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The
Billable Hour: Are Its Days Numbered?
Douglas McCollam
The American Lawyer
November 28, 2005
For about 50 years now the billable hour has been the dominant
feature of the legal profession. And for just as long lawyers have
been trying to kill it. A group of litigators who usually couldn't
agree that the sky was blue without several footnotes qualifying the
shade will gladly sing in harmony about the evils of the billable
hour and its partner in crime, the daily time sheet. Yet generations
of lawyers have accounted for their work lives in six-minute
increments. Both reviled and ubiquitous, the billable hour is the
cockroach of the legal world.
The basic flaw of the billable hour, say its detractors, is that it
puts the financial incentives for lawyers in the wrong place. Back
in a more genteel age, grouse many lawyers, when the practice was
more of a profession and less of a business, the cost of legal
services was determined not by the amount of time a lawyer spent on
a matter but on the value he delivered to the client. That model
broke down and was replaced by a time-based metric -- which, say
critics, encourages firms to overstaff matters, lard their bills
with marginally useful services, and draw out cases that might be
brought to a swifter conclusion. "Their pricing model follows the
production costs instead of following the needs of the buyer," says
David Perla, a former in-house lawyer with Monster.com and
co-founder of Pangea3, a new company that offers legal services
performed by lawyers and scientists based in India at a steep
discount to domestic rates. Perla calls the time-
based American legal
profession "grossly inefficient" and ripe for the competition that
companies like his can provide.
Offshoring is only one development posing a threat to the long
hegemony of the billable hour. Technology in general has allowed
firms to automate certain services for which they used to rack up
billable hours. At the same time, as associate costs have soared, so
have firm billable hour rates, climbing almost 30 percent during the
last five years. That has prodded corporate clients, led by the
likes of E.I. du Pont de Nemours and Co. and General Electric Co.,
to be more aggressive in exploring alternative pricing models for
legal services, forcing even longtime outside counsel to bid for the
right to represent the company. Fifteen years ago elite firms like
Skadden, Arps, Slate, Meagher & Flom could get away with padding
charges for photocopies and danish. Today sharp-eyed corporate
accountants aren't afraid to put bills from even esteemed outside
firms under an electron microscope.
Such aggressive auditing, and a growing recognition of the defects
inherent in the billable hour-
based system, have led many
inside the profession and outside to ask some simple but profound
questions. What is it exactly that lawyers are selling to clients?
Is it their time or their skill? And, if it is their skill, isn't
there a better way to measure that value than by watching a clock?
No one has put more effort into trying to drive a stake through the
heart of the billable hour than Robert Hirshon, chief executive
officer of the Portland, Ore., firm of Tonkon Torp. As
president-elect of the American Bar Association in 2001, Hirshon
traveled the country taking the collective pulse of the profession.
The principal source of dissatisfaction, he says, was the billable
hour. Associates complained that outlandish billable hour
requirements were ruining their personal and professional lives.
Partners resented that the almighty billable had become the single
most important measure of their worth to the firm. And general
counsel thought the billable hour caused firms to focus more on how
much time they could put into a matter rather than to focus on the
result obtained for the client. "All these complaints seemed to
intersect at the billable hour," Hirshon says.
So Hirshon put together a special commission to examine the impact
of the billable hour on the legal profession. The commission
surveyed hundreds of law firms and in-house legal departments,
quizzing them about their billing practices and reliance on billable
hours. The resulting report, issued in late 2002, ran more than 60
pages and fingered the billable hour system for a host of perceived
ills in the profession, including bill padding, associate defections
and the dearth of pro bono work. The report recommended a host of
alternative billing strategies that firms could adopt to replace or
augment the billable hour.
But three years later, Jeffrey Liss, co-managing partner of DLA
Piper Rudnick Gray Cary and co-
chairman of the commission,
admits little has changed. "You do see increased interest in
alternative billing arrangements," Liss says, "but the billable hour
is still supreme." Liss believes that if firms achieved even the
modest goal of moving 30 percent of their work to a non-billable
hour basis, the impact on the profession would be profound. But he
admits that even within his own firm -- which he sees as at the
forefront of the alternative billing movement -- that goal remains
distant. And the resistance to innovation isn't coming just from
hidebound senior partners. Liss says many clients talk a good game
about wanting alternative billing, but when it comes time to do a
deal, they get cold feet. "There is a comfort level on both sides
with the billable hour," says Liss, noting that it provides an easy
metric for measuring and deconstructing fees.
