The Billable Hour—Here to Stay?

  • March 12, 2014
  • Ann Macaulay

You grind away on files, day after day, counting each hour in six-minute increments. Keeping track of the time you spend can be tiresome and sometimes distracting as you switch gears from file to file. Ah, the billable hour. It’s been the most common method of billing by lawyers for decades but, despite its longevity, many believe there are better ways to bill clients.

There are several arguments to be made against billing by the hour: there’s a limit to the number of hours in a day a lawyer can work; hourly billing fails to acknowledge that different legal services have different value; some claim that billing on an hourly basis awards incompetence and inefficiency, since the longer it takes to finish a job the more the lawyer is paid and there’s a conflict of interest with clients since lawyers can be tempted to maximize the hours spent on a file to maximize profits.

The Myth of the Shift: The Billable Hour Remains the Standard

Many lawyers have gradually started to use alternatives to the billable hour, including flat fees, contingency fees, results-based fees, blended rates and fees by stages. And as clients demand more bang for their buck by asking for alternatives, many lawyers are more than happy to accommodate them. But the billable hour still reigns supreme in Canadian law firms. A much-talked-about massive shift away from the billable hour simply hasn’t taken hold yet, say several members of the legal profession. Eighty-five percent of all the legal work done in Canada is still billed hourly, according to Richard Stock, a partner at Catalyst Consulting in Toronto, although he says the number has gradually decreased. “Ten years ago it was 91 or 92 per cent.”

“We’ve been predicting since the early ’90s the absolutely imminent demise of the billable hour and a move to alternate billing,” says Simon Chester of McMillan Binch in Toronto, “but in any objective sense it hasn’t happened.” Why not? Quite simply, clients haven’t demanded it, says Chester. “The billable hour in fact serves firms and it serves clients in ways that alternate arrangements make more difficult because they depend on us articulating assumptions and confronting problems. The billable hour has this wonderful spurious objectivity.

“It requires more work on the client’s part,” Chester continues. Clients have to discuss what the work will look like and how much it will cost, and it’s easier to defer that to an apparently objective metric like hours times hourly rate. When the financial officer of a firm asks for justification of a bill, “it’s much easier to say here is a piece of paper that describes in detail everything that was done.”

Bill Rice, national managing partner at Bennett Jones LLP in Calgary, says his firm’s clients usually ask for an alternate billing proposal, but they end up choosing hourly billing since they don’t really know how to judge whether the alternate arrangement is appropriate or fair. “There just isn’t yet a comfort level that the alternative arrangements work,” says Rice. “Clients are interested in them, they want to see them, they like to see their lawyers presenting some imaginative proposals, but I still think they’re a little uneasy of stepping into them for fear that it isn’t going to work out well. They have no way of judging the value or maintaining control over the matter.”

Rice sees significant room for more non-hourly based billing in litigation. Sometimes it “goes on so long that the clients start to despair a little bit that it’s something they can’t control. If they feel they can set budgets, they might be more comfortable with that and there might be a sense that there’s greater incentive on the part of the lawyers to end the matter one way or the other.”

One way to approach it is to deal with stages of litigation, says Jeffrey Leon of Fasken Martineau in Toronto. “You prepare a budget and then negotiate how much should be spent on different phases of the litigation. You may take less as you go through, but you may agree on an upside if you’re successful.” One important ingredient is to determine what constitutes success. That doesn’t necessarily mean that you’ll win the case but it may be based on shortening the length of time it takes to resolve it.

Stock says that firms will continue to move away from billable hours to more creative billing methods. “It will accelerate when more and more examples of alternatives have been lived through for one or two cycles.” He likens billing discussions between lawyers and clients to going to the dentist: “You know you’ve got to go, and you can’t have a comfortable conversation while you’re there.”

When Alternative Billing Methods Make Sense

There are several options when it comes to billing clients. There’s hourly billing, with all its combinations, including discounts and mark-ups, which is time- and effort-based. There are blended rates, in which the work is divided between junior and senior lawyers, paralegals and students to come up with a relative blend of their hourly rates. Another type is fixed-fee billing—either for an event or for a schedule of activity (i.e., an immigration visa, a patent, etc.). There are also more risky success-based fees, which focus on the outcome of the file, including using contingency fees in litigation.

Alternative billing initiatives have obvious advantages. “They free us from the tyranny of the billable minute,” says Chester. “They encourage innovation and efficiency. They offer us a tantalizing glimpse of revenue that is not limited by the finite variables of hours times hourly rate times realization.” Plus, he adds, “There simply are not enough hours in a day to increase that beyond a threshold at which the human costs of overwork are literally unbearable—or as one young Canadian put it on his return from Manhattan, ‘Wall Street practice was killing me.’”

