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Guest Opinion: Is it time to kill the billable hour?

Thomas Bowden September 25, 2009 5

The views expressed in Guest Opinions represent only those of the author and are in no way endorsed by Richmond BizSense or any BizSense staff member.

legalbooksAsk most attorneys who Reginald Heber Smith was, and less than 1 percent will respond correctly.

And yet, it is Professor Smith — by all accounts a well intentioned and highly intelligent law professor from Harvard — who gets the credit for inventing a concept so central to the practice of law for over 50 years that most attorneys simply assume it has always been there.

The billable hour.

And it’s Smith whom Richmond business owners must curse when they get an hourly bill from their lawyers.

If you’ve ever paid legal fees charged by the hour, you may remember that gnawing feeling that the fee you paid bore little or no relationship to the value you received. If you asked about the fee, maybe your lawyer told you, “That’s the way it’s always been,” “All we have to sell is our time” or “You’re lucky, I didn’t charge all my time.” Of course, the first two are demonstrably false, and as to the third, well, you should be so lucky.

As an entrepreneur, I engaged (and fired) law firms large and small, so I’ve been on both sides of this issue. Today, my clients, especially entrepreneurs, tell me what I already know — billable hour pricing doesn’t work for them. They may forego the services they really need, and they resent the seemingly arbitrary fees they are quoted or charged. This has to end, but how? What’s next? How will the bulk of the legal profession survive if lawyers don’t charge for their time?

The answer is simple but profound. We must price legal services based on their value to the client and then find ways to provide those services profitably at that price. Technology can help, but, fundamentally, most lawyers must change the way they think. They must understand that by pricing according to value, they will prosper. Many attorneys in Richmond already know this and run their practices accordingly. Some of the largest firms here and across the nation are already moving in this direction, often urged on by their largest clients. But the vast majority of firms and lawyers are still “on the clock.”

Law is big business here in Richmond. Our firms command respect nationwide and provide thousands of jobs not only for lawyers, but also for support staff and countless local businesses that provide supporting services. As net exporters of legal services, Richmond lawyers must lead, not follow, if we are to maintain our competitive position.

Clearly we don’t want to topple the entire industry, but let’s pause for a second to see how we arrived at this system.

It turns out that the billable hour has only dominated the legal profession for about 50 years.  Professor Smith ran a free legal clinic at Harvard. He reasoned it would be a good thing to know how efficiently his lawyers used their time. What could be simpler than a timesheet! So he instructed his lawyers to write down everything they did in fractions of an hour. Those who accomplished more in less time were obviously more efficient, and to be rewarded. In this approach, Smith drew upon Frederick Winslow Taylor’s theories of “scientific management” and “time and motion” studies. Apparently Smith was a great admirer of Taylor.

Decades later, anti-trust concerns forced lawyers all over the country to abandon the rigid fee structures set and enforced by the local bar associations.  Smith, by then the managing partner of Hale and Dorr, dusted off his invention from the free-clinic days — the time sheet!  To adapt it to commercial practice, all that was necessary was to add a standard hourly rate for each attorney, multiply their hours by their rate and voila!  Profit!

Professor Smith’s well-intentioned system soon produced one of those “unintended consequences” that are so easy to see in hindsight but so hard to predict at the outset. In fact, the billable hour itself has spawned the unbridled growth of mega-firms built on a pyramid system, leveraging ever larger numbers of associates to generate more billable hours, and (it is hoped) higher partner profits. A tool to measure efficiency has morphed into a process that too often penalizes it! The only way to grow a firm based on billable hours is to bill more hours, and the only way to bill more hours is to add more people. The more people you add, the more your expenses grow, increasing pressure on profits, leading to more leverage, more hours — and the cycle continues.

But all pyramids ultimately crumble (except perhaps a few tourist attractions in Egypt and South America). Clients reject bills that charge them for what is, in their view, training of new attorneys. Associates reject unrealistic quotas of hours to bill, and even partners may ultimately reject the system when it comes between them and their clients, poisoning the relationship and marginalizing their standing. Old ways die hard, though, and still today, nearly all law firm management systems track the billable hours of each attorney for each day, month and year, down to the tenth of an hour.

Within the past 12 months, articles from the Wall Street Journal to BusinessWeek, and the ABA Journal have all run feature stories trumpeting the end of this deeply flawed and worn out “business model.”

But ask any lawyer today what their services are worth, and they’ll probably quote you in dollars per hour.  Exceptions prove the rule, such as plaintiffs’ lawyers who collect a percentage of the winnings and at the other extreme, pro bono lawyers who do wonderful things for free.  In some areas of practice, flat fees set in advance have long been the norm.  Estate planning comes to mind.  But the larger the law firm, the more likely it is that the billable hour is the measuring stick by which all activities are valued, managed and priced.

Increasingly our own firm and others often depart from the billable hour when an alternative approach better suits the client’s requirements and permits the firm’s attorneys price their work to the mutual benefit of client and lawyer.