Still, many within the legal industry think the hours are numbered
for the billable hour. Joel Henning, a consultant with Hildebrandt
Inc., says corporate clients are increasingly aware of the
competitive advantages of alternative billing. Henning says his firm
is working with a $35 billion company (which he declines to name) on
a soup-to-nuts overhaul of its outside legal services. Henning says
the ongoing review is clearly showing that even the best firms are
inefficient in delivering legal services. "A huge reason is the
hourly fee," says Henning. "It simply fosters inefficiency." Henning
cites several reasons for this. First, he says, it is inevitable
that as associate salaries go up, minimum billing hours go up in
tandem. "Partners are going to try to wring every last drop of blood
out of associates, and associates miraculously bill whatever number
of hours they need to hit bonuses," says Henning. He says that, "as
night follows day," firms using this system can't possibly conform
to what the client needs. They focus on what the firm needs.
But if the billable hour is such an inefficient system, then how did
it come about in the first place? The blame can be traced, as you
might suspect, to Harvard University. In 1914 Reginald Heber Smith,
a recent Harvard Law School graduate, took over the Boston Legal Aid
Society and enlisted the Harvard Business School to help him devise
a detailed system to track and manage the organization's finances.
One of his innovations was to have the lawyers begin keeping
detailed records of their time on different cases. Five years later,
Smith, now a well-known figure for his seminal book on legal aid,
"Justice and the Poor," joined the new firm of Hale and Dorr as
managing partner. He brought his detailed accounting system with
him, including a further refinement: the daily time sheet. Recalling
his innovation many decades later, Smith wrote that while he thought
"nothing could be simpler" than a form on which you recorded the
client, the name of the matter and the time you spent working on it,
the lawyers at Hale and Dorr hated his new invention. Indeed, Smith
wrote, it "seemed to them little better than a slave system."
In devising the time sheet, Smith was heavily influenced by the
theory of "scientific management" promoted by Frederick Winslow
Taylor, a businessman and researcher who taught at the Tuck School
of Business at Dartmouth. Taylor's theory of industrial management
stressed the importance of monitoring the time it took workers to
complete certain tasks. He even suggested that supervisors keep a
stopwatch handy to take accurate measurements of their observations.
Taylor's theories of "time study," developed fully in his 1911 book
"The Principles of Scientific Management," were hugely influential
in nascent business academia. But they were also controversial. In
1912 Taylor was called to testify about his unorthodox ideas before
a congressional committee, and subsequently a law was passed banning
the use of stopwatches by civil servants. Taylor's critics said
scientific management, with its strict emphasis on time, reduced
human beings to little more than machines.
None of that deterred Reginald Heber Smith in his efforts to promote
the time sheet. In 1940 he published a short book on law firm
management that gave full voice to his theories. "The statement that
a law office needs an accurate cost accounting system seems
revolutionary," Smith wrote, "but if every business concern has to
know its costs, why should the law office be immune?" Smith had
little patience with those who argued that the law was a profession
as opposed to a business. Moreover, Smith had no doubt what value
lay at the heart of the practice: "The service the lawyer renders is
his professional knowledge and skill," Smith wrote, "but the
commodity he sells is time."
To protect that valuable commodity, Smith gave specific instructions
on how the time sheet should be produced, what each line and column
should contain, what abbreviations of services should be used and
what the basic measurement units should be. "We use the hour and the
tenth of an hour because it facilitates not only addition but other
calculations. ... For convenience in figuring nothing surpasses the
decimal system."
Smith's Law Office Organization was enormously influential,
eventually going through 11 printings, but it wasn't solely
responsible for the triumph of the billable hour. By the 1940s, bar
associations in most states had in place flat-fee schedules for
various legal services. Indeed, it was often an ethics violation to
charge less than the proscribed amount. But the revision to the
federal rules of civil procedure in 1938 fundamentally altered the
landscape for law firms. The dramatic expansion of pretrial
discovery made it difficult for firms to estimate the amount of work
that might go into a case. In tandem, the rise of the trial lawyer
and mass tort cases in the 1960s and early 1970s rendered much of
the old flat-fee system quaint and obsolete. Finally, in 1975 the
U.S. Supreme Court delivered the coup de grāāce, ruling that
statewide fixed-fee schedules violated antitrust law. The way was
cleared for the bastard child of scientific management to dominate
the profession.
