Why I’ll Never Use Hourly Billing Again (And You Shouldn't Either)

Speaker A: One of the biggest oxymorons in the legal industry is the billable hour. Now, before you click stop, you move away from this podcast you're listening to and go on to the next one. You're like, this guy's insane. He doesn't know what he's talking about. You're not going to upend the whole legal industry. Let me explain. The legal industry is entrenched and built on ethics. As a matter of fact, for many areas of law, you need to do a conflict check before you even accept a client. So all that marketing, spend all those salespeople on the phone, and you actually can't work with them until you've made sure that you're not conflicted out of the case, because ethics is so important. However, when we look at the billable model being tied to the hours that you put in for the client, it is the ultimate conflict of interest possible. Meaning somebody comes to you, they want you to represent them. They want you to represent them in the most efficient way possible. They want you to represent them without charging them for your time at as much as possible. Right? Like, they want to pay as little as possible. And you, you're not trying to fleece them. That's not what I'm saying. That's not the message. But you want to make money, right? You, uh, have. You got to make a living. And if you work more for that client, you make more money and you bill them more. It doesn't mean that you're padding your time or anything like that, but there's no incentive for you to do right by the client. There's no incentive for you to find cheaper ways to serve that client. Are you going to go and invest in an AI tool to cut down how much work you have to do? Are you going to go and hire a bunch of offshore vas to execute on a bunch of the work that has to happen, or are you more motivated to hold onto it, do it yourself? It needs to be done for the client. It's completely justifiable. There's no ifs, ands, or buts about it. Right? But you and the client are at odds with what you want. You want more money, they want to pay less money. And it is a conflict of interest. And we're not calling it that. And nobody is. You know, the bar association didn't ban it, but they should. The reality is it makes no business sense either. And it made sense for that model when it was established initially because there was no other way to measure how much you should Charge somebody. Because we didn't have the technology we have today, it wasn't easy for people to track their time, to be able to analyze the data, to be able to look across a number of cases and see how much time was spent on those cases. Uh, to be able to figure out how you would have to package it in order to price it accordingly and still make money. Um, ultimately, uh, we're not doing this for free. Right. So when we look at hourly billing, when we look it is not good for the relationship between you and the client. It leaves you at odds and it creates a whole opportunity for the client to question how, why did you spend this much time on this? Or I don't agree with this time allocation. Right. Like they call you and you would bill them in six minute increments for a 30 minute phone call. You bill them for half an hour and they say, I'm looking at my call log and it says 27 minutes. It was not a half hour. I want you to deduct this by $150. We're having those conversations on multiple bills every single month. Right. Why are those conversations happening? Is it because our clients are cheap? No, but they know that this bill is going to run up, it's going to get out of control. And if they don't do this, if they don't come to you and have these argum and look at this in this way, then you're going to take advantage of them in their mind. Right. Like if left unchecked, the number of hours is going to balloon out of control. So we have, excuse me, we have what's called discounting. We need to discount our hours after they're billed. One thing that I know is that if you want to run a profitable law firm, you have to be able to unlock five times the cost of an attorney in your business. That means that your attorney cannot cost you More than 20% of the work that they're doing. So, um, if the average attorney is going to cost you $200,000 a year, that's a million dollars in revenue that they need to represent. Um, let's take a look at this and, and see what this looks like. Now, um, to put it in context, I want to, I want to first look at what is a solo law firm owner able to do when we're looking at the billable hour and see how little that is. Right. Um, so for those of you watching on a screen, I'm going to share my screen. And for those of you who are just listening to the audio I'm just going to narrate. Right. Um, this is a Clio legal Trends report from 2018. Clio did a study on, uh, what a law firm owner, um, bills. Right. Um, and they basically said that, you know, there's 5.6 hours missing in every day. So when they surveyed 2,000 law firm owners, uh, who are operating as attorneys in their firm, uh, what they found was, is that the average lawyer was billing two point, not billing, was doing billable work. Right. So was doing legal work for 2.4 hours of every day on average. And then from those 2.4 hours, only 1.9 hours was actually being billed. Meaning half an hour on average of every day was being written off before even being sent to the client as an invoice. Either because they felt like they should have known it and they were spending time researching it, or because they looked at it and said, this looks like too much. This client's never going to go for this. Whatever the case may be, they're discounting it before it's even going to the client. And then only 1.6 hours ends up being collected, uh, which means that they either didn't pay their bill, uh, or they negotiated it down further. Right. Um, so a non, uh, not