This is good thing.

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5 Comments »

  1. David Boelzner September 25, 2009 at 9:13 am - Reply

    I think most lawyers would be delighted to be freed from the tyranny of the billable hour. The difficulty is finding another way to “value” the work of a lawyer. In transactional work, perhaps, or work that is repetitive enough to anticipate how much effort will be required on average, fixed fees can be charged based on a reasonable estimate. But what is the value of a lawyer’s 250 hours of work on a trial that ends in a loss for the client? $0, because she lost? Some cases are lost despite perfectly good lawyering. How does the lawyer get paid fairly for five weeks of her time? A system of fees contingent on result works only where cases are screened carefully to insure a sufficient number of winners to keep the doors open and the copiers rented. Only the most legally sophisticated of clients will have sufficient insight into how lawyers work to agree to a fair fee based on something other than time. Mr. Bowden dismisses as nonsense the adage that the lawyer has only his time to sell, but it’s close to the truth: what the lawyer sells is his expertise devoted to the client’s concern; alas, nobody has devised a more broadly reliable measure of that than the time spent.

  2. Thomas L. Bowden September 25, 2009 at 11:49 am - Reply

    David, thanks for the response. I respectfully disagree with your statement that no one has devised a more broadly reliable measure in the billable hour. It only seems broadly reliable because it’s broadly used. The way the value, and therefore price will be determined in a non-billable hour marketplace is through market mechanisms. The fact that there is no easy calculation or book of standard rates actually makes the case for leaving it to the market, rather than the reverse. There are plenty of firms doing all sorts of litigation off the billable hour not necessarily using contingent fees. Check out the Shepherd Law Group in Boston, for example. I don’t know how they set their first price, but I guarantee they got better at it the more they did it. And of course, any discussion of market mechanisms must take into account the effect of information. In other words, ultimately the price will be set by fully informed consumers and providers of the service. In today’s world, only the largest clients (if any) can be considered “fully informed.” And of course, not all clients will have the same opinion of value, nor the same need for service. So there will certainly be clients no lawyer would want to represent, and lawyers that no client would want to hire. That’s what makes the demand and supply curves. And finally, if potential clients don’t really know the true value of legal services, lawyers have themselves to blame for hiding behind hourly rates. Hourly rates at your marketing information, because they presume that each time-consuming activity has the same value, which is clearly not the case. In a non billable hour world, attorneys have much more incentive to delegate tasks, and focus on whatever it is they do that clients really like. I can pretty much guarantee it’s not proofreading filling the file with academic memos.

    Finally, if a lawyer, or any professional or other knowledge worker really believes that all they have to sell is their time, they are in the wrong business. Leveraging knowledge can be infinitely more profitablethan leveraging time which is of course, limited.

    Thanks for adding to the debate, I welcome further comments from any perspective.

  3. Thomas L. Bowden September 25, 2009 at 5:05 pm - Reply

    I meant “hourly rates hide market information”

  4. Jerry Samford September 26, 2009 at 12:37 pm - Reply

    The tyranny of the billable hour is not unique to the legal profession. I ran a geotechnical consulting firm for 20 years. Most work was done on an hourly rate basis (plus expenses). Occasionally we would be able to work on a “lump sum” basis. I can identify at least three problems with that approach. A flat fee — base it on perceived value to the client — is workable when the project is well defined. When the parameters are vague and poorly defined, coming up with a reasonable fee for perceived value is a shot in the dark. Go into a rezoning project, for example, and predict up front the level of opposition you will face, and be forced to overcome. The project may go very easily and “anyone” could have done it, or your particular skills and expertise in negotiations may have been a critical factor that gained success where nobody else could have. The second issue is having firms compete on a flat fee basis makes it very easy for the consumer to select someone based on price alone, making the business of (law/engineering/whatever) a commodity rather than a profession. We still have an obligation to try to educate our clients regarding why we are more qualified than the next person, but gee, the other firm is $100 cheaper, so ….. And lastly, using flat fee structures has to be implemented with a change in internal culture of the typical organization. When you get close to the end of the chargeable fee, you have to be willing to continue to do what’s necessary for the project and the client and not fall prey to cutting corners to save costs and keep that fee profitable. (I know, the alternative is the opportunity to keep tacking on hours even when no work is necessary because there is no limiting fee and you can bill whatever you want.)

    My bottom line is that there is no one system that is always the best. Each has its merits and the competent business will use whichever – or even some third model – that best fits their, and their client’s needs.

  5. Christopher G. Hill September 28, 2009 at 10:15 am - Reply

    Interesting thoughts. I agree that the billable hour may not be the best possible method. However, given the difficulty of a withdrawal and the contingencies that are a part of all litigation, I am not smart enough to come up with a different method. It is up to attorneys to efficiently use the time that is entrusted to us by our clients with a billable hour method and to make sure we keep the prize in mind, i. e. an efficient resolution to the client’s issue.

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