Where alternative billing works best is when a task has been repeated so often that both sides are comfortable with what the cost should be. Certainly transactional work, such as real estate, wills and estates and intellectual property lend themselves more easily to fixed-fee billing, since the outcome is fairly predictable and it’s easier to estimate the amount of time each file will take. Files that involve a lot of repetition, such as drafting a patent application, are the most easily automated using form generation, which cuts down on time spent.

Some Canadian firms are already regularly using alternatives to the billable hour. MacQuarrie·Whyte·Killoran is a small, general practice firm in Gloucester, Ontario. Partner Bill MacQuarrie says the firm does a lot of fixed-fee billing, except for the more unpredictable family law area, which is still done hourly.

“Close to 100 per cent of our real estate work is done on a set-fee basis,” says MacQuarrie. “It’s easiest to do it that way, it’s more market-driven. Buyers now shop around, they compare prices. When you’re doing hundreds and hundreds of house purchases a year you have a very good idea of what’s involved and how much time you’re going to be spending on each file.” MacQuarrie also does wills and estates using fixed fees, and clients have a good idea what other lawyers are charging. Small business clients are also looking for a fixed fee for incorporations, partnership agreements and business contracts. “They want a set idea of what it’s going to cost.”

Unbundling is another method MacQuarrie’s firm has used for several years in real estate transactions, in which the lawyer is asked to perform specific tasks while leaving the rest up to the clients. A straightforward house transfer between spouses is a good example, in which the transfer needs to be done but not a title search. “Cost-conscious people say ‘is there any way that I can save some money?’” says MacQuarrie.

“About 40 per cent of what we do is done on a fixed-fee basis,” says Cory Furman, a partner at Regina intellectual property law firm Furman & Kallio, and he’d like to see that number go even higher. The firm does a lot of fixed-fee billing on repetitive, process-type work. Since the time spent drafting patent applications is fairly predictable, the firm’s lawyers can accurately estimate how much time will be spent on them. “Clients seem to appreciate the fact that we’re prepared to sit down and quote a fee,” says Furman, plus “it’s easier for them to comprehend.”

Wayne Myles, Q.C., a partner at business law firm Benson·Myles in St. John’s, Newfoundland, says his firm has a number of clients, “maybe less than 25 per cent, with whom we routinely make alternative billing arrangements.” He sees it creating a constructive, team approach because “in some ways it ensures that the professional advisor’s interests and the client’s interests are more closely aligned.”

Leon says he is experimenting with packaging a “whole approach to litigation that emphasizes best practices and budgeting, proper and efficient reporting. You’re really providing the client with a response in terms of the litigation process that they find particularly useful. It makes sense to them as business people.”

Open Discussion: The Key to Creating a Successful Alternative Billing Arrangement

Creating a successful alternative billing arrangement involves first discussing the work that’s needed as well as what the client’s expectations are. The key is to have very open discussions, says Pierre Legault, who recently joined Gowlings in Montreal. Legault implemented several alternative billing agreements while practising at Desjardins Ducharme Stein Monast. “We learned that you shouldn’t be shy in discussing specifics, but that you don’t want to be looked upon as only a salesman of legal services either.” Bottom line? “Everybody has to get what he’s looking for.”

Six months to a year after initiating a file, Legault sits down with his clients to assess how things are working out. It may be necessary to make adjustments to the arrangement. “When you have this open-minded approach, both from the client’s perspective as well as the law firm’s perspective, it works. And it can be extremely profitable for the law firm. But it has to be a very clear and open discussion.”

Legault adds that sometimes it’s difficult to reach the stage where both parties really understand what they want out of the arrangement. There has to be clarity in how the lawyer explains what he’s prepared to do, but the client must clearly indicate why he’s looking at alternative billing as an approach to meeting its legal needs. “Is it purely economics? Or is it in order to address, at the same time, certain types of needs in regards to certain types of legal services for which he’s prepared to look at an alternative approach that will allow it to obtain long-term added value?”

MacQuarrie says the key question is “is what you’re getting into a known quantity? Have you done it before and have you done it enough times to know what’s involved? If it’s open-ended you might not want to make that commitment, if you have no idea how long it is going to take. There’s no guarantee. You can give them an idea of what the cost is going to be and you keep them informed as you go on.”

It’s important to look at the nature of the matter and to what degree the firm has control over the time frame and the manner in which it proceeds, says Wayne Myles in St. John’s. “If there are too many variables and too many aspects of the deal that are beyond our influence and control, then that’s where we’re less comfortable, we have to be a bit more guarded in making these kinds of arrangements.”

Legault says he doesn’t have substantial formal agreements. “If the client is not happy with it, he is going to find a way to get out of it.” He insists that mutual confidence is the most important factor when implementing an alternative billing agreement. Although the lawyer can put the basic structure in writing and state what you are supposed to provide for the amount of money that you’re going to be billing, “at the end of the day it’s a question of confidence on the part of both parties that one party will not let the other down.”