a non associate, but, but the owner is, is doing 2.4 hours of work and is only collecting 1.6 hours of work. And this is, this is the model, this is the, the, the, the, the hourly billing model. Right. And, um, the only way that we can get to 100k per month, um, is by hiring an associate. So let's say we have an associate on staff and then let's look at what that would, uh, what that would look like. Right. So the attorney value rule of thumb, uh, which I just mentioned, is to achieve a profit margin between 30 and 40%, you have to have a minimum of five times the cost of the attorney. Right. So what's the problem? The problem is, is that five years of experience, an attorney probably costs somewhere between 150 to 200,000. Revenue would need to be 750,000 to a million. Right. Five times 150 is 750. Five times 200 is a million. Now let's do the math. Five days a week, 47 weeks per year. We took off five weeks for 10 holidays, 10 vacations and five sick days. Right. So 25 days come out. That is five weeks, two hundred and thirty five working days per year. Five times 47, five or six hours of billable time per day. I think we would all agree that most people are taking some time for lunch, they're taking some time to go to the bathroom, they're taking some time to be distracted by their phone, somebody walking into their office. They're not working eight hours a day. That in unbillable work. Right. Six is the most. Five is ideal. Right. So somewhere between five and six hours is what we like to have them do or happen. Multiply that times 235 days and we get a range of 1175 to 1 to1410 billable hours per year for an attorney. 1175 to 1410 and anything higher than this. So I've heard of firms mandating 1600hours, 1900 hours from their attorneys. If you're mandating hours that are more than this, likely your attorneys are needing to either work on nights and weekends or put in longer days. And they are, they are working harder to achieve that number because, uh, nobody's a machine. They're not coming in and putting those hours in from 8, from 9:00am to 5:00pm and hitting 8 hour days. Uh, right. That's just not happening. Either that or the client's getting billed for their bathroom time, which, let's go back to that ethical conversation and see, is that really the way it should be? Now let's. So now when we take, um, a million dollars and divide it by this number of hours. So you take a million dollars in revenue, divide it by 1175 and divide it by 1410. In order to make that math work, you would have to be billing your associate out at $709 to $851 per hour. Right. So if they're doing 1410 hours, then you can bill 709. You'll still hit a million if they're doing 1175 hours, you'd have to bill 851 to be able to hit a million. Now, for some people, they're able to build their attorneys out at this, and, and this works. But honestly, the people who are billing at that rate are probably working in an area where they're needing to pay the attorney more. I know one specific client that I know is their attorneys are being billed out at 700 and change. Right. 750, whatever it is. But she's, uh, not hiring an attorney for under $250,000. Right. So the math is a moving needle because at 250 I need to have one and a quarter quarter million in order to 5x my attorney's salary. Now, we could have a whole conversation of why it needs to be 5x the attorney salary. But that'll be for another podcast. So let's do the math. Same as before. Um, now I'm just going to go in reverse. So 1,175 to 1,410 billable hours per year. At $300 per hour, the maximum billable is 350,000 to 425,000. If you are billing 300 an hour, 350 an hour, the maximum billable is 410 to 495. At $425 an hour, the maximum billable Is $500,000 annually to $600,000 annually. And what's interesting is, is that this is the range that most law firms will bill their associate at somewhere between 304 25. And that creates a range based on these number of hours worked. Right? That creates a range of somewhere between 350,000 and 600,000 of revenue that's possible from that associate. With this model, it's not even close to $1 million. Not even close. And if we use our 5x rule, 20% of $350,000 and 20% of $600,000 means that we can pay a maximum for that attorney of somewhere between $70,000 to $120,000 in salary. Now, I don't know about you and where in the country you are, but in most places in the country you cannot get a good five year associate for $70,000. You very likely can't even get a good five year associate that will stay long enough. Were successful at hiring one for 120,000. That might be the minimum base pay that you have to hire them with, but you need to bonus on top of that and you need to give them raises or they're going to leave. So the math just doesn't work, right? The math of the billable hour just doesn't work. What if we could find a way to generate that much revenue within that amount of time? Right. What if we could do it, but it would require us to change the way that we structure the work that we do. So what am I talking about? So your target revenue in a month is 100,000. What does that look like? If we, instead of charging hourly, we charge a flat fee of $5,000 for a DUI. That would be 20 DUI cases in a month. That would be 100,000. What if it was an estate plan? We're charging $4,000 for an estate plan. That would be 25 estate plans in a month. What if it would be. What if you're a trademark attorney, you're doing trademarks and you charge four and a half thousand dollars a trademark. That would be 23 trademarks in a month. What if you do a state administration, right. And we did, um, a structure of $4,000 up front and $500 a month until the estate was settled. That would be 4,000amonth. 