Comparing Apples

Frequent readers will know that I’m not a fan of hourly billing. For the supplier, it’s a disincentive to efficiency. For the buyer, it has no relation to the value delivered.

But what should you do if, as a buyer, you can’t negotiate a fixed fee or other measure and you have to purchase on an hourly billing basis?  In particular, how do you compare competing hourly rates?

The temptation is to compare the hourly rate at a nominal level so that, for example, £100 per hour looks cheaper than £200 per hour.

But that’s the wrong approach. If you are buying by the hour the true measure of cost equals hourly rate X number of hours X rework and unnecessary costs X downstream costs.

Some lawyers work fast, some work slow. Some have more efficient systems (e.g. good templates), so the number of hours is a major variable.

The next key factor is the rework/unnecessary costs which result from poor understanding of the issues (or people) involved. Some of these will impact the number of hours you are billed, whereas others, such as lost management time and increased customer friction, sit outside the hourly calculation.  Ditto negotiation costs when you could have avoided or shortened the negotiation.

And then, wholly separate, are the downstream costs. Downstream costs are the costs that you would not have incurred had the job been done properly the first time. Essentially, it’s the net present value of factors like excessive liability, the inability to claim or recover costs, or a weaker IPR position: in short, any weaknesses that you are exposed to which would have been avoided if the job had been done better.