Legal Fees: Hourly Billing v Value Billing

We’ve seen a few legendary battles – the thriller in Manila, the rumble in the jungle, Sugar Ray Leonard’s Vegas ‘Showdown’ against Thomas Hitman Hearns, or Hearn’s other legendary bout against Marvellous Marvin Hagler. But the battle over how lawyers charge their clients promises to be a lengthy knockdown fight.

For generations law firms have charged clients for the time spent on a particular matter – one charge out rate for the supervising partner and lower rates for more junior staff assigned to a case. But driven by increased competition, more demanding and informed clients and changes in technology, a new methodology is gaining favour – Value Billing. Through Value Billing, lawyers are rewarded not for time spent but for the difference that is actually made whether that is an improved outcome in a dispute resolution, a better price or terms on an acquisition or more favourable partnership terms.

So a billing battle is raging - in the blue corner, the established champ - billing by the hour. And in the Red corner the young pretender, much talked about, much fancied – especially by clients – Value Billing.

From litigation to corporate finance, giant firms to family office specialists there isn’t an area where billing by the hour does not dominate. It isn’t a beautiful fighter – there’s not much finesse and critics say that in a fast changing game the method has kept winning by mere pounding. Fans admit that you won’t see much fancy foot work but that’s the point.

What billing by the hour delivers is simple. You don’t need to be an in-house general counsel to understand what’s going on. You get what you pay for, whether that’s a room full of associates moving commas round a contract or a top fee earner using thirty years of legal muscle on a complex dispute.

So the question on everyone’s lips at the ringside right now is ‘Does billing by the hour have what it takes in the modern age?’

Value Billing is taking on a hundred years of tradition. But it makes some serious criticisms– billing by the hour encourages ‘busy work’ and fails to recognise creativity or strict solutions focus. Then there is the question of ‘what exactly is a reasonable hourly rate for a lawyer?’ It’s a big question and Value Billing is punching home the message that all too often it means you pay more for a big firm regardless that thousands of smaller cheaper firms could provide the same services. Commoditised services and over-reliance on a long-term relationship are the next blows.

The adoption of new technology has allowed firms backing the by the hour bandwagon to reduce costs to clients albeit at the expense of overall bills. It seems the old workhorse has been putting in the hours on the speed ball and the miles in on the road work. Losing some weight might means Rhino isn’t able to pound as hard though – at least not clients’ wallets.

The argument is made that only by throwing the hours at a project can clients be sure no vital fact has been missed. More disputes have been resolved before the court steps have been reached due to the attention to detail teamwork helps. Strip away the ability to charge for time spent and you won’t know what’s been missed until a joint venture falls apart.

But Value Billing musters positive arguments – in the modern business world lawyers are not mere sub-contractors but should be part of the team and incentivised in the same way as the rest of the participants. Value Billing aligns interests and rewards talent, creativity and problem solving not mere grinding.

The system also allows great flexibility. Firms and their clients can agree before a case starts on ground rules – a certain number of depositions for a certain price; payments for achieving phase completion in project or contract negotiation or otherwise breaking complex situations into component parts and jointly assigning value to those parts.

To be sure, there needs to be plenty of trust between client and firm but if a firm cannot come to terms with its client how good can it be at dealing with their clients’ problems?

As the commentator yelled at the Hagler vs Hearns match in 1980 ‘This is only the first round!’

Which approach would you back? Who's your bet on? Comment below.