Are flat fees replacing the billable hour?  

Dylan Brown explores the pros and cons of alternative billing structures

Law firms have traditionally based their fees on a set hourly rate, dividing each ‘billable hour’ into 10 increments of six minutes and submitting their invoices to clients accordingly. However, there has been a trend over recent years towards introducing alternative fee arrangements as a replacement to the billable hour.

Alternative billing structures

One of the arguments against measuring work according to time is that it stifles innovation and efficiency. In particular, the automation of certain legal processes by legal technology could essentially reduce the overall client bill because time spent by fee earners on client matters is reduced.

Obviously, this frees up the time of lawyers to spend on other tasks but that doesn’t necessarily improve profits and may actually reduce profits when you take into account the IT expenditure.

Stephen Denyer, director of strategic relationships at The Law Society, notes this paradox: “One of the basic aims of law tech is to speed up tasks, which doesn’t really help your profitability if you’re still sticking to billable hours, so firms are still coming to terms with how to feed in the law tech element.”

Conversely, if fixed fees are the primary billing arrangement, firms may be encouraged to invest in tech and enhance efficiency, to maximise their profits.

Technology aside, there is an argument that targets linked to billable hours can lead to stress and burnout among fee earners. One senior lawyer in the UK claimed that: “The billable hour is horrible from a mental well-being perspective because you always have this general level of anxiety and stress.”

Benefits of the billable hour

Some types of legal work are, by their very nature, difficult to quantify in terms of time and resources which may be required. There is a danger that, if a firm agrees to complete an open-ended task for a flat fee and underestimates the cost, this may result in significant financial losses.

Commenting, Denyer says: “if you’ve got a major, multi-party M&A transaction or a restructuring or a bit of litigation that could go in lots of different directions, you’ve got no realistic way of knowing what elements there are going to be and therefore what you ought to charge for them.”

In this scenario, it’s generally wise to stick to a billable hour arrangement, to ensure the work is profitable irrespective of the amount of time it ends up taking.

In terms of well-being for lawyers, despite the aforementioned claim that billable hours lead to a culture of overwork, flat fees can arguably result in even more stress by imposing de facto time limits. Instead of simply spending as much time as it takes to complete a client matter, lawyers working on a fixed fee basis are expected to minimise time spent in order to maximise efficiency; this can add more pressure and potentially even result in lower quality work.

Billable hour’s future

Although the legal sector is certainly moving away from strictly time-based billing and increasingly experimenting with flat fees - especially for in-house clients with routine work - it’s probably too early to call time on the billable hour.

It’s likely that the uptake of alternative fee arrangements will be initially driven by client demand, with a recent Bloomberg survey showing 85 per cent of law firms which offer alternative billing structures do so as a result of client demand.

In the long term, the adoption of more sophisticated technology which leads to time savings and greater efficiency may result in firms encouraging or requiring their clients to agree to fixed fee contracts - in order to maximise their profits.

However, in the case of open ended or urgent work the billable hour will probably continue to operate as the primary billing method, particularly where a hands-on approach is required.

Dylan Brown is content lead at LexisNexis UK lexisnexis.co.uk