Inevitably, as firms began to use time as the basic measure of their
industry, billable requirements for associates and partners became
commonplace. As those requirements climbed above 2,000 hours a year
at many firms, lawyers and commentators began to talk and write
about how the "treadmill effect" created by such high thresholds was
ruining the profession. As a baseline, consider a study by the ABA
in 1958 when billable hours were first coming into vogue. It found
that there were approximately 1,300 fee-earning hours in a year
(that assumption included working half-day Saturdays). Studies show
that lawyers need to spend about three hours in the office for every
two hours of billable time. Ergo, under that measure (assuming an
hour for lunch), billing six hours means working a 10-hour day,
which in turn generates between 1,500 and 1,600 hours of billable
time a year. Turn in those kinds of time sheets at most firms today,
and you'll get back a pink slip.
The day hasn't gotten any longer, so where do the additional 500
hours that many lawyers bill each year come from? Out of their
souls, to hear most lawyers talk about billable requirements. To hit
billable targets, they sacrifice their personal lives, their public
service and often their physical and psychological health. One of
the things Hirshon noticed in his travels for the ABA was how
lawyers who had gone in-house rejoiced in being free of the time
sheet. It wasn't that they were working any less, Hirshon says, it
was that they were liberated from the demeaning ritual of having to
account for their professional lives in tenth-of-an-hour increments.
Their fate no longer rested on the time they billed, but on the
results they achieved. They had been unharnassed from the clock,
freed, as Hirshon puts it, from the "tyranny of the billable hour."
The question remains then: If the billable hour is so unpopular, why
hasn't it been replaced? For starters, it's a huge moneymaker for
firms. To a large extent, reliance upon the billable hour is
responsible for the pyramid structure of the modern law firm. With
legions of associates toiling away on behalf of a narrow band of
partners, the modern megafirm generates huge revenue. Take away the
billable hour, however, and the foundation of the pyramid collapses.
If the basic commodity sold becomes knowledge, not time, then the
modern megafirm suddenly begins to look like an obsolete smokestack
industry.
That's certainly the view of litigator Fred Bartlit Jr., whose
60-lawyer litigation shop Bartlit Beck Herman Palenchar & Scott, has
more or less done away with the billable hour in favor of flat-fee
billing. "I go to these legal conferences," Bartlit says, beginning
a well-worn harangue, "and all anybody talks about is increasing
profits by taking billables from 2,000 to 2,200 hours. It's all
quantity over quality." Bartlit says law firms should radically
rethink their business model. "Most firms have 70 percent too many
associates and way too much real estate, says Bartlit. "But when the
basic metric is 'how long can we take to do something?' that's not
going to happen."
But the Bartlit Beck "diamond-shape" model, which features small
teams with a partner at the center, would seem to have some obvious
flaws. Strict flat-fee billing might work for a boutique firm, but
wouldn't it inhibit growth past a certain point? Further, at some
point big litigation law firms have to put some wing tips on the
ground. Who is going to vet those 3 million pages of documents prior
to trial?
Bartlit rejects such criticisms. He says larger firms are actually
better able to sustain the occasional miscalculations on flat-fee
billing. As for discovery, Bartlit admits his firm needs to team up
with larger shops on some cases to handle the workload. And here is
where Bartlit's vision meets Pangea3's vision. He says in the near
future, firms will be able to rationalize their structure by farming
out such labor-intensive tasks to computers and offshore workers. To
some extent, that day has already come. Bartlit says that his firm
has run blind tests pitting document discovery software against a
document review team of lawyers, and the software performed as well
or better than its human counterpart. Bartlit concedes the system
may not be perfect -- but then neither are associates, and they cost
a hell of a lot more.
"All these firms are staffed for the 100-year flood," says Bartlit,
"it's just a bunch of excess capacity." He says lawyers should let
go of the idea that every last stone in discovery has to be turned
over by someone with a J.D. on the wall. "I've never been surprised
by a document in court in my life," he says, "but even if you had
100 lawyers working on a case, it's possible it could happen."
