For ages, lawyers and firms have been charging clients by the hour. What started off as a convenient method for billing legal services became so common that using any other fee structure was unheard of—until today.
Billing by the hour is on its way out as more and more buyers opt for cost-effective solutions over paying expensive fees for quality, although that doesn’t mean they’ll settle for mediocre work.
The rise of technology does not make it easy for firms either. Alternative legal service providers are competing (and winning) against lawyers in acquiring clients with sophisticated platforms and affordable services. Corporations are even using AI and machine learning to automate routine tasks that lawyers used to do.
Why is this happening and what can lawyers do to make the best out of this situation?
Demanding clients and hourly-billed projects don’t mesh well. Consider this situation; a firm bills its client for 40 hours of legal work, to which the client responds by questioning why does it take that specific amount of hours to finish the project.
Many firms don’t have an answer simply because they’re accustomed to approximating how long a case would take to finalize an invoice. Clients then lose confidence as they’re forking out tons of money without knowing what they’re really paying for, causing them to seek firms with greater transparency in their costs.
While being able to clearly break down and explain a project’s fees is an advantage, it is still a problem.
When you reveal your firm’s costs to clients, you’re actually letting them decide your firm’s income. Transparency is a good thing, but when clients know the finances of your business to the point where profit margins are disclosed, it becomes a major detriment in negotiations.
Imagine a meeting between a firm and its biggest client. While negotiating, the firm rep reveals that 10% of the agreement’s billable hours comes from allocating overtime work since it is a huge project. The client does not agree with this and asks for it to be removed from the invoice as they feel their issues can be solved without overtime.
Notice the problem?
The time and units-based approach by lawyers has led to buyers becoming extra price-sensitive.
“Is the firm really spending 30 hours on this project?”
“Can I call my lawyer without being charged?”
“Can I pay less if I don’t need certain things in the agreement?”
Billing by the hour is destined for failure in the modern world as clients never want to pay based on their lawyers’ input. As a result, firms have to deal with haggling clients all the time. If the project fee is lowered, that’d mean lawyers have fewer hours to work with which impacts their performance and customer satisfaction greatly.
What is the solution?
Lawyers should stop selling their services based on time and units. Instead, focus on value and outcomes.
When you stop selling on costs, you remove a high-pressure environment where every single cent of your income is determined by time and units.
The benefit of value-based pricing works both ways. Clients no longer have to keep track of their lawyer’s activity to avoid racking up the bills. They’ll also be more inclined to ask for advice and get on the phone—two chargeable events in the billable hour model—which improves client engagement and satisfaction.
Firms have the advantage of utilizing the resources they need to perform in the outcome-based model. The amount of time spent on a project is still relevant in determining costs but it’s not as important as the value of the results delivered to clients.
This pricing structure works because clients know it’s in the best interest of firms to deliver on their promises. Firms, on the other hand, have leeway to charge higher rates as long as they can guarantee high-quality outcomes to their clients.
It’s time for lawyers to stop talking about time and units and focus on value and outcomes if they want to remain relevant in the modern legal industry.
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