Attorney Bookkeeping - The Slow Death of the Billable Hour

 Last week we talked about the attorney billable hour and writing down hours to discount the work provided for legal services. Writing down hours can be a devastating blow to the bottom line.

Is it time to ditch the billable hour for other billing methods?

The billable hour has dissipated from most accounting practices in the accounting industry. I haven't used billable hours in years. We figure out the fixed amount and bill for it. There are wins and losses when you start to implement this method. Determining what to charge can always be challenging. You get better with practice!

Many experts, from Ron Baker to Mark Wickersham, have jumped all over this topic. Their promotion helped facilitate the move towards accountants and bookkeepers leaving the billable hour for fixed fee billing.

Reasons to Ditch Hourly Billing

Let's review the reasons why attorneys should consider leaving the hourly billing model and changing to something more profitable for your firm:

•  You are limited by the amount of time by the hours in a workday.
•  It is unrealistic to expect eight hours per attorney billed every day.
•  There's much uncertainty for the law firm's clients as they do not know what the case will cost them at the end of the day.
•  Hours are typically written down and discounted to alleviate client dissatisfaction and encourage payment on the invoice.

Fixed or Flat Rate Billing

Let's review why a fixed fee type of billing would be a great alternative:

Note: Check with your local bar rules to see if this is allowable in your jurisdiction.

Client expectations are clearly defined upfront at the initial consultation. The fees are agreed-upon at that time.

With fixed-fee billing, the focus is on the value to the client and not on the hours worked.

Your client is not going to worry about the clock ticking. Not worrying about billed attorney hours should allow for better communication between the client and the attorney.

Of course, there are some concerns around fixed fee billing for the partners of a firm. Concerns over the work taking too long or too many unaccounted-for hours by the firm's lawyers are why you may see some law firms incentivize the completion of projects on a quicker or more timely basis to increase the profitability of the case or matter.

Family law practices are a great example of where we will see fixed fee or flat-rate billing. For example, if you're performing a divorce action, there needs to be a capped amount of hours for that fixed fee and a defined scope. Every divorce is not cookie-cutter.

Using legal technology will help the partners track time in a fixed fee matter, and the time the attorneys at the firm devoted to the case. Have the attorney of the record track their time and at the billing moment make that time non-billable. Tracking time is a necessary action to know whether or not the case or matter is profitable.

Long or drawn-out matters may not be the best fit for fixed fee billing.

Hybrid Method

And this is why I think most law firms should take a hybrid approach. Incorporate as much to fix for your flat-rate billing as possible once you've determined the exact amount of the matter you're billing for. Keeping specific parameters around the case is critical in a profitable law firm.

There are other billing methods, but it will depend on the practice area. Business law is a great example of an evergreen retainer or subscription-type billing. The beauty of these two methods is that cash flow is evened out throughout the year.

Evergreen retainer

If you're unfamiliar with an evergreen retainer, it is when you set a fixed amount for the retainer balance. Evergreen retainers are continually replenished as the month progress. For example, a firm could hold a $10,000 evergreen retainer. And then, the ask will be to fill the retainer back up to the $10,000. The retainer is applied like a standard trust accounting method if work is performed for that client.

Subscription billing

Subscription billing is similar to a fixed fee as the law firm will determine the total invoiced for a year, divide by 12, and bill the client monthly for that fixed fee. Subscription billing is tricky, and you should check with your local Bar Association about the rules and guidelines for subscription billing.

I hope that these alternate billing methods will help you consider making a change, being more future prepared, and help improve your cash flow at your firm.

Imagine the freedom of getting rid of the billable hour.

Please contact me if you're interested in exploring these new methods or discussing this topic with me.