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 primarily hourly billing for a while. However, we’ve reduced our use of hourly billing only to circumstances under which there is very little information about the next steps required in a case.

Why the change, and what made us see the light?

First, we’ll discuss the problems with hourly billing. Then, we’ll explain how we bill and why clients love it.

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 also 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 limit it.

First, hourly billing creates incentive for inefficiency. Incentives drive human behavior. The more hours lawyers put into a case, the more they can bill for it. Therefore, even the most ethical attorney has incentive to extend and “over-work” a case for profit.

The other problem is the client’s lack of certainty about cost. How many services do you sign up for where you’re basically giving a blank check. The uncertainty of hourly billing is stressful for the client and often leads to shock when the client receives the lawyer’s inflated bill at the end.

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 optimize income. 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.

But even if you have an ethical lawyer billing hourly, the bottom line is that the system itself is deficient. 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 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

We’ve established the issues with hourly billing. 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.

Examples of Flat Fees

- Preparation of documents, filing, exchange of documents with the other party and a 4-way meeting to work toward resolution: $2,950
- Exchange of documents, preparation for, and representation at a motion hearing: $2,975
- Preparation of pretrial memorandum, preparation for and representation at pretrial hearing: $3,250

These are examples. We price the case based on the issues and complexity. But the key is that you get the price in advance. No guessing what your bill will be for that phase.

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 firms 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 firm doing good work and about getting a good return on their investment.

Ongoing Cost-Benefit Analysis 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 make an educated decision on how much to invest in the case. 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 more work.

Flexibility

Of course, some flexibility has to 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 much more or less work or decides to terminate services, the bill must be adjusted accordingly.

And there are limited circumstances under which our firm bills hourly. Unfortunately, there are periods in a case in which what’s coming next is completely unpredictable. And during that time, the client may need some help, a lot of help, or no help at all. In that case, hourly billing is the fairest arrangement.

But as soon as there’s a concrete step or action that needs to be taken or an event scheduled, people deserve to know what they’re paying for in advance.

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. That’s what we use, and our clients love it.

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