500amonth for 12 months. You're talking about $10,000. That's 10 estate admin cases per month. Bring on 10amonth and you're at 100,000amonth. Nine basic landlord tenant litigation cases at 5,000 upfront and 1,500 per month for four months. These are different ways that we can come up with. And these are a mix of flat fee and a flat fee up front plus subscription. Um, or like an onboarding fee. You're getting starter fee plus subscription. These are different ways that we could position legal services. And I just gave you a bunch of examples where we can. Even with stuff that's litigated or it takes a long time that we can find a way to position this so that it makes sense for the client. Right. Uh, like somebody looking to be defended in a DUI case, needing to spend $5,000. Not unreasonable. If we tied it to the number of hours spent on the case, it would be less at whatever billable rate you. You perceive you would be able to bill at, it would be less than 5,000. Yet to the client, they're happy as can be to be able to know that it's going to cost them five grand. Yeah, they have to come up with the money, whatever. Right. So some people who don't have that kind of money, they need to find it. But that's not the conversation we're having. At the end of the day, they are thrilled to know that this is what their bill is going to be. Imagine going through that ordeal where you need to defend yourself. You need to hope that your attorney is going to do a good job and get you off of this charge. And then at the same time, you have to worry about what bill's coming next. What surprise am I going to get? Oh, my gosh. The judge just adjourned this. We need to come back. I got to pay for a whole nother day of this attorney's time. That adds a whole nother layer of fear, frustration, unknowing, maybe even anger from your client. That's unnecessary. And the flip side is actually it's better for the client, and it's actually way better for you. Because this is how you can create a predictable business. This is how you can create a profitable model that's truly going to work. So when we look at this, I want to take it a step further because it's not just moving away from hourly billing to an alternative billing model. It's not, it's not just there, but it's also thinking about the holistic picture of your business. There's a lot of opportunity out there to make your business more efficient, hire lower cost staff, train them up and push things to the lowest cost operator. Look at how you can improve the process. How can we shave time off of the things that we do to serve our clients? How can we get our clients faster success? How can we get our clients move through the process faster? You have zero motivation to make that happen in the billable hour model. However, in, uh, any alternative fee arrangement, the motivation is all your profit and the client is the one who gains. You can look at it from the lens of, oh no, it's not fair to the client. They're not getting the attorney time, their work is being handed off to somebody else. Uh, but if you ask the client from their perspective, what they want to know is, I'm going to get the result that I hired you for and I'm going to get it as quickly and efficiently as possible. You think the client wants to be interacting with the law firm? You think the client wants this thing to drag on for nine months? No. So if you sell them an estate plan, how thrilled will they be if two weeks later it's done? But if the attorney is holding the bag on everything, if the attorney needs to do all the work, they're not turning estate plans around in two months. In two weeks it's going to take two months. Mhm. The efficiencies that can be had that are going to drive the profit margin of the business, that are going to put more money in your pocket, are only possible if you move away from the billable hour. And I know that a lot of our listeners, um, uh, have probably already moved away from it. A lot of our listeners are probably not doing this. But if you are, I invite you to think about what you might be leaving on the table, what opportunities you might be leaving on the table, what client satisfaction you might be leaving on the table. There's a whole nother aspect of this that we didn't talk about, which is the overhead of the billing and the accounts receivable and retainer replenishments and all that whole gamut that goes away. When you're not doing the billable hour, if you are not billing by the hour, you're not charging a retainer. You don't need to put money into trust. Now, don't take my word for it. Check with your ethics committee, whatever your bar association. Every state bar has its own rules about how to treat funds when you collect them, but by and large, most of them. When you're charging a flat fee for the engagement, you can direct deposit it directly into operations, which means that you don't have to even go through the trust account. Removes a whole overhead of trust accounting. On top of that, most. Here's a few challenges when it comes to hourly billing. Number one, with hourly billing, we often are billing once a month. Most firms are billing once a month. In what other industry are you waiting a month to first ask for payment for the service you provided? Imagine going into the nail salon to get your nails done. When you're done, you just walk out and you go in the next week or two weeks later, you get your nails done again. And then, um, on the 1st of the month, uh, uh, Maria at the nail salon calls you and says, this past month you got your nails done twice. You got a facial and we did a waxing. Your total bill is $420. How would you like to pay for this? Would you like me to put it on your credit card? Are you, Are you. You would never expect the nail salon to do that. Are you? Are you? Right there's uh, I would, I would venture to say that you will not find another industry that operates in this way. Yet. It's okay in the legal industry because that's just what we do. The reason that we bill once a month is because it's such a