Learning that his obituary had been published in the New York Journal, American writer and humourist Mark Twain famously quipped: “The reports of my death have been greatly exaggerated.” The remark could equally apply to the status of the billable hour, the standard used to charge for legal services.
Despite the column inches in the legal press devoted to its demise, the billable hour lives on. Talk of its death, says Michael Davison, global head of litigation at Hogan Lovells, is “premature” but, as Tony Williams of consultancy Jomati notes, it is coming under pressure.
As the clamour to drive down costs, control budgets and increase transparency and certainty has intensified, the appetite among clients and general counsel for more nuanced pricing structures has grown.
Fixed fees are a popular alternative. For some types of work at Charles Russell Speechlys, says managing partner James Carter, they have become the norm to such an extent that there are “discrete parts of the business that no longer record time”.
Despite the column inches in the legal press devoted to its demise, the billable hour lives on
Colin Brown, chief financial officer at Addleshaw Goddard, gives a run-down of what’s on offer across the board, from capped and contingent fees to volume discounts, variable prices for different aspects of a transaction and fees based on a percentage of transaction value.
Pinsent Masons have long-term agreements with infrastructure business Balfour Beatty and energy company E.ON to provide all their legal work across certain categories for a set price, says chief operations officer Richard Masters.
VERSIONS OF PRICING
Richard Burcher, managing director of legal pricing consultancy Validatum, presents a dazzling array of pricing options. In addition to the old favourites, there is “peak-load pricing”, where price is influenced by when the work is required during the calendar year. Then there is “versioning”, giving clients a choice of the legal equivalent of first-class, business-class and economy-class service, and “subway pricing” where the client builds their own menu and urgency premium trade-off, to name but a few.
Despite this veritable smorgasbord, it seems the billable hour will always be on the menu and as Paul Rawlinson, managing partner at Baker & McKenzie, notes it operates as a “sense-check” against which to assess other options.
While most agree it is up to firms to innovate, general counsel must play a role, says Mr Burcher. Too often, he bemoans, they default to a request for discounts off headline hourly rates.
Law firms and barristers now bill clients in a variety of ways
Alternative fee arrangements reassign some of the costs risk to the law-firm suppliers. And technology, in the form of case management software, plays a vital role in helping manage that risk and ensuring the price is right. Getting it right, says Mr Masters, requires an analysis of data on past cases to map cost drivers.
Technology, he says, also assists with the efficient execution and monitoring of work. Automisation and standardisation of processes keep down costs, as does on or offshoring implemented by firms such as Baker & McKenzie, which last year opened a second dedicated global service office in Belfast.
The management information provided by IT systems, says Mr Carter, enables an analysis of whether the pricing adopted has been effective and, as Tim Aspinall, former managing partner of DMH Stallard, points out is a valuable means of demonstrating the value of work to clients.
Itemised e-billing, which Mr Brown notes is increasingly demanded, enables firms to collate a rich data set to learn from to help improve efficiency.
In the United States, the role of the “pricing officer” has emerged as firms take a more analytical approach. A survey last year for AML Legal Intelligence showed that three out of four large firms employ a dedicated pricing professional. The trend has yet to catch on at UK firms, although Mr Brown notes most have individuals and teams to facilitate and control pricing.
In the United States, the role of the ‘pricing officer’ has emerged as firms take a more analytical approach
There is general agreement that surety of pricing is achievable in most cases, providing, as Mr Carter says, work is scoped accurately and agreement made with the client about what they want, by when and an assessment made of the risk of overrun, particularly the unknowns.
The world, adds Mr Davison, is uncertain and the important thing is to maintain honest conversations throughout the process, so there are no surprises.
It is clear that pricing will become more and more important and, predicts Mr Burcher, those who master it will inherit the Earth.
VERSIONS OF PRICING
