We don’t have billable-hour targets in our firm, because if your reward is based internally on how many hours you bill, then what is the incentive for you to do it efficiently? It’s counter-intuitive.
Momentum towards value-based billing is growing as clients demand greater transparency from law firms and lawyers seek a more fulfilling way to work.
It’s been linked to law firms fudging bills, lawyers charging for trivialities, and unrealistic staff workloads. Still, time-based billing remains standard practice in Australia. However, change appears to be on the way, with a growing cohort of law firms using alternate billing models that are proving increasingly popular with clients and lawyers.
Fees measured by outcomes, not time
Law Squared founder Demetrio Zema is one of the players at the vanguard of the current move to alternate billing. His firm, founded in 2015, uses a project-based fee model.
Zema says this model addresses a big systemic problem with billable hours – cost uncertainty.
“Sure, there are potential clients that we haven’t won because we haven’t been able to conform to the old model, but there are so many more clients that we win because we are able to offer cost certainty when other firms can’t,” he says.
The former litigation lawyer says despite the firm’s novel approach to billing, Law Squared’s offering has proved popular with a wide range of businesses, especially technology firms.
“Across our technology client base, our ASX cohort, our mid-market and early stage high growth businesses, we really see clients who are coming to us as a firm and moving away from
traditional mid-tier firms because we are able to offer that cost certainty.”
Another big plus, according to Zema, is the positive impact of value-based billing on his 22 staff in Sydney, Brisbane and Melbourne. To that end, he says his firm “fundamentally won’t charge” by the hour because he doesn’t want his people to be held accountable to the billable unit.
“We want them to be measured by outcomes achieved rather than the hourly rate,” he explains.
“We can have a much more wholesome conversation around performance that’s about more than finance. We look at all the areas of someone’s journey in the business.”
As a result – simply due to the firm’s approach to fees – the culture at Law Squared is “inevitably more conducive to a much more collegiate and less competitive environment” than a traditional law firm, he says.
“People aren’t worried about hitting their own billable units. They’re trying as a team collectively to share a target, so there’s greater value in the team working together.”
Value-based quoting a hit with grads
Griffith University Law School Dean Therese Wilson echoes these sentiments, saying alternate billing is proving a more rewarding way for many young lawyers to work.
Indeed, Wilson says she’s noticed many of the “current generation” of new lawyers – graduates from the last decade – gravitating to so-called “New Law” firms for this reason.
“I think one of the negatives of legal practice and one of the things that causes lawyers to become dissatisfied with the nature of legal work is the lack of professionalism with time-costing – billing in six-minute increments, you become a bit like a machine,” she says.
By contrast, Wilson says fixed-price quoting means both lawyers and clients can more easily “know where each other stands”, leading to better outcomes.
“You’re able to put the time in that you need to a matter and get a sense of satisfaction from doing a good job,” Wilson explains. “It becomes more of a professional undertaking rather than a clock-watching undertaking, which gets depressing.”
Legal services a buyer’s market
It’s not just young lawyers who seem to be fans of value-based pricing. The emerging model also appears to be gaining widespread traction with legal services customers, according to Westpac’s recently released Smart Industry Report.
The bank’s report – a snapshot of current trends across the professional services sector – points to a rapidly developing “buyers’ market” for legal work in Australia, which it suggests is accelerating a shift to value-based pricing.
“The movement toward value-based pricing, which has been growing in recent years in the accounting industry, for example, is now picking up a decisive pace in some law firms,” the report, released late last month, says.
The big driver behind the pick-up in demand for fixed- and project-based billing, it says, is the so-called “uberisation of lawyers”, which is prompting firms to change billing practices.
“With fixed fees, you can now compare lawyers through online reviews and digital profiles, and this shift in supply and demand is creating the opposite incentive of billable hours.
“If a lawyer tells a client what they’re expecting to charge them, the onus is then on the law firm to improve efficiency – or they lose out and it comes out of their pocket.”
The report also points to several recent collaborations between traditional firms and legal disruptors, many of which use alternate pricing, such as Gilbert + Tobin’s deal with Legal Vision and DLA Piper’s partnership with Lawyers On Demand. It also noted Norton Rose Fulbright’s “strategic alliance” with LawPath that will see the pairing offer “standard fixed-price services online to small and emerging businesses”.
Katie Richards, of fixed-fee online law firm Virtual Legal, backs Westpac’s conclusions. She attributes the growth of her business to customers wanting more transparency around the cost of legal services – just like other products and services in today’s digital world.
