What’s So Bad About the Billable Hour?

John Chisholm advises professional service firms on how to end the practice of charging clients by the hour. A lawyer for four decades and the former managing partner of two large firms, he says it leads to unethical behavior and runaway costs. In December, for example, a judge earmarked $77.5 million of the Equifax Inc. data breach settlement for lawyers, which left most consumers with less than $7 each.

Chisholm likes pricing models that remunerate lawyers not for their time but for their expertise and value, and where services are billed as flat fees, retainers, or subscriptions that are adjusted as the scope of work shifts. Here are edited excerpts of his conversation.

● What’s so bad about the billable hour?
There’s no way of knowing the [total] fee until after the event. It’s a ridiculous scenario.

● Is that why you think the practice is unethical?
The whole model tempts otherwise ethical professionals to sometimes do unethical things.

● Like what?
Who’s going to know if I put an extra hour here or there?

● What do lawyers think about tracking their time in six-minute intervals, as most legal firms require when billing hourly?
It penalizes good, fast lawyers, and it’s demeaning. We take the best and the brightest out of law schools, and we make them record every six minutes, all day. In my experience, most lawyers put down what they think their time was or what the time spent should have been, rather than what the actual time was.

● What business model do you suggest instead?
Value-based pricing. You sit down with your client, you work through the scope, and you give three options with different prices. There’s no surprises. It’s the way law firms used to do it.

● Isn’t it difficult to estimate legal fees in advance?
You can’t necessarily price litigation out to its end, but you can price by phase, and some clients will pay more for priority.

● What would force a change in the model?
The Big Four professional firms [Deloitte, PwC, Ernst & Young, and KPMG] have exponentially increased their legal services over the last few years. While those firms predominantly billed by the hour, their foray into other services such as consulting means they have experimented with other pricing models. One of the Big Four will change its pricing model before any global law firm, and all will follow.

● How does someone at a firm start a conversation about billing for deliverables that actually mean something to clients?
Try saying, “Recording time is inaccurate and nontransparent, and no one values it. Our clients value projects completed on time, revenue, and new intellectual property.”

● Where are corporate clients on this?
An increasing number of them are saying, “Unless you give us prices upfront, you’re not working for us.” Apple, Panasonic, Cisco all have.

● What’s next?
Many startups and new law firms are adopting upfront pricing, and some global firms use it for specific types of work. But change is being led from the bottom—it’s the smaller firms transitioning, and they’re successful and profitable and have lawyers queuing up to work for them and clients wanting to use them. It’s the future of law, but it’s hard to tell a roomful of millionaires that their business model sucks.