Billing by the hour (or fraction of the hour) has been common practice in the legal profession for half a century. Until recently, many law firms had little reason to set fees in any other way. Clients complained, but nothing really changed.
As hourly rates have continued to climb year after year, clients are now pushing back harder, particularly since the Fall of 2008 when the recession kicked into full gear. Corporate counsel are now demanding more certainty about what an engagement might cost—i.e. rather than simply hoping for the best. The challenge for most lawyers, however, is that they are unaccustomed to thinking this way.
The good news is that lawyers need look no further than other professional services firms to find some well tested billing solutions. Project based billing is well established at accounting firms and at management consulting firms. Management consultants figured out a long time ago that if you develop processes for solving business problems, that over time, you know how long the steps of those processes will take (at least on average). Furthermore, if you work with the same clients on more than one project, you get a better sense of what your clients expect in “deliverables” and you can factor that into your pricing.
Russell Franks, co-founder of IPEngine, comes from a management consulting background and he believes that lawyers are eminently capable of adopting some of these methods. Lawyers simply need to get more accustomed to scoping out work before launching into a project. Lawyers can avoid under bidding a project by more carefully defining the limits of the engagement and by staying within those limits.
When IPEngine begins working with a client, before the project begins, the company will establish what the client’s expectations might be for the end product. If the client is using IPEngine for patent intelligence work, for example, a combined sales and operations team will meet with the client to define clearly the scope in terms of field of invention, information required, format, etc. before a price is calculated. Franks says that over time, he and his team grow increasingly sophisticated about what the client needs and can make adjustments to either the pricing or the project itself.
Law firms can learn from this pricing model by investing the time to measure how long it typically takes to complete individual tasks. While it may still be difficult to quote an overall price at the start, by creating and documenting processes, law firms can at least give clients more certainty than they get from straight hourly billing.
Patent prosecution is illustrative. A firm could charge a flat rate for drafting a certain kind of patent and then a flat rate for each office action that the firm needs to file. While the client may not know in advance how many office actions there will be, at least there will be some parameters for what the final bill might be. Although pricing may be more complicated when there is an opposing party in a deal or an adversarial party in a conflict (i.e. since it is hard to predict in advance how heavily another party will negotiate or litigate), there are many aspects of IP practice that can be distilled into discreet tasks that require a reasonably predictable amount of effort to complete. As long as the vendor and the client agree on the deliverables, then it is not necessary to rely on a strict accounting of the time it takes to complete a project.
This is the direction that the practice of law could be moving. But change comes slowly in law firms so at least for now, hourly billing will continue to prevail. However for firms that want to distinguish themselves in the marketplace and please in-house counsel, the shift away from the traditional model offers a new way forward.