Two Cheers for Hourly Billing

This is Rule 6 in Zen and the Art of Legal Pricing. This follows from Rule 5, The Value Pricing Mirage, where clients were given the promise of cost savings in a Cracker Jack box that can have a surprise inside.

Notice we are talking about “hourly billing” and not the “Billable Hour.” The first is a cost accounting convention. The latter is a regime upon which billion-dollar revenue legal businesses are based.

Hourly billing works fine when three factors are present:

1. A lower-cost, quality firm.

2. A busy, in-demand lawyer leading the project.

3. A project estimate, with monthly targets.

For big-ticket items, you can use factors two and three and have it work out well. Most GCs have had the experience of using an expensive lawyer (on an hourly basis) and getting a good, efficient result precisely because of that lawyer’s expertise and the team that surrounds such a person.

In the long run, some of the most expensive law firms turn out to be those with average lawyers being sold at premium prices.

When you use all three factors, you can often eclipse expensive firms that earnestly try to value-bill or live up to the terms of aggressive AFAs. Here’s why.

First, a lower-cost firm, typically outside the money centers and larger cities, provides a head start in savings that the biggest firms struggle to catch up with. When you have a $200/hr+ savings off the top person on a matter, you will also likely see hourly savings for other firm lawyers on the project.

Second, when you pick a good lawyer at a firm that is busy, the mindset is typically one of solutions, not of flailing away to generate fees. As I said at the start of this series, some outside counsel look for work to fill the hours. Those can show up in AFA deal estimates as well, they are just called something else.

Finally, GCs have been asking for and getting project estimates and monthly targets for years. They know from working inside that the CFO needs to know how much something will cost and when payments will be made. I have seen in-house lawyers who are below budget being called on the carpet when wrong on monthly projections. Heck, one of them would be me.

When you put these three factors to work, and choose your outside counsel carefully, you have a method to appease the skeptical CFOs and supply chain ninjas I mentioned yesterday. They intuitively understand lower unit costs. Sure, you still want to redesign processes and automate when you can. Starting out with a good law firm having a lower cost structure is a no-brainer these days.

For all the ink spilled and conferences delivered on legal cost control, we are really still in the early stages of a long-term trend. There is low-hanging fruit everywhere you look. Unless a law firm has unique leadership and special organizational and service delivery skills, one thing is certain:

Firms with high hourly rates are likely expensive on any other basis.

So before you get caught up in the AFA stampede, remember that hourly billing can still work when done right. Both are part of a GC’s cost control portfolio.

Tomorrow, we end this overview of Zen and the Art of Legal Pricing with something different. It’s time to shift the gaze from the outside to the inside. That would be Rule 7: In-House Counsel Are Expensive, Too.