Legal fees on trial

How lawyers charge clients is changing, but the billable hour refuses to die, as Edward Fennell reports

For years the legal world has debated the future of the hourly-rate as the controversial basis of charging for legal services. And as the war on price intensifies so does pressure on the billable hour.

Tony Williams of consultancy Jomati is emphatic: “I’d love the billable hour to die like a vampire with a spike through its heart, but no one has yet been able to kill it off.”

So billable hours survive, but only perhaps as a convenient fiction. As Professor Laura Empson, director at the Cass Business School centre for professional service firms, puts it: “There are three forms of fudge around the billable hour. First, what the lawyer records – that is rarely accurate. Second, what the manager chooses to bill – that is going to be a value judgment on the work done. And, third, how the client sees it. They rarely believe the number of hours they’re told.”

In effect, the billable hour has become a convenient way of disguising complex legal pricing. Simon Hodson, senior partner of DAC Beachcroft, points out that less than 50 per cent of his firm’s revenue is now based on charging by the billable hour.

“The debate is not really even about price any more,” he says. “It is about value. There must be a correlation between what lawyers charge and how the client benefits. Once you start thinking about value, then you start to make sense of the way clients now want to buy legal services.”

Lesley Wan, corporate real estate counsel for Lloyds Banking Group, sums it up well. “Price is only one element of value,” she says. “Value also includes elements such as quality of advice, relationship, approachability, willingness to engage and commitment to supporting the business.”

So across all areas of the legal market there is more to pricing than billable hours. That is why most progressive law firms are now offering a flexible menu of options to their clients. Mark Shillito, head of disputes, offers a run-through of the choice which he presents to Herbert Smith Freehills’ clients. “We offer a choice of hourly rates, discounts on hourly rates, discounts for volume work, fixed fee for some types of work as well as conditional-fee agreements and, the latest option, damages-based agreements,” he says.

Flexibility combined with clarity is now the key. Mr Hodson says: “Clients increasingly want to unbundle work to see how it can be done most cost effectively and by whom.” Clients no longer accept that simple, routine tasks, which are done by a junior lawyer, should be charged out at the same rate as work which is much more complicated.

I’d love the billable hour to die like a vampire with a spike through its heart, but no one has yet been able to kill it off

A good solution has been developed by Balfour Beatty which has a retained-services agreement with Pinsent Masons. The firm is guaranteed most of the company’s work for a three-year period and at an agreed total price. “We get a variety of benefits including predictability, discounts, in-house secondees, training and a commitment to continuous improvement,” says Chris Vaughan, Balfour Beatty’s in-house counsel.

Even so, there may be exceptional pieces of work, such as particularly complex or unusual litigation, where Mr Vaughan decides to go elsewhere. Trying to control the unpredictability of these mandates is not easy, as Peter Stewart, partner at Field Fisher Waterhouse, says: “Uncertainty and risk are an inherent and unavoidable part of litigation.”

And if the risk is significant, it may be that the billable hour will be summoned back into action. Not least, as Mr Shillito points out: “Because when it goes to the tax office, that is what they want to see and understand to decide if the fee is fair. If it’s a fixed fee, then they have no way of measuring it.”

Nonetheless fixed fees are increasingly popular where non-contentious work is concerned. “Our transactions in the corporate real estate business are generally carried out on a fixed-fee basis in the current market where borrowers are very cost conscious and want fees to be agreed upfront,” says Ms Wan.

David Howitt, head of legal and compliance at Xoserve, uses the Lawyers on Demand “On call” service because it gives him absolute certainty on costs. “Since we buy Lawyers on Demand’s services for a pre-agreed monthly fee, we have found a way to reduce our legal costs while increasing efficiency,” he says.

Often it is clients’ procurement departments which put pressure on in-house counsel to get a grip on legal expenditure. That has led to reverse e-auctions where lawyers bid against each to offer the lowest price for a piece of work. Clients then go with the cheapest offer without assessing whether the “winner” has the skills or experience for the job.

“It’s based on the idea of standard commodity work without taking account of quality at all,” says Richard Masters, head of client operations at Pinsent Masons. “You might get the cheapest price, but it will cost you more if the work is done badly.”

Increasingly a way of reassuring clients about costs is by providing billing information via an extranet. “We have developed a bespoke extranet solution for clients which allows them to view information on case tracking and billing in real-time,” says Natalie Griffin, chief operating officer at business law firm DWF, which recently won an award for best managed firm. “It’s proving very popular and is used by over 100 clients,” she says.

Whatever approach is adopted, however, key advice comes from David Kerr, chief executive at lawyers Bird & Bird. “We make a big effort to clarify from the start exactly what services are provided and how they will be charged for,” he says. “The big thing is that there should be no surprises.”