pain to do the billing that we push it off. We try to just do it in one shot so we don't have to worry about it. Right. People push back and they say, well, if a client receives a bill more frequently, then they're going to be upset or it's going to confuse them. Why should they be confused? Why should they be upset? As a matter of fact, you're helping them by making the bill smaller so they can digest it in more bite sized chunks. Why shouldn't they get a bill? Now I understand that it's almost impossible with today's, uh, you know, technology, you know, as good as it is to generate an invoice at the end of every day, right? But, and it's probably overkill, but maybe not. But I would argue that most firms are not big enough to withstand the cost. And they should be able to get unlock the cash from their work quicker so that they could pay payroll. And your billing cycle should be weekly, not monthly. The pushback you're going to give is, well, our billing cycle is a four hour process or it's a two day process, right? Like our attorneys need to review all their entries and make sure that they're client facing and they're clear. And once they remove all errors and they've discounted, you know, marked the right number of hours as non billable because we can't see charging the client for this, then it can go through and somebody could generate the invoices. Then we go through and create the batch of invoices and we send it out to the clients and then we move money from trust and put it on, you know, and pay the invoice and then we go after the clients who didn't have enough money in trust to pay the invoice. And then if we have a good system in place, we don't do it. Retainer replenishments, that's what this process looks like for the average law firm doing hourly billing. It is a cumbersome process. It puts the onus on you to stay on top of retainers and make sure that you're not doing enough unbilled hours that you've used up the retainer with unbilled work, right? Because you never want a retainer to go to zero because then who's to say the client's going to pay? You may have just done free work, right. Then um, having another process to request that they replenish their retainer and make sure that it is back up to where you need it to be to protect you for the work that's going to be in progress. Next, most firm owners, most firms don't have a good process around retainer replenishments. Most of them don't stick to what it says in their retainer agreement with the client and make sure that they maintain the balance that they said it should maintain. All of these are areas that cause a lot of cash flow issues in law firms and from some of them cause them to go belly up. But for most, this shows up when the owner needs to transfer personal funds to cover payroll and to cover rent. And most of the clients that I have that are in that situation come into my world or in that situation. And by the way, that's how I got started in supporting the legal industry back in 2018, because I got a client that had that. And then they introduced me to some of their friends, and all their friends were doing the same thing. Covering payroll and rent from personal funds and then send it back. And this game, this cash movement game, all stemmed from two things. One, not billing weekly and billing monthly, and two, uh, not charging enough for your services. Because I just laid out the math of how terrible the math is if you billed all those hours that we said. The reality is, is that if you look at that CLIO report, it doesn't get any different when it's an attorney on your staff that's doing the billing. So they might work six billable hours in a day, but they might discount that to four and a half billable hours. And then your clients might argue some more, and some of them might not pay, and you only see 3.7 of that. So the math is even worse. And it becomes really, really difficult for your business to make money because you're paying your attorney not 20% of revenue, but closer to 40% of revenue. And that's your profit margin that just got eaten up by the fact that you're paying the attorney for that. So the problem with hourly billing is not just in the relationship with the client, not just in the inefficiencies in your business, not just in not being able to charge enough for what you do, but it's also in the cash flow. It's also in the lost labor and effort required in the actual billing cycle. The attorneys are usually involved in the billing process, which means that they're not doing billable work during that time. And then on top of that, you m. A, uh, firm that's busy enough has a dedicated person or a group of people that are, that are just doing the billing. They're just generating these invoices, sending them out, and then trying to collect on them. And then you would argue, oh, I don't have a collections issue because I've got retainers. Well, guess what? That's not true. Most, if not 100% of law firms that are doing hourly billing have an accounts receivable balance, meaning these are open invoices, uh, that have not been paid by the client. Now, this can happen either through poor retainer replenishment, management, or oversight of unbilled work. It could happen with deadbeat clients who refuse to pay a bill and you don't do the right thing that needs to be done and disengage from them, or you're not allowed to disengage from them. Uh, or the third thing is that you had an overrun um, and did the work, and then they didn't pay. Right. But every law firm out there that's doing hourly billing falls to this trap. Because your systems have to be perfect. You gotta be on top of it. Uh, you gotta be willing to stop work when somebody's running out of money. And because we're struggling through the creation of our own enemy within the firm of the billable hour, because of the way we structure the business, we're always cash