This is supposed to be the dawning of the age of “alternative fee arrangements”(cue the music…), when lawyers are encouraged to be “creative” in how to price professional services, and move away from the ubiquitous hourly billing model.
Carol Schiro Greenwald, PhD, of Greenwald Consulting, is an expert in marketing strategy for law firms, and was my co-panelist last month at a CLE program for the Westchester County Bar Association. She reminded us all that “the billable hour” is actually a relatively new concept in legal billing, introduced as recently as the 1950’s.
Back in “the day”, before the billable hour was discovered, lawyers used a combination of billing methods: set fees for particular tasks, annual retainers, a discretionary “eyeball” method, and contingency fees, which the ABA approved as ethical in 1908. They rarely billed by the hour. Of course, back in “the day”, they did not have computer systems to track their time, either.
Many of the CLE attendees at our seminar were violently shaking their heads “no!” at the idea of abandoning the billable hour, especially those in matrimonial or estate administration practices. But some attendees, typically those who have large corporate clients, were more receptive, since they are getting pressure from those clients to keep costs down and share in the successes and failures of the litigation work.
Whether you bill hourly, on a flat fee, on a contingency basis, or on some other basis, the key is to know whether you are being compensated sufficiently for your services. That means you should track your time, and compare it to what you are receiving in payment for those services.
Here is a tip for all of you wanting to know how much your hourly rate has to be to cover your payroll, benefits and taxes, which is your overhead labor rate (yes, even your own).
Calculate your overhead labor rate, which is annual salary plus employer taxes plus benefits, and divide by 2,080 hours. The lowest billable hourly rate you charge should be no less than your overhead rate multiplied by 4!
All of the billing systems that Eastern Legal Systems supports: LexisNexis’ PCLaw, STI’s TABS3, and Timeslips by Sage, can show you how much you are making on your alternative fee arrangements, whether they are flat fee or a combination of hourly, flat and contingency. The numbers that go into the overhead labor rate can be found in your accounting system, which could be Intuit’s Quickbooks, Sage’s Peachtree, or STI’s TABS3/General Ledger.
Contact Eastern Legal Systems at 1.877.ELS.0555 to discuss how best to set up reports and activities in your billing system to be able to see your profitability, whether hourly or for alternative billing arrangements.
Jack Schaller has been active in the field of law office technology since 1989, and has worked with a variety of commercial accounting, legal billing, practice management, and document management software products during his twenty plus years in the software consulting field. During his tenure as a software consultant he has garnered many sales and service awards for his work with legal software products. Jack is a frequent presenter at legal conferences and seminars, and is a regular contributor to TechnoLawyer and other technology publications.