BusinessReport.com

Seven years ago, Baton Rouge CPA Tim McKey nearly had a “mental breakdown.”

“If we don’t change how we do business, I’m going to the bridge,” as in to jump off, he remembers telling his partner. Unless he had his head down, grinding away to rack up as many billable hours as possible, he felt guilty. But on that day seven years ago, he had an epiphany: Why are we billing by the hour anyway?

“Time sheets measure the wrong thing,” McKey says. “How do you put a value on an idea?” Billing by the hour encourages inefficiency and relies on the Marxist idea that the value of something is equal to the labor that’s put into it, he says. Why shouldn’t customers of professional service providers be able to pay a fixed price up front? If, for example, insurance companies can set fixed prices in an environment of risk, why can’t accountants, lawyers and other knowledge workers who typically bill hourly do the same? A relatively small but growing number of professionals are coming to the same conclusion.

“The way the system is set up, you’re rewarded for efforts, not results,” McKey says. “That’s not America.”

And while McKey stresses that charging by the hour is not inherently unethical, he argues that it encourages abuse, citing recent accusations of overbilling against Hailey, McNamara, Hall, Larman & Papale, a Metairie law firm working for the Louisiana Insurance Guaranty Association.

McKey’s firm, Burris, McKey & O’Brien, is a boutique outfit that provides traditional accounting services and business development advice to business owners, but he says the fixed-price model works for larger firms as well. It just takes someone with the experience and savvy to scope out the project and come up with a fair price with which the customer can live.

McKey’s clients, like restaurateur Louis DeAngelo Jr., can call or e-mail for advice at any time, knowing a clock doesn’t immediately start running when someone picks up the phone. McKey says if he billed by the hour, he would have no incentive to even answer a question right away; the instinct would be to say, “I’ll get back to you on that.” DeAngelo pays the firm a flat monthly fee and says it wasn’t hard to agree to a price. He says they bring so much value to his operation that haggling over a few dollars is pointless, and besides, they offer a money-back guarantee.

“They really have been responsible for educating me,” about better business practices, DeAngelo says. “Before, I was really confused.”

The supposed evils of hourly billing have been a hot topic in the legal profession for years. In a 2002 American Bar Association Commission report, Supreme Court Justice Stephen Breyer says “the ‘treadmill,’ the continuous push to increase billable hours,” prevents many attorneys from doing pro bono work or having much of a life outside of the office. Breyer says “the profession’s obsession with billable hours is like drinking water from a fire hose, and the result is that many lawyers are starting to drown.” In August of 2007, author and lawyer Scott Turow declared “The Billable Hour Must Die” on the cover of the ABA Journal.

S. Guy deLaup, president of the Louisiana State Bar Association, says many Louisiana lawyers offer fixed prices for divorce or bankruptcy services, for example, but hourly billing is more prevalent. In fact, he says hourly billing seems to have become more common since he entered the profession in 1981.

Fixed pricing can also create ethical dilemmas, deLaup says. Say a client changes lawyers midstream. If the original lawyer was paid a flat fee, how much should he refund? Hourly billing provides a clear record of exactly how much work has been done, and many clients like it that way, he says.

But some don’t, partly because of the unpredictability of hourly billing. Large corporations are starting to demand alternative pricing from the outside firms they hire.

“Put most bluntly, the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour,” said Mark Chandler, general counsel for Cisco Systems, in a January 2007 speech at the Securities Regulation Institute in San Diego.

Steve Boutwell, client services director with Kean Miller in Baton Rouge, says they have hybrid arrangements with some of their big corporate clients whereby the client pays a flat fee every month that the firm bills against. Every quarter, they tally things up. If the firm does enough work to exceed what’s covered by the monthly fees by more than 5%, the client pays a bonus. In the reverse situation, the client gets a rebate, or the difference rolls over to the next quarter. The firm still bills by the hour, but the cost is structured in a way that’s more predictable for the client. Kean Miller also offers volume discounts, he says.

Boutwell says many clients are just more comfortable with hourly rates. And with litigation work especially, he says it’s hard to set a price ahead of time because you never know how the other side is going to react.

J. Alan Jordan is a worker’s compensation mediator with The Winning Way and a worker’s comp defense attorney with Jordan & Broadwater in Baton Rouge. His mediation work is always based on a set fee structure, which creates an incentive to bring about a quick resolution. He says about 50% to 60% of his legal clients pay on a fixed or structured-fee basis, and says he’d like to move as many of them away from hourly billing as possible. Jordan says moving toward a fixed-fee system hasn’t had a big impact on his bottom line one way or the other.

“It frees me to really focus on what [the client] hired me to do,” which is bring the client’s case to a resolution, Jordan says. “The hourly pricing model assumes that one size fits all. [Fixed pricing] will sift to the top those who are best at what they do.”

Or as McKey puts it, perhaps jokingly, “If you suck at what you do, bill by the hour,” he says.