The Shift to Flat Fee Billing

Even the Traditionalists are considering it.

When one thinks about the legal profession, one of the immediate associations is the billable hour. The dreaded billable hour – dreaded for both biller and billee. For obvious reasons. 

The cost of legal services and the advice that will be obtained – is it really worth the long invoice full of endless notations and details on charges for calls or correspondence, research, and consultations? It’s a hefty bill and we don’t mean that just for the sake of the price tag. 

It’s enough to make any client think twice about seeking legal counsel – why do we have to be charged in this way?

It’s also enough to make the everyday lawyer want to pull their own hair out – the endless time spent thinking about billing for each and every ounce or tidbit of work they produce in order to compete with the other bigwigs within their team of lawyers can drive anyone looney. 

It has also been a great source of debate and tension between law firms and their clients. Corporates have pushed back at perceived overcharging, with some arguing for the greater certainty of a fixed-fee model. 

Now, the advancement of generative Artificial Intelligence (AI) is fuelling fresh criticism that billing by the hour is an outdated model that encourages inefficiency.

But how did we get there? Where did this all come from?

The Billable Hour

The Billable hour hasn’t come from the proverbial “this is how we have always done it” instead the “invention” of the billable hour is widely attributed to Reginald Heber Smith, who was managing director of the Boston law firm Hale and Dorr (now Wilmer Cutler Pickering Hale and Dorr) from 1919 to 1956.

And the funny thing is, the idea for the billable hour didn’t even come from “Big Law.” It came from legal aid. In 1913, Smith — who had recently graduated from Harvard Law School — was invited to become counsel at the Boston Legal Aid Society. What he confronted in that job, according to Slice of History: Reginald Heber Smith and the Birth of the Billable Hour, was “the challenge of funding and staffing approximately 2,000 legal aid cases per year on a shoestring budget, with the help of only a few assistant counsel, a social service secretary and some clerical assistants.”

Realising that he needed help, Smith sought assistance from Prof. William Morse Cole and his students at Harvard Business School. The result was the design of a new accounting and recordkeeping system for the Boston Legal Aid Society, a key part of which was a system for the accurate tracking of hours spent by each lawyer on each matter. Using the system, Smith was able to clear 65% more cases compared to the previous year, whilst also significantly reducing the average cost of each case. Smith remained at the Society until 1919, when he joined the newly formed firm of Hale and Dorr.

Notwithstanding its development in 1913, the billable hour did not become the de facto standard for pricing legal services until the early 1970s. In the early days of the United States history, attorneys provided legal services on a fixed-fee basis, normally using fee schedules set by state law. In 1908, the American Bar Association (ABA) approved the use of contingency fees by lawyers. And this action was followed by the approval of other forms of payment, including bar-approved flat fee minimums. Prior to the 1970s, lawyers billed their clients primarily through a combination of fixed fees, contingent fees, and an amorphous method known as ‘value billing,’ wherein they would simply hand the client a bill at the end of the matter for ‘Professional Services Rendered.’ Few lawyers itemised their services by the hour or established a written compensation agreement with the client in advance.

All of this changed abruptly in the 1970s with the explosive growth of corporate in-house legal departments. Corporate general counsel embraced the billable hour because they believed it provided transparency into the relationship between the work done by outside counsel and the fees charged.

While the billable hour, upon which law firms have become reliant, began simply as a way of valuing legal services, it quickly mutated into the dominant model for the evaluation of lawyer performance; for measuring the economic value of matters, clients, and practices; and for setting economic goals. By the 1980s, the billable hour had become the linchpin of law firm management, surviving many predictions of its imminent death.

The billable hour was adopted by South African law firms in the 1970s. It has become a bedrock of law firm economics and forms an important part of how lawyers are evaluated within their firms. Although – and as we have said already – it’s criticised by clients, it’s a measure that South African clients understand and, historically, local law firms have been reluctant to move away from it. 

Arguments Against the Billable Hour

While we have already established that it is a cause of tension between lawyer and client, here are some other arguments against the continued use of the billable hour – 

1.          Encourages inefficiency – the billable hour incentivises lawyers to prioritise the quantity of work over its quality. This may lead lawyers to bill more hours than necessary, resulting in inefficiency and inflated costs for clients.

2.          Strains client-attorney relationships – the billable hour can create a conflict of interest between lawyers and clients. Clients may be reluctant to reach out to their attorneys for fear of mounting charges, potentially hampering effective communication and collaboration.

3.          Client uncertainty – the billable hour makes predicting the final cost of legal services difficult for clients trying to budget. This uncertainty can induce stress and financial strain, particularly in complex or protracted matters.

4.          Stifles innovation – the billable hour discourages lawyers from embracing technology or seeking more efficient ways to deliver legal services. This resistance to change can impede innovation within the legal profession.

Generative AI Will Have an Impact on Billing

In recent years, experts have anticipated a profound impact from generative AI on law firms, particularly on junior or support jobs. As more mundane legal tasks become automated, there are fewer working hours for lawyers to bill. 

And lawyers need to be prepared for the possible changes that automation and generative AI may have, not only on the efficiency of their practice, but on the way they bill. 

