There is growing condemnation among in-house counsel of hourly fee charging. Private practice lawyers cower, meekly agreeing or asserting that they have been against it all along. Defending the hourly rate to corporate clients currently seems as suicidal as arguing for MPs having state-funded duck houses. But why?

The central objection to hourly billing is that it rewards waste. It incentivises law firms to work inefficiently, or to over-engineer their work. This objection plainly has merit, but the difficulty comes in finding alternatives. Pricing any service is a market-led balance between the two factors of supply and demand: cost to the supplier and value to the client. The problem with pricing legal services is that, unlike most types of supply, cost can’t usually be predicted and value can’t usually be measured.

No, really, cost can’t be predicted. There are narrow exceptions, but most legal projects are about interactions with other parties. Such interactions are essentially unpredictable and, to make matters worse, these projects typically generate zero client value unless completed.

And value can’t be measured. Five minutes of my time might produce an idea that saves the client a fortune. Five hours might be spent slogging away with no measurable value at all. But without the five hours I probably couldn’t do the five minutes, and those five minutes only have value if the client implements the advice, which may happen (if at all) only much later.

The hours I spend getting boilerplate right in a contract may have no eventual value to the client, or may save the client from disaster.

That kind of value can’t be measured objectively, and if it doesn’t materialise until after the billing date, it can’t be the basis of billing. Any mechanism for pricing legal services has to grapple with these difficulties. There are three such mechanisms on offer, though with myriad variations: time-based (hourly fee) billing; fixed fee billing; and ‘value’ billing. The first of these is flawed, but what of the other two?

There are areas of work where both fixed fees and ‘value’ billing work well. However, their application is still very limited. ‘Value’ billing remains a martyr to unmeasurable value, so is useful only when the overwhelming point of the project is an immediately quantifiable financial realisation – debt collection, property transactions and so on, where ‘value’ simply means the sum realised or transacted. Fixed fees are still a martyr to unpredictable cost, and thrive mostly in bulk commodity legal services where even though a single project can’t be predicted the variability averages out so that many hundreds can.

For the rest, hourly fees still rule. Are they really so bad?

A time-charged fee is auditable on an open-book basis. Hourly rates allow cost comparison between law firms and true competition on price rates. Discounts can be negotiated in return for regular work feed, and due to efficiencies in that type of relationship those discounts can be pretty steep without even cutting into recovery rates. Fee-earner performance is evaluated on a time basis, whereas both alternatives can severely distort fee-earner motivation at critical moments. Hourly billing is least likely to disincentivise the law firm from giving best impartial advice.

And what of the central objection, that hourly rates incentivise inefficiency? They can do, in the absence of good management. But they can also facilitate the very opposite: an open-book approach to time spent, and an emphasis on fee-earner recovery rates as a proxy for the law firm’s opportunity costs.

There have always been two competing approaches to good professional purchasing: adversarial negotiation of a one-off deal, or a long-term partnering relationship in which supplier and customer can have trust and therefore cooperate. The latter, with open-book accounting and costing, is at the heart of the best modern supply chains. Hourly rate billing can promote inefficiency if you let it. But it is also the key to efficiency if you want it.

Dick Jennings is a practising solicitor and member of the Chartered Institute of Purchasing & Supply