inVOICE: The Hourly Bill isn’t going anywhere!
Welcome to this month’s issue of inVOICE. These “5-minute reads,” brought to you by InvoicePrep, are short, informational executive briefs designed for law firm executives and managing partners. They provide practical tips and provoke new ideas to make your management of your Firm more effective. (For our prior newsletters please visit us here).
Last month, we spoke about the importance of demonstrating the value of your work in a legal invoice, and how important this is to improving law firm realization rates. We also covered, in some detail, legal author John G. Kelly’s thoughts about cross-team collaboration, and specifically the use of true “specialists” to enhance the client experience. We talked about attorneys and MBAs working hand in hand as a 21st century model of legal services providers.
This month I want to share some thoughts about one of the great on-going predictions in the legal industry; a prediction that been repeated over and over for some time. Then I want to tie those thoughts to an interesting article I read about the “Non-Integrated law firm” and the opportunities such a firm has. These are thoughts affirmed by what our law firm customers tell us, and I’d like to know if they resonate with you too.
Hourly Billing Isn’t Going Anywhere
Let’s start with the great prediction: that the demise of the hourly bill is imminent. Do a Google search for the “end of the billable hour for law firms” and Google will give you 72,000 results addressing the issue. At every legal conference there is significant discussion about the topic. Clients and firms alike speak to new and innovative billing arrangements they’ve just constructed.
The New York Times wrote about it in 2013; the Washington Post in 2014; the Atlantic in 2015. The general theme is this: hourly billing frustrates clients; firms need to find new ways to add and show value – and the best way is through alternative fee arrangements that clients are gravitating towards in droves.
Inherent in this discussion (which frankly makes many law firms very uncomfortable) is the thought that the need to prepare a legal invoice accurately and compliantly will go away. After all, if the arrangement is an alternative flat fee for a litigation phase (for example), there will be no need to show the hourly detail behind each action taken on the file. I think this thinking is overly optimistic for firms, and problematic for law firm leaders.
My contention is that nothing will change about the importance of capturing activities on an hourly basis – and in fact that being able to showcase those activities will put firms in a better position. Let me explain.
First, I believe that the “buzz” about the death of the hourly invoice has not and will not extend to a very important segment of the legal profession – litigation specifically, of which insurance litigation defense is a very large component. In this regard, my thoughts mirror those of David Stratton, who wrote a very nice blog piece in 2013 entitled “Alternative Fee Arrangements are not going to Do Away with the Billable Hour.” His reasoning for this is very sound. Stratton points out that insurance defense litigation firms have been operating under layered cost controls since the late 1980s (unlike corporate attorneys) and that they’ve been using detailed litigation plans for at least a decade before the new (fashionable) legal project management structures rolled out by corporate law departments.
His main point though, and one that resonates with my deep experience on the payer side, is that the “billing data and the analysis of that data is tremendously valuable to the clients / insurers”. That fact, as much as anything, underscores why I believe that the billable hour isn’t going away. There is an entire sub-profession within the claims industry now focused exclusively on legal metrics and data analysis (read: which firms give us the best value?) and that constituency needs data to work with. As we’ve written before, this is yet another reason why firms need to contemplate the development of a legal metrics and analytical frame work on their side too.
Integrated vs. Non-Integrated Firms
So, given my assertion that the billable hour is here to stay in litigation and insurance defense (insurance defense generates $30 billion in legal fees annually by the way), let me turn to the interesting article that got me thinking about this topic. It is by Martin Ervin, now a law firm consultant, and formerly director of operations at Prince Lobel Tye.
Ervin writes about the traditional firm structure (non-integrated) in which various departments operate unto themselves and without true integration. He makes an analogy to the basic premise behind the basic training regimen in the Marine Corps – namely their functional process for tearing recruits down entirely and then rebuilding them with the skills that the Corps knows they will need to be successful in the future.
Clients want flexibility, quality legal and excellent client service. Erwin points out that non-integrated firms are reactive. In contrast, if a firm is torn down and rebuilt, the opportunity for the firm’s senior leadership to integrate with what are generally considered back-office functions (billing, collections, and accounts payable) is huge. Building an integrated firm means that these functional areas — which are often much more attuned to the satisfaction level of clients — allow the firm’s leadership to be proactive, not reactive, when it comes to needed changes. These are skills firms will need in the future.
The parallels here with our focus are significant. We know that client satisfaction is driven to a significant degree by basic compliance with billing requirements and rules. And if hourly billing isn’t going anywhere, law firms would do well to get really good at that process!
Two Final Thoughts
Let me leave you with two final thoughts. First, shortly after I formed our Company one of our largest law firm customers came to us with a problem. It seems they had struck an alternative fee arrangement (flat fee) with a large insurance carrier. Things were going along quite well until, many months later, the carrier asked to come in and audit the firm’s work and hourly billing.
The firm explained that there was no hourly billing to review since they were operating on a flat fee basis. “But how will we understand the work you performed, and the time it took you to do that work?” the carrier responded (quite seriously too!). Just because the payer’s front end changes the paradigm doesn’t mean the client’s back end can keep up. Shadow billing is here to stay. Firms should know that.
Second, on the heels of the 2013, 2014, and 2015 articles I referenced above, all predicting the demise of the hourly bill, there was a nice 2016 article in the Wall Street Journal. It announced that billing rates for partners at elite corporate firms keep rising, despite low inflation and weak demand – and that a new hourly rate had been reached: at $1,500 an hour!
I’m interested in your thoughts. Do you think the hourly bill is going away?
InvoicePrep enhances law firm profitability by improving e-billing quality and accuracy. When invoices are prepared properly, payment is more prompt and the number of denied charges decreases. InvoicePrep’s system is streamlined, efficient and uses a combination of cutting-edge technology and professionals with extensive legal invoice compliance and e-billing software knowledge. To learn more about InvoicePrep, please visit www.invoiceprep.com