On March 24, 2016, the Barreau du Quebec (Quebec Bar Association) released a report « La tarification horaire à l’heure de la réflexion » (in French only and translated to say Hourly Billing: A Time for Reflection) calling for an end to hourly billing by lawyers and law firms in the hope of improving access to justice for the public and a better work-life balance for lawyers.
According to the report, 70 percent of lawyers are using the hourly billing method for payment of their services.
The practice of hourly billing as the determining factor in the calculation for lawyers’ fees dates back to the 1960s in Canada. For the majority of lawyers in private practice, income generated comes from the generalized hourly billing model. However, this practice as we well know today is no longer effective or meets the needs of clients.
“Before then, lawyers did take into account references to time allocated to various tasks in the form of handwritten notes in the file, but other considerations also entered into the equation (experience, repetitive nature of the service, client’s ability to pay, location of the lawyer). Starting in this period, the industry quickly understood the highly lucrative connection between number of hours billed and income. In the early 1970s, introduced by large firms, hourly billing became the norm for the majority if not for all lawyers in private practice.”
“The hourly pricing model worked well in the 1970s and 1980s. However, in the 1990s, flaws appeared in the workings of the model. It is the American Bar Association that addressed a warning to the profession regarding this dysfunctional economic model that no longer responds to the expectations of clients, and is even less in tune with economic efficiency.”
(Source: Lawyers in private practice in 2021 https://www.barreau.qc.ca/pdf/publications/avocat-2021-en.pdf, p. 68)
This has been a well-known fact in Canada, but is taking a long time to change.
This said, lawyers and law firms are very reticent to abandon this model. But as reflected in the Quebec Bar Association’s report and the Lawyers in private practice in 2021 study, this hourly billing model corresponds less and less with the reality of the current economic environment. The use of this model keeps lawyers from progressing in terms of business models and in terms of developing partnerships with their clients.
The lawyer’s or law firms priority is billable hours according to both reports. The negative effects of the hourly billing model include (among others):
- The frenetic pace of work on law firms has an adverse health impact on lawyers. More hours are also required to offset higher costs and this has an effect on the legal culture.
- Certain talented lawyers are abandoning private practice.
- There is little free time for lawyers to devote to pro bono work.
- The client has a hard time predicting the cost of a case.
- The outcome is often inappropriate given the costs incurred and the risk is totally borne by the client.
The Quebec Bar Association’s report proposes the adoption of alternative fee arrangements. The Barreau argues that law firms using the hourly billing method are not serving the interests of the partnership with clients, that the firms should be doing a better job serving the interests of clients whether those interests lie in the efficiency of a fixed or flat-fee structure, or the predictability of a fee that’s conditional on outcome or duration.
The Quebec Bar Association intends to take steps to encourage and support lawyers and law firms to shift to alternative pricing methods (MAT) from the hourly billing method. MAT is not really new, but what is emerging is the insistence of clients wanting to negotiate rates and total fees and not accepting the current billable hour’s model.
Emerging MAT include: flat rate, ceiling price, project management with conditional price according to value, etc.
It was long believed that the hourly rate seemed to be the right way to ensure profitability since it has a direct relationship between time worked and money received. However, MATs can be just as profitable if a lawyer has a good knowledge of their practice and the value of their services added for clients and potential clients.
The Bar Association’s Board of Directors adopted an action plan to initially deploy the report to educate members of the profession, and to develop new fee agreements that propose alternative methods of pricing. They will also offer training based on the establishment of new business and pricing models, including evaluation of the cost of producing a legal service and the cost of a folder, and to stimulate the necessary changes.
In addition, the Board is suggesting that lawyers adapt to existing and new information technology, invest in their business development and collect their statistics. This will enable them to master their practice and services to demonstrate to clients and potential clients the value of their legal services which in turn will improve the marketplace for their services.
A lawyer already knows how much each type of mandate cost in hours worked (billable and non-billable) and knows how much each file should report on average. These figures should translate under an MAT into realistic and achievable goals to create some alternative pricing models for the same mandate. This will allow lawyers with effective negotiating powers with the client to reach a win-win agreement.
However, lawyers and law firms need to understand that using MAT requires better project management, risk management, financial and marketing savvy and digital tools/software to ensure a successful completion of a mandate and any unforeseen matters. The lawyer will need to keep statistics. It will be essential for MAT to succeed.
However, and from what I am reading from the report, and although it is long overdue, it is going to be a tough and long transition period for the profession to shift from billable hours to MATs.
The report indicates that only 57 percent of in-house lawyers believe that the MAT improves the efficiency of legal service delivery against 84 percent of them. Among those who have experienced the MAT, the results are varied: while 81 percent of in-house lawyers consider that the projects that have been charged other than by hourly rates were more effective or as effective, this opinion is shared by only 40 percent of them.
In addition, the model based on hourly rates seems to have blunted to some extent the lawyer’s ability to assess the value of his or her work other than on the basis of hours. During the review to create the report, lawyers had a hard time identifying what services they were selling and to express the value that this service can represent to the client.
The conclusion and message received from this report, lawyers are currently selling time not solutions. That is what they are comfortable with and know. And this has to change. Lawyers should be selling solutions not time!
A change in mentality and culture among lawyers and big law firms will need to happen to drive this change. The Quebec Bar Association will need to do a lot of work on educating its members and providing them with the tools needed to achieve this shift if it wants it to really happen.