“The number one thing for us is absolute transparency,” she says, adding that greater flexibility and customisation on pricing are added bonuses for clients who in the past were used to suffering “invoice shock” when dealing with firms that bill hourly.
Richards explains: “We say, ‘This is what the price is, this is what it includes.’ But if clients then contact us and say, ‘We can do, say, the lease part ourselves and you do the other bits’ then we’ll say, ‘If that’s the case then we’ll make the fee this much’ and agree on a different fixed fee for the transaction”.
In addition, she says there’s a greater trust relationship established with clients from the get-go, which is created by her firm’s fixed-fee offering.
“Because prices are listed on the website, we basically just have to make it work for the client,” she says.
However, the Queensland-based lawyer concedes that getting her fixed-fees right has involved “a lot of trial and error”. This included, in the business’ initial stages, setting prices that were way too low because of underestimating how long legal tasks would take.
“We ran a bunch of losses and we had to go through every tiny part of each transaction to look at if it could be done at a lower level salary point, while maintaining quality.”
Systemic issues with billable hours
Like Richards, Peripheral Blue founder Mellissa Larkin is not a fan of billable hours. Larkin, who refers to her firm’s method of billing as a “subscription model”, says that after 20 yearsat big firms it was clear to her that billable hours weren’t serving clients.
“We just got rid of all of that,” she says. “We don’t have billable-hour targets in our firm, because if your reward is based internally on how many hours you bill, then what is the incentive for you to do it efficiently? It’s counter-intuitive.”
According to Larkin, time-costing, in addition to not working for clients, also leads to unwanted behaviour inside firms that fosters toxic culture.
For instance, she says even though there may be someone inside a firm who’s “advised on a particular point loads of times and may be able to handle it much quicker”, time-billing often means you decide to keep the work yourself “if your billable hours are down”.
“There’s also the fact that if you hand your client over to someone else, even for a discrete piece of work, you might not get them back, so it creates a cultural problem,” she adds.
I don’t think there’s going to be a massive change. It’s still there and it’s going to continue to be the main way that lawyers [are] remunerated. Clients understand it and it’s easy to record.
Fixed fees and millennials
Tomoyuki Hachigo, co-founder of Sprintlaw, which operates online on a fixed-fee basis, is another innovator with pricing transparency as a key drawcard of his Sydney-based firm. Hachigo, who established the firm in 2017 with fellow ex-corporate lawyer Alex Salo, says his mostly small and medium-sized clients are surprised that, unlike most other businesses, many traditional law firms don’t have prices featured on their websites.
“For our target market, millennial founders and business owners, they want the same experience they get buying anything online. But in terms of getting legal services, we realised there wasn’t a packaged online experience,” he says.
“We found that they ended up going with a lawyer who they found through a referral. What that means is that people are starting their searches online, or on Google, or some online forum – but there wasn’t that added digital buying experience.”
While his firm has gone some way to address this need in the market, there’s more room for improvement from the sector as a whole, he says, especially when it comes to fees.
“Even today, there is usually not a clear path to the question, ‘How do I get legal services?’. It’s usually a website with a page that says, ‘Here are our lawyers, these are the areas of law we do, and then if you want to enquire send us an email or call us’.”
Sprintlaw aims to simplify the process for customers, according to the co-founder. He says it offers around 100 legal products on a fixed-fee basis, adding that a key to the firm’s success is only to list products that he terms “predictable”, so costs don’t blow out.
When it comes to the services the firm offers, it’s “anything from starting up a business, drafting a contract, shareholder agreements, service agreements and employment contracts”.
The company doesn’t do disputes, he notes, because it’s an area that’s more difficult to price up-front. “With us, it’s like you’re getting a tailored suit – it’s always the same price.”
Time-based billing not dead yet
While there are no doubt moves away from time-billing, industry veteran Rob Bryden of Robert Bryden Lawyers says there has been similar talk for “many, many years”.
Bryden, who pioneered the “no-win, no fee” approach to handling compensation matters, recalls former NSW Chief Justice Jim Spigelman making “front-page news” when he once spoke out against time-billing while in office.
Bryden says despite that high-profile call, nothing much happened and time-billing remains “a reasonably fair way of remunerating lawyers”.
“I don’t think there’s going to be a massive change. It’s still there and I think it’s going to continue to be the main way that lawyers will continue to be remunerated. Clients understand it and it’s easy to record,” he says.
The industry veteran warns upstart firms about charging fixed fees when it comes to litigation in situations where you might “settle early, or you might end up in the High Court”.
“It’s pretty hard to predict how long a piece of string is.”