Ripples that can cripple: Outdated billing festers in a firm

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Edward Poll, The Daily Record Newswire

I have discussed more than once the reality that the successful law firm of the (near) future will not use straight hourly rates to bill for its services. Still, many firms remain unconvinced.

Although most can understand the benefits to offering another billing methodology, some may not see specifically what’s wrong with the traditional system in the 21st century. Let’s examine the reasons.

Studies and surveys have already exhaustively demonstrated that clients, especially business clients, are fundamentally rejecting hourly rates as a valid billing gauge for legal services, with that rejection centering on eight key concerns:

• Perceived abuse in terms of overbilling

• Lack of predictability in the overall costs of the matter

• Lack of control over the factors involved in setting the bill

• Discouragement of efficiency

• Discouragement of value-added services

• Disconnect with technological efficiencies

• Inequality in hours spent delivering the same services

• Discouragement of risk and benefit sharing

The sum of these objections is that hourly rates reflect neither the actual costs that go into the provision of legal services, nor the value that clients perceive in those services.

The hourly rate is also the focal point of other pernicious effects on the business of law. Take, for example, its impact on four areas: client communication, firm governance, lawyer succession and, ironically, financial performance.

Let’s consider each of the four areas in turn.

1) Client communication

Lawyers who are intent on piling up billable hours tend to focus on the task at hand without communicating to the client exactly what work they are doing. Such lawyers may be doing a great job dealing with documents, the court and the opposing party, but because the client doesn’t hear about those things, the lawyer fails to build up the client’s confidence and trust.

Thus, ultimately, no matter how successful the end result is, the client doesn’t understand what has been accomplished and may even refuse to pay the bill when it comes due.

When client communication is just another itemized function charged by the hour, both lawyer and client lose focus on the real intent: creating a relationship, not a new charge.

2) Firm governance

When an attorney acts in contravention of the Rules of Professional Conduct, those in the firm who have managerial responsibility may be personally liable. That’s a heavy burden that many lawyers fail to attend to because they incline toward focusing only on rainmaking and their own billable hours. The result is a lot of room for error.

3) Lawyer succession

In many law firms, the older partners run the “business” side of the practice while the younger attorneys tend to be the followers. Because firm compensation is generally based on hourly billing output, senior partners may not want to share information about clients or prospects with a next-generation lawyer for fear that the younger lawyer might “steal” business before the first lawyer is ready to step away from active practice. That creates an all-too-common problem of client service continuity as older attorneys retire.

4) Financial performance

Lawyers often think that financial success means ever-rising billable hours. The truth is that an attorney’s inventory is not billable hours, but the cash that those hours represent.

Uncollected billables are a financial liability that can sink a firm. More than one law firm has been forced to file for bankruptcy despite substantial sums in outstanding accounts receivable.
Had those firms been more diligent and aggressive in collecting the money owed for outstanding billed and unbilled work-in-progress hours, they could have remained alive.

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Edward Poll is the principal of LawBiz Management. He coaches lawyers and is the creator of “Life After Law,” a program that helps attorneys plan for profitable exits. He can be contacted at edpoll@lawbiz.com.