Firms still paying for time billing

More clients are requesting fixed-fee pricing, but firms keep investing in new ways of capturing time, a new study has found.

Leanne Mezrani • 05 November 2014 • SME Law

The percentage of large law firms with more than a quarter of their clients requesting an alternative fee arrangement (AFA) has almost doubled since last year.

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While firms are more likely to invest in systems that support AFAs this year, 43 per cent are also investing in systems that capture more billable time.

These findings are from a study conducted by legal software provider Aderant, which interviewed 227 firms in 13 countries, including Australia. More than half of the respondents represented firms with 50 or more lawyers.

Legal consultant and former Maddocks managing partner John Chisholm (pictured) told Lawyers Weekly the report confirmed that many AFAs are “billable hours in drag”, with firms continuing to spend money on technologies that track time, such as mobile apps, to inform their so-called fixed rates.

Chisholm said the trend is symptomatic of the slow and reactive approach to AFAs taken by Australian law firms.

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“Most firms don’t want to change the system unless they’re being made to, let’s be frank … it’s somewhat disappointing but understandable,” he said.

A mistake that many firms are making is “trying to be all things to all people” by offering a multitude of AFAs alongside time-billing, continued Chisholm.

He said firms need to be “courageous” and dump timesheets altogether.

“Firms that have been more successful and even more profitable … say, ‘we can offer clients different options, but hourly billing is not one of those options’.”

Under pressure

The Aderant study suggests that pricing pressures influence technology spending decisions.

Almost three quarters (74%) of firms feel increasing pressure from clients to lower hourly billing rates. Among these firms, the two most frequently cited IT spending initiatives are systems to automate processes and workflows and tools to improve the productivity of lawyers and timekeepers.

Productivity gains, however, do not necessarily translate into higher profits for firms that are hanging on to time-billing, claimed Chisholm.

“If I come up with something that allows me to do something in an hour that would have otherwise taken me five or six hours and I was charging my clients by time or by the hour, that’s dumb isn’t it because any productivity gains I’m losing in profit,” he said, adding that more firms are appreciating that investing in technology that results in greater efficiency reaps rewards under a fixed-fee model.

The report also revealed that large law firms are seeing more requests for AFAs than small and mid-sized firms.

Chisholm said general counsel, who tend to deal with large law firms, are driving demand for AFAs, while small business clients are often unaware of the AFAs available.

Raj Saturday, 06 December 2014

I am a patent attorney based in Perth. In my experience, fixed price service is great for clients, however for such cases scope of work needs to be outlined carefully. Invariably in most cases clients try to push more work in the same fixed price.

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Rob Millard Friday, 05 December 2014

Joe nails the real issue here. Most AFAs are not so much billable hours in drag as fixed prices in drag so it is essential that law firms understand how many hours typically go into each component of a matter, so they can accurately price that matter. Yes, obviously there's a measure of unpredictability but firm's need to understand the range that has applied to similar matters in their experience and what generally causes each component / step to take longer or shorter (i.e. cost the firm more or less) so that they can better understand (a) where they need to become more efficient e.g. by sourcing individual components differently and (b) where they need to allow for contingencies in their letters of engagement. So, it is probably more accurate to say that law firms are investing in technology to capture time "more accurately" or "in greater detail" or "more comprehensively" than simply to suggest that they are trying to capture "more time."

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Joe Reevy Saturday, 15 November 2014

Time capture has nothing at all to do with the selling price of services (or shouldn't do) except in the long run - in the sense that a firm must cover its costs and make a profit to survive.It is about understanding costs. Let me give you an example that makes it clear. It is representative of how Our business (<a href="Words4Business.com" rel="nofollow">Words4Business.com</a>) sells content to law firms. We sell it on a price per service unit basis...like your supermarket sells you cans of beans. Because it is an intellectual product, the cost of producing it is (like the delivery of legal services) dominated by the direct cost of production - the time one of our highly qualified court reporters spends writing it and the time our expert editors spend editing it. Those don't affect the selling price one iota.Why therefore record the time? Because the information that gives us about the cost of our product lines vs the income from them informs our strategy.People costs typically exceed all other costs put together in a law practice...by some margin. To improve profit, the easiest way is to increase gross margin, which means (usually) doing 2 things. 1. Looking at pricing more efficiently. 2. Looking at reducing process cost. It is this latter cost that is dominated by people.A quick point on retainers. I always found the way to make retainers work was to control the cost of the service provided to ensure in the medium/longer term the income exceeded that. The easy proxy for this is time. If you know your time costs for doing the work, and cost of servicing a client (this includes indirect servicing costs, such as the admin cost of the account maintenance), you pretty much have your variable costs nailed.Using documents delivered is fine, but you still need to know costs: a client who wants 5 documents but spends 2 hours of your staff time to decide which five is less profitable than one who just orders them and pays.Similarly, we have found that our clients who do not use standing orders take, on average TEN times the administration time of those that do: they just need a receipt on payment. So, we charge 'account' clients more.

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Ivan Rasic Friday, 14 November 2014

I also agree with John that a good part of AFAs are merely an hourly-based billing in a drag.Take the Subscription fee arrangement for instance. Depending on what law firms let their clients subscribe to, this structure can actually be selling hours in disguise at a discount (i.e. if you buy 10hrs per month, you get these at the 20% off the standard rate).However, subscription can also be "product-based" in which case a law firm obliges to deliver certain volume of products to its customers over the subscription period. E.g. a plan of $1,000 per month can get you 5 drafts of XYZ documents, or other types of legal products.The latter case is far better than the former, for both law firm partners and their clients.Namely, clients do get the value they expect with the most certain predictability (contrary to merely getting hours which do not guarantee any result). Partners, on the other hand, have a model which is far more scalable and, if delivery process is manged properly, much more profitable as well.Thanks for the article, great insights. Ivan

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Thomas Pambris Wednesday, 05 November 2014

In my capacity as solicitor director of Pambris Law Pty Ltd : its is incumbent to remember correct value alignment ought to be fore-mostly at the hands of an officer of the Supreme Court NSW, as our duty is to the Court.Given the Legislative Scheme protecting clients on a cost assessment basis, a bona fide client (seeking bona fide value for legal services rendered) not seeking to 'win' against the firm ought to be content with milestone guidance where appropriate on the basis of a genuine pre-estimate of the usual scheme of time/cost billing and insured risk.I state this Law Firms concluded view not out of discourtesy to its clients or a lack of understanding of the unavoidable pressures brought to bear in managing corporations needing to budget legal spend/lender and insurance risks (EBITA) but on the very premise that it is our relationships with key hard working and diligent clients that might allow us to 'notional fix costs' which can also bring any law firm undone as against novice (or sharp profit seeking behaviour) of new clients or different instructing parties in the case of larger entities.

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