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A Note on Hourly Fee Billing

Published On: Sep. 07, 2017

Last Updated: Oct. 05, 2020

One of the aspects of ZwillGen that regularly draws clients to our firm is our alternative billing philosophy. As explained on our billing philosophy page, we believe in billing clients the way they want to be billed – whether on an hourly, flat-fee, monthly retainer, or success fee basis. We know clients have different preferences in billing arrangements, and we try to be relatively indifferent. As long as we receive fair compensation for our efforts, we want to present the broadest range of options we can. But what we’ve learned, over and over again, is that clients prefer the hourly billing method over all other methods… at least until they try the monthly retainer method. Once they try a retainer arrangement, clients rarely go back to hourly billing. We thought it was worth a blog post to discuss this phenomenon, and to share what we’ve learned from 7+ years of experimentation with fee approaches.

First, why do clients regularly choose hourly billing when given the chance to pick their method of billing? We think it’s a combination of three factors: (1) familiarity; (2) internal procedures require expenditures to be justified by backup, where only hourly timesheets provide adequate backup (in the view of their accounting departments); (3) fear of making a bad deal. The third of these factors is the most curious, but we find it to be a very potent discouragement for many of our clients. For those clients who do choose an alternative billing method, they generally feel comfortable that the value of a “deal” should be ascertainable based on the cost and the quality or complexity of the deliverable (i.e., the memo, the privacy policy, the launch of a new product). They don’t worry that the only way to measure the value of the services purchased is through the number of hours applied to the project. This makes sense, because when purchasing other products in the market, there is not as tight a correlation between the amount of labor and the price of the product. Indeed, especially in law, the hours spent on the work is not always a good indicator of the value the work brings to the enterprise. While you would think that legal services providers should be more worried about a “bad” deal in this regard, we find the greater fear to be on the client side. Thus, we enter into arrangements where a client will gladly agree to pay anywhere between $5,000 – $10,000 for a project depending on the amount of time it takes us, but won’t agree in advance to pay $7,000 for the same project, out of fear that the hourly charges may only amount to $5,000 worth of time. Given that the number of hours that are spent on the project can vary considerably by lawyer, you would think the flat fee solution would be a clearer choice. But that has not been our experience. Despite our efforts otherwise, hourly billing is still the most popular selection.

Second, while it often takes months for our clients to consider a shift from an hourly billing arrangement to a monthly retainer structure, our experience is that clients almost never go back to hourly billing once they make the switch. The reasons for the general satisfaction with these arrangements are worth discussing. Rather than creating marginal costs for each additional piece of work, a monthly retainer arrangement allows the outside law firm to be treated like internal lawyers, who are rarely paid or judged on the value per hour of their work, but rather on the basis of overall satisfaction with the quality and quantity of projects completed. This is the same way that internal employees are evaluated – over the course of time, rather than on a per project basis. These arrangements also remove artificial barriers between the law firm and the client, allowing the lawyers and the client to have a more natural give and take without concern that the “meter is running,” on every call and interaction. Of course, the more time a good lawyer spends with the client, the more effective and useful the advice will be. These arrangements foster greater connection between attorneys and their clients and usually result in more frequent, practical advice for the clients. Moreover, in tighter fiscal times it provides the client with incentive to push more work to the law firms that are on monthly retainers and away from firms that are charging by the hour because it helps them better manage their budgets.  This predictability can be invaluable in managing an internal legal budget. Again, you would think that law firms would be more reluctant to enter these arrangements out of fear that their workload will double without a concomitant increase in income, but again, we find that it is the clients who are more reluctant to try it.

Hopefully, this blog helps shed light on why our clients may be drawn to one form of billing over another. At ZwillGen, we stand ready to support you in exploring various billing options in order to find the best fit or combination of approaches for your unique needs.