Bill Josten, Senior Manager for the Thomson Reuters Institute, said that there would be a push towards greater fixed fees for certain types of work that have become more readily commoditised based on the adoption of AI. Simply put – it will be more difficult to bill based on the hour because a lot of the laborious work is going to be AI-automated. So, the need to shift towards a fixed fee is going to be essential.

The Thomson Reuters Institute has seen more than 50% of their clients say that an increased use of alternative fee arrangements (AFAs) is forming a significant part of their cost control strategy.

And while the billable hour may not go away completely, flat fee structures may become more viable under automated work because the law firm would essentially be increasing its overall work capacity. And with the law firm able to do more work, it can generate more revenue, even under a fixed-fee arrangement.

The Move Towards a Fixed Fee Structure

A flat fee structure is shaking up the legal industry. Instead of charging by the hour, more and more lawyers are choosing flat fees to offer clients transparency and predictability. And this shift is rapidly gaining traction as clients demand more clarity and convenience, especially as generative AI and automation has a stronger hand in what output law firms are able to put out. 

The flat fee structure essentially involves charging clients a fixed, predetermined amount for a specific service or case, regardless of the time it takes to complete. It gained traction from the Alternative Legal Service Providers who use this pricing model. 

It can apply to a wide range of legal services, such as drafting a will, handling a divorce, or representing a client in a straightforward criminal case. 

The key benefit? Clients know exactly what they’re paying upfront, which helps avoid surprises and fosters trust between client and lawyer, doing away with a lot of the arguments against the billable hour listed above. 

Some of the positives of flat fee structures – 

1.          Predictable Income – there’s a steady cash flow, making it easier for lawyers to manage their finances and plan for the future. Instead of relying on the uncertainty of the billable hour (which can fluctuate depending on the complexity of cases and hours worked), flat fees offer a clear, upfront payment. This predictability helps lawyers maintain consistent revenue, making it easier to budget for expenses, staff salaries, and office overhead.

2.          Better Client Relations – with clients needing transparency, clarity and convenience, flat fee structures deliver just that. By offering a fixed rate for services, clients are no longer surprised by escalating costs or unsure about how much time their lawyer is spending on their case. This clarity builds client trust, making clients feel more comfortable with their lawyer and reducing potential conflicts over bills. When clients know exactly what they’ll be paying from the start, they are more likely to feel positive about the entire experience.

3.          Efficiency – a flat fee structure encourages a lawyer to work more efficiently because they no longer need to track every minute of their time. With a set price in mind, lawyers can focus on getting the work done as quickly and efficiently as possible, without worrying about how long each task will take. This leads to faster turnaround times and increased capacity, allowing lawyers to manage more cases without sacrificing quality.‍ And this means the adoption of and investment in technology (which can only benefit their practice), making them more productive.

4.          Attracting New Clients – flat rate law firms can make legal services more appealing, especially to price-conscious clients. Many clients seek out predictable pricing because they want to avoid the uncertainty of hourly rates. This pricing model can be an attractive option for clients who are wary of the escalating costs of hourly billing, making it easier for lawyers to attract new clients and grow their practices.

5.          Higher Client Satisfaction – the biggest benefit of flat fee pricing is the impact it has on client satisfaction. With clear expectations and no surprises, clients feel more confident in the legal services they have obtained. This leads to higher levels of trust, which can translate into repeat business, referrals, and long-term relationships. Happy clients are your best marketing tool — they’ll send their friends your way, helping you build a client base without lifting a finger.

6.          Reduction of administrative work – billing by the hour necessitates an army of bookkeepers and the effort required to meticulously pore over Work in Progress reports and invest in simultaneous time tracking. Even though technology exists to make this easier, why would anyone want to create additional work? Flat fee attorneys can optimize their firms with simple, up-front payments from clients.

7.          A Competitive Advantage – in a world where everyone is billing by the hour, distinguishing yourself from your competitors by offering peace of mind and cost assurance of flat fees can significantly benefit your firm. From start to finish, everyone wants a straightforward legal experience – simple and easy. While you can’t control every twist and turn of a client’s case, you can control the billing process. Flat fee attorneys have more freedom to lead clients through a straightforward billing process. 

While there is – probably – still a need for the billable hour, insofar as tracking the progress of a matter, outstanding accounts, WIP and the like, this will most likely remain an internal tracking metric as opposed to how a law firm charges their clients. 

The feeling is that the more technology a law firm adopts – one, because their clients are now demanding tech-savvy and tech-enabled law firms – the less likely they will be relying on the billable hour. This may take some time, but law firms should at least start getting their minds around the move over to a flat fee structure, because there are so many benefits in doing so. 

In doing so, AJS is perfectly poised to support this process due to the very fact that it’s an extremely flexible billing model being available for all instances from minute details to hourly billing to flat fee structures or even a hybrid of both. AJS’ legal accounting and practice management software doesn’t stand in the way of your change requirements.

If you are ready to incorporate a new tool into your existing accounting and practice management suite, or if you need to start from scratch, Get in touch with us to see how we can best support your strategic goal setting and progress tracking needs. We have the right combination of systems, resources, and business partnerships to assist you with incorporating supportive legal technology into your practice. Effortlessly.

AJS is always here to help you, wherever and whenever possible!

– Written by Alicia Koch on behalf of AJS

(Sources used and to whom we owe thanks: Law People; De Rebus; Thomson Reuters here, here and here; Financial Times; Sabinet; Smokeball and Clio)