From our first ever in-house survey, released in October 2012, it was clear that the hourly rate is still very much alive and kicking. After years of calling for its demise, why do clients still accept it, and will it ever die?
COMFORTABLE SHOES
‘While clients have an inherent dislike and distrust of the hourly rate, they do not yet appear comfortable with the alternatives law firms have put forward. This is partly because some work types are suited to hourly rate-type fee arrangements and partly because the hourly rate enables a very easy comparison to be made between rival firms. Clients are also aware that at the end of the day, law firms often still seek to re-negotiate fixed-fee overruns. I think it is clear that clients will continue to demand better value and transparency from law firms and ultimately this will put more pressure on a simple hourly calculation of fees.’
Lee Ranson, managing partner, Eversheds
BY DEFAULT
‘The problem with moving away from hourly rates, whether to fixed fees or any variation such as capped fees, is that it is in the nature of certain types of legal work that the scale of the assignment can be very difficult to assess at the outset (for example in M&A transactions) and virtually impossible to do in complex litigation cases. Accordingly, law firms are reluctant to quote other than by reference to the time involved in such cases. In-house counsel know why this is too. Even so, it has surprised us that tender invitations typically invite “innovative pricing” proposals, but almost invariably also ask for hourly rates to be quoted. Presumably procurement managers find hourly rates easier to compare. But this does tend to perpetuate hourly rates as the default pricing option.’
Jonathan Denny, managing partner, Cripps Harries Hall
ALTERNATIVE PRICING
‘Many clients still prefer hourly rates. Law firms are often asked to provide innovative pricing solutions and these are difficult for clients to compare. In procurement-led tenders, it is easier to demonstrate a successful outcome through the blunt instrument of reducing hourly rates. Continuing to accept downward pressure on rates while absorbing increasing costs is not a sustainable business model. We have a vested interest in the success of alternative pricing structures which provide the best chance of running a profitable business. Firms who embrace the discerning purchaser by re-engineering their businesses to ensure that clients receive value for money will thrive in
this environment.’
Allan Wernham, co-managing partner, Dundas & Wilson
UNREALISTIC DEMAND
‘If you said to your builder: “Build me a house of between one and four floors that may, or may not, need a cellar, a roof terrace and a lift shaft – oh and by the way, I need a fixed-cost quote,” the builder’s reply might make your readers blush, but it would not come as much of a surprise. Why should lawyers be expected to provide fixed quotes in the face of similar uncertainty? Law firms readily agree fixed fees where the legal task can be accurately specified, as in many property transactions. This is not a departure from the hourly rate, simply an ability to accurately calculate the hours required for the job.’
Simon Rous, chairman, Ashfords
FAIR VALUE
‘Chargeable hours provide a benchmark that is easily understood and fluent, which explains why they remain popular for some clients. However, in reality the client is substituting a difficult question – ‘‘how do I assess the value of a lawyer?’’ – with a far simpler question – ‘‘how does the lawyer’s hourly rate compare?’’ The answer to the simpler question leads to an initial judgement being formed about value, but the danger in that approach is that the client experience, the efficiency of the process and the alignment of the law firm with the client’s business objectives is often overlooked.’
Andrew Clinton, managing partner, asb law
NO TRUST
‘In our experience, clients are generally quite suspicious of anything other than the hourly rate but only because it’s a format with which they’re entirely familiar. That is a shame – although a remuneration system based on rewarding strategic delivery and successful outcomes is more difficult to achieve, it does lead directly to a more trusting relationship between adviser and client.’
Paul Murray, managing partner, DAC Beachcroft
EASY COMPARISON
‘The hourly rate has traditionally been seen as a measure of quality and clients will continue to use the hourly rate to benchmark quality between different firms. Although the advent of fixed-fee contracts has meant that clients show less interest in the chargeout rates of individual fee-earners, rates for partners who lead the engagement are still relevant. Knowing the hourly rate also allows clients to relate annual increases in rates with increases in salary levels across the legal sector and be able to challenge their legal advisers.’
Duncan Weston, managing partner, CMS Cameron McKenna
SIMPLE WORKS
‘Provided the client manages them well, with estimates and monthly billing, in the right circumstances hourly billing can work well for both sides. We have seen clients who have initially required super-complicated discount structures only to find that they can’t live with the complexity and associated admin internally. An hourly rate arrangement, discounted or otherwise, often has the advantage of simplicity. The obvious downside is that the arrangement can encourage inefficiency or excessive time recording. We avoid many of these issues by not having billable hours targets for any of our lawyers.’
Mark Watts, joint managing partner, Bristows
TRANSPARENT MEASURES
‘Clients look to balance both transparency and certainty in fee arrangements, so it’s about being open and flexible, whether that’s on a hourly basis or otherwise. Hourly rates are often used for benchmarking but even that is subject to debate, given time is only one part of the cost/value calculation and is no substitute for real expertise. Most importantly, when you have a relationship based on trust and integrity, clients know you will provide quality and value for money however it is priced.’
Jim Edmondson, senior partner, Farrer & Co
TIGHTEN-UP
‘To me, it does not really matter how solicitors charge as long as there is transparency between them and the client, and time charging is as transparent as any of the systems. For some reason, many highly qualified and reputed solicitors find it difficult to record their time or record it accurately. The one-time industry standard of the six-minute unit has now become blurred, with some solicitors with 10, 15, 30 or 60-minute minimum units. We need to go back to the gold standard of the six-minute unit. As a profession, we need to stick with time charging but tighten it up. Subject to tightening it up, it is the most transparent billing method and the best of a bad lot.’
James Harcus, founding partner, Harcus Sinclair