The Pros and Cons of Common Billing Types

“The one nice thing about a fixed-fee arrangement is if you can tell the client how much it’s going to cost, you can accurately ask to be paid up front,” says Furman. “We typically get paid up front, because we can tell you to the penny what something’s going to cost. We sit down with the menu and figure out what we’re going to do, and, even if it’s not exact, we can tell within a couple hundred dollars what something is going to add up to be.”

In real estate, the fee is collected on closing, says MacQuarrie, “so we don’t have a lot of accounts receivable to chase anyway. I would see it as being easier, you have an understanding up front what the fee will be, there are no surprises, so there’s no reluctance to pay the account when it’s due.”

One disadvantage of not billing by the hour comes during those unusual situations that end up taking more time than you would normally spend. “But you’ve got to take the good with the bad,” says MacQuarrie. “If it takes a little bit more work and you otherwise would have billed for that, well you don’t go back to a client and bill them an extra twenty bucks. You’re just going to eat it. But by and large the advantages far outweigh the disadvantages.”

Leon says that even if you’re not being paid by the hour, the discipline of keeping track of your time is important. “In order to really get good at developing appropriate alternative fee arrangements you have to be able to predict and estimate.”

The following is a breakdown of various billing types, along with the commonly accepted pros and cons of each:

  • Hourly rates – The lawyer bills the client for time spent on a file. Can include volume discounts and discounted fees, in which a firm agrees to reduce its hourly rates in return for a guarantee of a certain amount of legal work.
    Pros: easy for both client and lawyer; the firm gets paid no matter what the outcome
    Cons: encourages inefficiency; doesn’t differentiate the value of the work done
  • Blended rates – Time is billed equally on an agreed-upon rate, no matter who in the firm works on the file.
    Pros: encourages work delegation; simplifies billing; easy to negotiate and administer
    Cons: hides personal contribution; can result in use of less experienced or less efficient lawyers
  • Fixed or flat fees – The lawyer provides a specific service for a set price.
    Pros: encourages efficiency; easy to negotiate; encourages delegation
    Cons: the law firm assumes cost overruns
  • Result-based or contingency fees – The lawyer is paid according to results achieved. Payment is based on a percentage of the recovery, settlement or amount of money saved.
    Pros: allows clients with little money to obtain legal representation; both client and lawyer determine the fee from the outset
    Cons: the law firm assumes all the risk; if successful result is reached with little effort, the client may feel the lawyer was overpaid
  • Unbundling (also called discrete task representation or limited retainer) – The lawyer is hired to do certain tasks within the full-service package, which are agreed upon in advance by both lawyer and client, including legal research, gathering facts and drafting documents.
    Pros: offers legal services to clients who can’t necessarily afford full legal representation; makes it clear up front what tasks the lawyer will perform and what will be charged
    Cons: puts more responsibility on the client to understand what needs to be done
  • Task-based billing – Categorizes fees according to the type of work performed. Information is grouped according to pre-defined phases and tasks with the associated costs. A coding system makes it easier to track costs, compare costs for different activities, improve budgeting, and create standard software processes to facilitate the review and reconciliation of the account.
    Pros: easy to administer; provides client with a degree of certainty of what the case will cost; codes can provide a database to project future project costs
    Cons: lawyers must be able to estimate costs accurately
  • Capped fees – The client pays an agreed-upon maximum fee.
    Pros: good for law firms that can leverage efficiencies and expertise for high-volume, routine work; clients are happy being able to predict costs
    Cons: can hurt firm if something unforeseen happens or if it misjudges costs

Looking Toward the Future: Is the Billable Hour Here to Stay?

Getting away from billing by the hour is what many lawyers want and they hope clients will start to feel more comfortable with it. “Billing by the hour wears on lawyers,” says Bill Rice in Calgary. “They feel the pressure. Often lawyers argue that they’d like to get away from this hourly rate environment because they feel so much pressure to account for all their time and to maximize the efficiency they get out of their time. They feel they can’t relax, they can’t sit back, they have to keep producing during the course of the hours they’re charging for.”

Rice insists that lawyers are extremely efficient with their time. “I don’t observe people in the business community who are efficient at dealing with an hour as lawyers are inclined to be. I think they work very hard at getting the most out of an hour and I don’t think that the clients are getting bad value. I see our people being very meticulous about the time that is spent and how quickly they do things and how efficient they are in getting as much progress made in the course of a day and I find in comparison to some of the business people we deal with that there is a much, much stronger inclination to get things done, to not let meetings drag, to get the most out of available time. So our mentality actually is to be very efficient with our time and the fear on the part of the client is in fact that we’re being incentivized to do the reverse.”

“I think that hourly billing is the rewarding of the inefficient and the slow and clients are starting to understand that in some cases and are looking for more alternatives,” says Robert Tapper, Q.C., of Tapper Cuddy in Winnipeg.

But although those alternatives are slowly being accepted, for now it looks like the billable hour will continue to be the predominant billing method used by Canadian lawyers.

Ann Macaulay is a Toronto-based freelance writer.