Achieving a minimum of 1,800 billable hours per year per lawyer is one of the objectives required, mainly by law firms in Anglo and American jurisdictions based on the references we have consulted and, as well, in some Spanish firms. That figure varies depending on the office, and may even reach 2,200 hours per year. This price/hour system is being strongly criticized by customers, just in their original areas, demanding alternative and more transparent system of charging for services rendered.
In Spain the hourly rate is not the most extended pricing system. It is used, mostly, by the national largest firms and the international ones with offices here. However it is a system that is part of the range of pricing structures used and also, quite the preferred for law firms according to conversations with dozens of partners in recent years.
Who wins with the hourly rate system?
The general feeling is that billing by the hour, it is not possible to lose money because you are charging for the time actually spent on the matter. But if you observe a little more the dynamics of this practice we might find some surprises and will see that both sides, the firm and the client, are loosing something.
The client may be overpaying for inefficiencies in the execution of the matter, for work done by experienced lawyers when it could have been done by other professionals, etc …
But the law firms might not be collecting all the money it deserves according to the value delivered to the client, which may be well above the price encapsulated in an hour of work.
The value goes out the window
Imagine that a customer requires extra work that requires a level of specialization and expertise far superior to orders being made by the firm. Should we charge the same hourly rate? If the matter involves a more specialized or more seniority lawyer, the price per hour will also be higher, but how much higher can the hour rate be? ¿100 € more? ¿€ 200 more? ¿€ 500 more?
Consider another factor. If the lawyer who attends the more complex matter has a very deep specialization in similar topics, he will solve it in less time: the case will take less time to be executed.
Suppose the more specialized lawyer devotes five hours to the matter and that the hourly rate is 800 €. For that extra work he will charge the customer € 4,000, which is not bad, but is this the correct price for a complex issue that requires the intervention of our most experienced lawyers?
The more experienced lawyer will require less time in finding the right solution. Should this lawyer collect less money than a less experienced one? If the most experienced attorney allows you to solve an issue before, how many issues does he need to attend to meet his goal of 1,800 billable hours a year?
What the hourly rate does not measure
• What was the value that the client was willing to pay for this issue? An issue that required a high level of expertise.
• Would have he been willing to pay more?
• Was it an urgent issue? Perhaps he would have paid an extra for the priority.
These are issues that we rarely know when applying the hourly rate system. Chances are that the firm is leaving money on the table in this and many other matters.
If instead of an hourly rate a different fee system is used, at the moment we are having the pricing conversation with the client we will have the opportunity to learn the value we are providing to the customer and will be able to propose a more adjusted one, based on the factors listed above and many others.
Billing by the hour versus efficiency.
The combination of technical and human resources that we use to complete the tasks is an internal affair of the firm whose supervision and control must not be transfer to the client. The client will only be interested in this supervision task when you are billing by the hour, but actually this is an extra work the client has to do that adds no value to him.
The ultimate interest of our client is the result of our work, a job well done, efficient, effective, completed within the period set and the agreed price. In my opinion, and based on our experience in numerous consultancies performed, law firms are losing a lot of money using a billing by the hour system inherited from other industries and transferred to the legal industry, ignoring that what a professional sells is his experience, intellectual capital and its effectiveness in resolving a matter, not the hours it takes to do so.