Hourly rates still favoured by firms, but partners predict this dominance will shrink. Alex Newman reports

Large commercial law firms need to improve both the way they price work and bill clients, according to new research.

Legal Week's latest Big Question survey found 72% of respondents said law firms could be better at accurately and fairly pricing work and billing clients, with a quarter of these stating firms were either 'terrible' or that they 'should be much better'. Only 28% of respondents said large law firms were already using sophisticated pricing and billing methods.

In defence of the findings, partners argued that the complexity of large commercial deals can make it difficult to accurately price work in advance, particularly given the current volatility in the global markets, which can make even a seemingly straightforward deal more complex.

Ashurst banking partner Mark Vickers admitted: "Even well-intentioned cost estimates can become wide of the mark. From the client's perspective, a deal never seems as straightforward as when the law firm is first instructed.

"From the lawyer's perspective, experience teaches you that transactions only ever get more difficult, never easier. The real skill of the lawyer is to bridge the gap while maintaining an acceptable level of profitability."

Despite the need for improvements in predicting costs upfront, 41% of those who responded to the survey said major law firms were largely trustworthy and transparent in their billing practices, with only 6% saying firms were falling far short of acceptable standards.

The majority (54%) said trustworthiness across the industry as a whole was a mixed bag. Few respondents had doubts about their own firms, with 92% stating their own firms' practices were either 'very' or 'considerably' trustworthy.

Despite growing pressure from clients – particularly banks – for alternative billing methods, the survey confirmed commercial law firms' reluctance to move away from the billable hour, with more than two-thirds (67%) of those taking part saying time-based billing either 'totally or largely' dominates the market.

While firms may be committed to hourly rates, partners expect this to change in the future, particularly as clients come under more pressure to cut legal spend. Just more than half of respondents (51%) expect time-based billing to become less important in the long-term future, and a further 13% predict that it will either largely fade away or become totally obsolete.

Slaughter and May senior partner Chris Saul commented: "Fee pressure remains significant – wholly understandable given the challenging business climate. While hourly billing remains a touchstone for many, clients are very focused on value for money.

"This means that law firms need to redouble their efforts to craft imaginative alternative billing proposals and to articulate the value which they can add and the way in which their 'product' is differentiated from that offered by other firms."

Vickers added: "The banks are at the forefront of change to billing practices and procedures. All the major banks strongly believe that the concept of time-based billing is outdated – it has become more of a measure of inefficiency rather than a determinant of value."

In contrast, Jeremy Cape, a tax partner at SNR Denton in London, noted that 36% of respondents were committed to hourly rates. He said: "I'm not entirely convinced by the claims that firms will move away from time-based billing. Many clients who ask for innovative billing structures often ask for or return to the hourly rate."

The survey also questioned partners about how efficient clients were at ensuring advisers were reasonable, proportionate and transparent in billing practices.

Only 28% of partners said clients were effective at ensuring advisers were delivering fairly and transparently on fee structures and billing, with a further 50% saying clients' efficacy was mixed.

More than 20% said clients were not very effective at all at ensuring advisers were reasonable and transparent.

Partners on billing

72% argue law firms need to get better at accurately pricing work and billing clients
67% state that time-based billing still dominates the market
64% believe time-based billing will become less important over time in preference of alternative structures
6% state that major law firms are not trustworthy when it comes to billing practices