Wait, you’ll quote my divorce legal fees in advance instead of billing me by the hour and shocking me with a huge bill after the fact?!

Hourly billing has been the default payment arrangement in divorce - and legal services generally - since the stone age. Alright maybe not that far back, but pretty close!. And I admit that our firm used hourly billing until only recently. Why the change, and what made us see the light?

First, we’ll discuss the problems with hourly billing, then we’ll explore a much more transparent and fair alternative.

Here’s how hourly billing works: You make a deposit of legal fees. If you’re lucky, the lawyer gives you a rough idea of estimated costs, but tells you (usually truthfully) that it’s impossible to predict the total cost because there are a number of variables the attorney cannot control: for example, whether the other side will cooperate, how reasonable or unreasonable they’ll be, whether other issues will arise, and other factors.

What’s the problem with that?

TWO MAJOR ISSUES WITH HOURLY BILLING

There are a couple of major issues with the standard hourly billing arrangement, which ultimately caused us to abandon it. First, hourly billing creates incentive for even the most ethical attorneys to unnecessarily “put more hours” into the case for profit. And secondly, the client’s lack of certainty about cost is stressful and often leads to shock when the client receives the lawyer’s inflated bill.

Attorney’s financial incentive to “drag on” the case

Attorneys are human beings. Human beings need money. And hourly billing by its very nature is a system that rewards inefficiency. The more hours the attorney puts into the case, the more the attorney earns. And that’s not necessarily in the best interest of the client.

This is not to suggest that there aren’t honest attorneys out there who bill by the hour. They exist, and I know some. But the bottom line is that you’re playing with fire when you’re operating in a system that rewards inefficiency.

The best case scenario is that you have an honest, ethical attorney who has every intention of doing quality work for you efficiently. But even in these circumstances, the reality is that humans tend to underestimate the time it takes to accomplish something, so the attorneys often take longer than anticipated to accomplish certain tasks.

And even an honest attorney is human and therefore trying to make as much money as justifiably possible. The attorney is therefore trapped in a billing system that pays out more if that extra phone call is made, that extra letter is written, that extra hearing is done - even if that’s not in the best interest of the client.

The worst case scenario is that you hire a snake-oil-salesman who’s shamelessly padding the bills with unnecessary tasks and steps, all of which are a waste of your money.

The bottom line is that the system itself is deficient. If you have a good lawyer using it, your risk is much lower. But it’s still a bad system. Paying someone by the hour does not encourage that person to perform quickly and efficiently. It actually encourages the opposite, which leads to the next problem.

Lack of predictability on bills + lawyer’s incentive for profit = shock when client sees the bill!

We already know that hourly billing has inherently dangerous incentives built into it for lawyers. So how how do you feel giving a lawyer what essentially amounts to a blank check?

Most clients have accepted hourly billing, mainly for lack of an alternative. Again, the majority of law firms use it. So if you’ve needed a lawyer, you really haven’t had a choice in the matter.

But what if pricing for legal services were like most other products or services you buy. The attorney offers a service, quotes you a price, and you decide whether you want to invest. If you sign up and the lawyer delivers the agreed upon service, you pay the price agreed upon!

Instead, clients locked into hourly billing hope an attorney works efficiently … in a billing system that encourages the exact opposite.

Therefore, hourly billing results in either the attorney underestimating the amount of time necessary to deliver value to the client, or succumbing to the incentive to over-bill. The result is the same: the bill is often much higher than you expected!

But when you consider the nature of the system, is it really be so shocking?

Solution to the hourly billing problem

Hourly billing is an ineffective - but deeply-rooted - billing system that provides the lawyer incentive to put more hours into the job than necessary to create profit and leaves the client with uncertainty heading into the transaction and often shock upon receiving the inflated bill.

But what’s the alternative? Is there a way to use fair pricing that avoids shocking clients with huge bills and ensures lawyers are fairly compensated?

That’s where phase-based pricing comes in.

In phase-based pricing, the attorney gives the client in advance a quote for the next phase of the case.

For example:
- preparation of documents, filing, and exchange of documents with the other party will cost $X
- exchange of documents, preparation for, and representation at a motion hearing will cost $X
- preparation of pretrial memorandum, preparation for and representation at pretrial hearing will cost $X

But how can attorneys know in advance exactly how much time will be required for the task? They can’t. Inevitably there will be adjustments to the plan: either an extra phone call is required or an extra document exchanged. But any attorney with significant experience in a given field should have a good idea of how much work will be involved in a certain phase of the case, and should therefore be able to quote a fair price for that work in advance.

Is there some risk? Yes, for both sides. A task may take more time and work than anticipated. Or, the office may work more efficiently and less time will be required.

But the bottom line is that this small amount of uncertainty is far outweighed by the benefit to the client of predictability in billing. People don’t really care about how long it takes a lawyer to get the job done. They care about the attorney doing good work, about receiving a good return on investment, about getting value for what they pay.

Another benefit of phase-based pricing is that it forces the attorney and client to engage in a cost-benefit analysis to determine whether and how much more money should be invested in the case.

With hourly billing in place and a huge retainer sitting in an attorney’s trust account, it’s easy for an attorney to attempt to justify further work (or to make it up). However, phase-based pricing forces the attorney to have a discussion with the client about the next steps, the client’s goals, the odds for accomplishing those goals, risks, and of course, costs. This cost-benefit analysis increases the likelihood that the client will receive good value and that the case is resolved efficiently.

In fairness, this analysis can also be done in an hourly billing arrangement. But it’s less likely to happen because of the built-in incentive for attorneys to justify the need for further work on the case.

Of course, some flexibility must be built into this pricing arrangement. If the client hires the attorney for a certain phase, and then quickly decides to move in a different direction that requires more work or to terminate services, the bill must be adjusted accordingly.

No system is perfect. But a system that provides predictability for the buyer seems much more desirable than one that’s built on a framework of inefficiency and surprise (the bad kind).

Phase-based pricing seems to be a logical alternative to the antiquated concept of hourly billing in legal services.