Moreover, Bartlit says the psychic toll the modern discovery
practice takes is huge. "I don't have a single friend who is really
happy in a big firm," says Bartlit, "and being a trial lawyer should
be the greatest job in the world."
Using his model, Bartlit says, firms wouldn't have to hire 80
lawyers a year, could do proper mentoring and training and could
work in small teams that produce higher-quality work. "We do all
that [at Bartlit Beck]," Bartlit says, "and it all comes from
abandoning the billable hour."
But not everyone is ready to do away with the trusted hourly rate.
J. Warren Gorrell, managing partner of Washington, D.C.'s Hogan &
Hartson, says his firm is open to alternative billing arrangements,
but he doesn't foresee the end of billable hours anytime soon. "That
structure may work for more routine stuff, high-volume work or
repeat work, but on bet-the-ranch matters, you are going to get a
premium." Gorrell says that it is precisely Hogan's ability to
muster a big contingent of lawyers over a large geographic area that
makes the firm valuable to many of its clients. He notes that Hogan
is currently handling a piece of litigation for a client that
involves 30 lawyers in ten different offices.
Gorrell does agree, though, that more and more clients are exploring
alternatives to the straight hourly billing: "I'd say that the
number of RFPs [requests for proposals] on major projects is
probably ten times higher than it was five years ago." Clients are
looking to cut down on the number of firms they use, consolidate the
knowledge base and shift some of the financial risk over to outside
lawyers in return for repeat business. Gorrell also says he sees a
lot of interest in a sliding scale on fees. "We are seeing a lot of
'we want a 2 percent discount for prompt payment' or 'we want a 10
percent discount if we give you $10 million in business,'" says
Gorrell.
That squares with what Liss at DLA Piper Rudnick is seeing as well.
Liss says he meets with firm clients often and pitches alternative
fee arrangements, but has relatively few takers. Liss says he'll
talk about flat fees for an individual case or transaction, or a
flat fee to handle a whole portfolio of business, or a flat fee to
do all the client's legal work, or a flat fee with a cap on the high
and low end so that both the firm and the client are protected or a
flat fee with a performance bonus for positive results. "They always
appreciate the offer," Liss says, "but usually they stick with the
hourly rate -- with a 5 percent discount."
Why firms remain wedded to the time sheet is understandable. But
it's more surprising that corporate clients don't have a bigger
appetite for alternative billing. Anastasia Kelly, MCI Inc.'s
general counsel, co-chaired the ABA's committee on the billable
hour. She thinks alternative billing is great, but admits she hasn't
done much of it in her two-plus years of running the legal division
for the telecom giant. In part, that's due to circumstances -- MCI
has been mired in bankruptcy, and been a takeover target for both
Qwest Communications International Inc. and Verizon Communications
Inc. Even so, Kelly says that part of the impediment to alternative
billing is just inertia.
"The billable hour is easy, that's the reality of life," says Kelly.
"It doesn't always reflect the value of the work being done, but
it's predictable and familiar." In her former job as general counsel
for Sears, Roebuck and Co., Kelly says the company did do value
billing on commodity-type legal work, such as certain repetitive
contracts and agreements. "Those don't take a rocket scientist," she
observes. But for more complex transactional work, she says getting
the valuation right for a flat fee would be difficult. "You never
know how a transaction is going to go, how long it will last, and
what might get in the way," she says. Kelly thinks such an
arrangement could work if a company did many small acquisitions, but
for big-ticket deals she remains skeptical. Still, she is optimistic
about the future of alternative billing. "We had a toe in the
waters, and now we are up to an ankle," she says. "In a couple of
years we'll be up to our knees. But someone is going to have to dive
all the way in [in] order to get a breakthrough."
But before they do that, lawyers need to make sure there is enough
water in the pool. The essence of alternative billing is risk
shifting. While trial lawyers are used to the vagaries of the
contingency system, defense firms remain much more risk averse. So
long as they keep submitting time, lawyers are highly paid service
workers with little exposure. As soon as they break the bonds of
time, they become more independent and free of time-sheet-induced
drudgery, but also free to fail. Accepting more risk will entail a
basic shift in the relationship between lawyers and clients. For
now, relatively few firms or clients seem inclined to make that
change. Until they do, lawyers will have both predictability and
chronic dissatisfaction. They will have unsatisfying work, but they
will have steady profits. In short, they will have the hours.
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