what clients are saying they need,” he says.

“It’s really about spending time with your clients to work out what they need and value the most.”