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Legal Insights: Billing for legal services when time is no longer the measure of value

Legal billing

 

This article is part of Hunit’s Legal Insights series. We’re sharing some of the key learnings that we’ve gained from in-depth interviews with legal professionals across multiple international markets.

We’ve called our series of in-depth interviews with law firms and financial service providers our “listening tour”.  Using a standardized set of discussion questions, we set out to gather systematic insight on the legal professional’s day-to-day operations, their problems, their concerns and of course their understanding of DLT and smart contracts.

One of the listening tour’s key discussion points concerned billing methods in an environment when a lawyer’s ability to create value for the client is disassociated from the use of their time (billable hours). In an increasingly technology-enabled environment, what does the law firm of the future’s customer invoice look like?

Outside of technology pressure, external research shows that the hourly billing model has created significant reputational challenges for the legal industry. According to a recent legal trends industry report, the majority of clients believe that lawyers are overcharging them. Indeed, the egregiousness of lawyer’s fees is so commonly the subject of jokes that the jokes themselves have become cliché. However, the same report also cites data indicating that the average lawyer only logs 2.2 billable hours per day. Contrasting the value that the legal industry collectively provides to its clients and the moderate average daily billing rates against its overwhelmingly poor reputation, its easy to wonder if the current billing model has functioned well in the past, let alone the future.

Is there a model that allows the legal industry to charge appropriately for the value they create, even if part of the value is driven by technology, while simultaneously fostering a more transparent and positive relationship with clients?

Unfortunately, our listening tour didn’t provide a one-size-fits-all answer – only that there is broad agreement amongst professionals that their billing model is due for an overhaul and there this is a plurality of approaches being tried. In fact, nearly 50% of our interviewees offered no insight into new models at all, instead choosing only to acknowledge that the problem exists and needs to be addressed.

Of the interviewees that discussed some of the new models that they are experimenting with, there was a clear trend towards linking value delivery and cost in a way that increases the transparency and predictability of fees.  Day rates, team rates, fixed fees per deliverable and even service rate subscription fees were discussed. While not included in our listening tour, the Danish law firm Dahl believes that these new models outperform hourly billing. In a recent interview from legalTechWeekly, their managing director said: “Typically, in order to make money in this pricing model, you have to agree on a fixed scope and price, and subsequently be able to lead a project. To be able to disrupt our own business model we involve lawyers, accountants, project managers and even programmers, thereby improving Dahl’s ability to manage matters and projects and reduce financial shortfall caused by bad planning.” We at Hunit feel that this can be summarized as a shift from “fees for expertise” to “payment for solutions” and that this shift is perhaps being accelerated by the increasing role of technology in a solution structure, but is ultimately customer demand driven. Going back to the question of value for money, any hourly fee seems expensive when it doesn’t bring the client to their destination, which is a solution to their need.

How will the arrival of DLT and smart contracts further drive the evolution of industry billing practices? Natively digital agreements promise to automate many of the execution tasks that keep junior associates busy (and billing). This automation creates clear value for the client, and the automation is originally set up by the contract’s author (presumably a lawyer), but will a client accept continued costs based on intellectual property (the contract) that was created and billed for previously? Or, is there a possibility of lowering upfront client costs through small ongoing charges every time a digitalized agreement performs an action?

Adding further pressure, a whole cohort of startup companies is dedicated to helping clients optimize their legal spending. New York based AI firm Bodhala recently raised $10 million to further its goal of an AI driven legal marketplace that analyzes, rates and reviews law firm invoicing. In an interview with Crunchbase, co-founder Raj Goyle stated that: “We have built algorithms that when a law firm puts invoices through the software, it gives them insight and analytics on things such as why so many lawyers are working on a case, why they chose an expensive law firm or why they paid that hourly billing. Our database helps companies understand what is wrong with what they are spending and how to correct it.”

Reflecting further, regardless of technology, billing by the hour is an ineffective way build a healthy relationship as it disconnects the unit of cost from the unit of value. If a client needs a solution but is paying for time, how can they be assured that one will translate into the other? Further, hourly billing creates an inverse result for a lawyer who’s invested heavily in skills, knowledge and productivity management platforms. If they can provide a better solution in one hour than a competitor can in three, the less efficient lawyer has captured more of the value they’ve created than the better lawyer has.

Instead of tidy conclusions, we can only offer some trends for your consideration:

Will technology continue to expand as a part of legal deliverables, and will this drive pressure to evolve from the hourly billing model?
– Both external research and our listening tour is unequivocal

Will customer empowerment platforms further drive billing model evolution?
– We’d bet on it.

Will the law firms themselves lead the evolution?
– Hard to predict at this stage, but it’s looking increasingly possible that the client (and their helpers) will lead the way.

Can the evolution of billing models (regardless of who leads it) result in a better business environment for the legal profession?
– We think it’s an unanticipated opportunity – imagine what value-based billing would to do the culture of a firm driven by an unrelenting need to bill hours.

Can the evolution of billing models open the door to new levels of customer alignment?
– We’ll miss the jokes about lawyers and Rolexes.