Billable hours

Billable hours are the hours of work that a lawyer, accountant or consultant records against a client and charges for, at an agreed rate per hour. Law firms usually record this time in units of six minutes, a tenth of an hour, so a five-minute phone call is billed as 0.1 hours. Many large law firms around the world still charge corporate clients by the hour. In India, many firms also offer fixed fees and retainers, which are fixed fees paid every month for ongoing work. IT service firms record their technicians' time in the same way, in professional services automation (PSA) software.

Here is how it works in general. The client and the firm agree an hourly rate for each lawyer, which is higher for a senior partner than for a junior associate. Each lawyer records the time spent on each task, such as "drafting the share purchase agreement, 1.3 hours", against the client and the matter, one piece of legal work. At the end of the month, the firm's software multiplies each entry by the rate and produces the bill. A partner reviews the bill before it is sent. The client's legal department checks each line, and pays, or disputes the entries it thinks are wrong.

The model has a known weakness. The firm earns more when work takes longer, so the client cannot easily tell whether ten hours were really needed. Clients answer this with billing rules, called outside counsel guidelines. These might say that no more than two lawyers may attend a meeting, or that time spent on internal emails is not billable. AI tools now draft in minutes what took a junior lawyer hours, which makes a charge by the hour harder to defend.

Take, for example, a law firm with 80 lawyers. Its law practice management software records each lawyer's six-minute entries, and turns them into the monthly bills.

Consider a company's legal department that receives a ₹18 lakh bill for a dispute. Legal spend management software checks each entry against the company's guidelines, and flags the hours it should question.

Say a start-up founder needs to register a trademark. Online legal services charge a fixed fee for the whole job, so the founder knows the price before any work starts.

How is billing by the hour different from a fixed fee? A fixed fee is agreed in advance for a whole task, however long it takes, so the firm carries the risk of the work taking longer. Billable hours put that risk on the client. A similar change is happening in software, where makers are moving from charging for each user to charging for each result, as explained in SaaS pricing models.