A New Billing Model

19 Oct ’05

Jacquie McNish has a strong article in the Globe today outlining the drift away from the straight billable hour model that we have been seeing for a while in law in major markets in Canada, and presumably over a longer period in the U.S. This is a natural evolution of improvements in technology that allow tracking and comparing legal costs in greater detail, and presumably also a reaction to escalating legal costs in the major markets in Canada, particularly Toronto.

We’ve seen more and more written about cost issues in recent years, and concern seems to be accelerating. Bruce MacEwen posted some interesting thoughts from Jim Taronji on this earlier this week that focused on the role that project management techniques could have on the profession:

Eventually, the “billable hour” will go the way of the Model T (just a curious novelty from the past). Why? Because that’s what corporate clients really want. They want certainty in billing because that’s what they need for internal budgeting purposes.

Law firms will continue to resist until they are forced by their large corporate clients to accept it.

The smart law firms will get ahead of their clients and accept (dare I say, “offer”) flat fees for each project, with a “change option” for unplanned situations.

Professional service providers do this now with a detailed “Statement of Work” that is created by the service provider and the client. It lays out what will be done and when, the number and level of human resources devoted to the project (times the number of hours each person will devote to completing the project, times their hourly rates), and additional costs (travel, copying, etc.). The end result is a budget that is agreed on by both sides. Any changes to the “assumptions” will result in a change in the final cost of the project.

One of many interesting angles to this approach is the opportunity it presents for firms that are more sophisticated in their job estimation and project management – they would prosper, while those who aren’t would quite rightly suffer.

I wrote (less elegantly) about the same topic a few months ago in a letter to the Editor of the National, a CBA publication, that appeared in the June 2005 issue after an article in the March issue on changes in the billable hour model. (It’s a little guttural, coming from an email that I had sent the editor).

What’s difficult about this issue now is that the management and compensation structures of the firms do not really lend themselves to being that responsive to these concerns in the here and now. The senior guys presumably want to hang on to the halcyon days of NY billing rates and Toronto overhead, and squeeze as much out of that as they can until they either retire or go inhouse to get the big pension; tomorrow is presumably not much of a concern. The younger guys have a future to think about, but don’t have the influence that they need to in order to rework business models for the new reality.

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