hungry. And because we're always cash hungry, we're afraid of losing a client. So we serve the client even though we're not covered or protected. And then we get into a situation where we're owed money that doesn't get paid. There's no reason to have an accounts receivable in your business. There's no reason not to charge upfront. Um, for what? For the service you're, you're providing, collect on it and be done with it. And you can do that by moving away from hourly billing to an alternative fee arrangement. And this is why I push every single firm that we work with to try to move away from billing hourly for anything that they do. It is highly inefficient. It is bad for the client, it's bad for your relationship, it's bad for you. And it causes a tremendous amount of overhead that's unnecessary and it robs you of the ability to create efficiency in your business. And ultimately, if we look at an hourly firm versus a, um, versus a alternative fee pricing firm, where the alternative fee pricing is done correctly, the profit margin is drastically different. Uh, firm billing, hourly wages. If they're making a profit, they're making somewhere between a 5 and 10% profit margin. And a well structured alternative fee billing firm could be making between 30 and 50% profit margin. That is a massive difference. That's a Firm that's doing $5,000,000 in revenue making 500,000 versus making somewhere between $1,500,000 and 2.5 million. That's a lot. And that's what I want you to think about and try on when you're approaching this conversation in your head. Um, I know there's a lot of firms out there that have successfully moved away from it. Um, many criminal defense firms, many estate planning firms. The ones that have a harder time moving away from it are family law, um, really any litigation focused firms. So, uh, not real, not real estate, non transactional. So real estate litigation, landlord, tenant, stuff like that. Um, uh, probate administration, estate admin. Many, um, of those types of firms have trouble Moving away from the billable hour. But, uh, the good news is, is that we have created a guide to help you try to figure out what that alternative fee model might look like. The alternative fee, um, pricing guide, uh, which we created for you can be downloaded at. See, I have the link here. Profitwithlaw.com pricing playbook profitwithlaw.com pricing playbook and, um, you know, we've put that, that guide, um, out for you. Um, now here's some interesting, um, things to add to what we already, um, you know, what we already discussed. Uh, Clio Legal Trends report in 2024 says 71% of clients would prefer to pay a flat fee for their entire case and 51% would prefer to pay a flat fee for individual activities within their case. Still, hourly billing is the Most common with 71% of firms offering hourly billing to their clients. Which is mind boggling, right? Like almost three quarters of the clients out there want a flat fee, uh, option or opportunity. And yet almost 3/4 of firms are not providing that, which means that there is a massive opportunity if you're willing to adopt this, because you can cater to all the clients that are dissatisfied, all the clients that are looking for this as an option and are not finding it. Um, what's interesting is there's another Clio study that contacted 2,000 law firms acting like a potential client. And 2/3 of the law firms either never answered the phone, never called back the voicemail that was left, or never spoke again after the first initial conversation. They never made an attempt to reach back out to get that client as a client. So couple these two together. Two thirds of the firms out there are inept at answering the phone. They're not going to actually talk to the person. And then of the 1/3 that they talk to, 75% of them are gonna have a billing model that the person actually doesn't want. How easy is it to just get all the business out there, right? Like, it's phenomenally easy. You just gotta answer the phone and have a flat fee model, right? And boom, you should be raking, right? So, um, very interesting stuff. Then Clio Legal Trends report, uh, in 2024 also said that matters that are billed on an hourly basis take approximately 2.6 times longer to close compared to flat fee matters. Now we, uh, can surmise why this is. Maybe it's that ethical conflict that we talked about where you're subconsciously not even realizing it, spending more time on the file than should be spent. Maybe, maybe that's it. Um, maybe it's maybe it's the fact that the attorney is doing all the work and not having legal assistance and paralegals do the work because of the billing model. So the attorney's doing a lot more of the drudge work that doesn't need to be done by the attorney, which just causes files to take longer. Um, or maybe there's just less motivation to close it out. To close it out. Right. Like, if I keep it open, maybe something will come up, maybe the client will contact me. I still have some more retainer, uh, in the trust account that we'd like to draw down if we can. Right. Um, so very interesting stuff because what does the client want? Client wants faster. Client wants it to close faster. They want it to be done. So if, you know, um, it can, it can happen faster with flat fee. One more. A 2025 survey by ALM and Law.com Compass found that 65.5% of lawyers reported that billable hour pressures negatively affected their mental well being. And this is something that I have never mentioned before on any of my conversations around the billable hour and is very interesting and something that we really should be paying attention to. That's it for this week's episode of Profit with Law. If you have enjoyed the show, please consider sharing it with at least one person. Imagine how many lives we can change change if we each shared this episode. 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