Savvy Blawgers' Query #2: The Future of The Billable Hour

This Just In:  Results of "Savvy Blawgers" Query #2

The second query to this august group concerned the future of the billable hour.  My original email to the Savvy Blawgers reads in pertinent part:

• As much criticism as is directed at the billable hour, it seems indestructible.  Why does it persist as the "default" billing model?
• Is the billable hour model a better deal for the lawyer or for the client?
• If a lawyer told a client they were open to other types of  fee arrangements, how often do you think clients would suggest an alternative?  And what would that alternative be?
• Do you have anything nice to say about the billable hour?  Somebody, please rally to its beleaguered defense!
• Tell me something I haven't thought of.

As should be expected given the combined intellectual horsepower assembled to tackle this notoriously difficult issue, responses varied wildly.

Prof. William Henderson of Indiana University School of Law/Bloomington, had this to say:

"Bruce, this is a terrific topic. The billable hour is a terrible thing. Everyone in large law firms is better off by scuttling it, with the exception of the dishonest and inefficient, who will fare poorly. The savings garnered by the client can be split with the honest and efficient lawyers.

Here is an amazing ABA report on the topic. One of my students found it and cited it in his paper."

[The 2002 ABA report is indeed a wondrous creature, and I encourage one and all to download it.  As Associate Justice Stephen Breyer puts it in his Forward to the report:

"The villain of the piece is what some call the “treadmill”— the continuous push to increase billable hours. As one lawyer has put it, the profession’s obsession with billable hours is like “drinking water from a fire hose,” and the result is that many lawyers are starting to drown."

And the Preface by Robert Hirshon, then-President of the ABA, contains this:

"It has become increasingly clear that many of the legal profession’s contemporary woes intersect at the billable hour. The 1960s marked the coming of age of the billable hour – an economic model that was created to address antitrust concerns with bar association fee schedules, to provide lawyers with a better handle on their own productivity and, more urgently, to address clients’ demands for more information about the legal fees charged. "Today, unintended consequences of the billable hours model have permeated the profession.  [...]

"The billable hour is fundamentally about quantity over quality, repetition over creativity. With no gauge for intangibles such as productivity, creativity, knowledge or technological advancements, the billable hours model is a counter-intuitive measure of value."

There are many more gems in this report.—Bruce.]

J. Craig Williams, to be converse in the extreme, responded in the entirety as follows:

"Bruce,
I think it's fairly simple, and there's no need for significant analysis.  The billable hour is alive and well and it's prognosis is good for a long and healthy life.  Certainly it will evolve into new and different variations, but most of those we've already seen:  the flat fee, value billing, and the well-known contingency fee.  I don't think the English system of "loser pays" will ever make it across the pond.  That's my 0.1 of an hour thought on it."

Thanks, Craig; your check is in the mail.

Ron Friedmann essentially makes a similar prediction about the robust durability of the billable hour, but in sorrow if not anger:

""What is the future of the billable hour?
"For the high-end, non-commodity work that large law firms do, the billable hour will prevail, at least for next decade or two and likely beyond. When I started in the legal market in 1989, I was sure alternative billing was just around the corner. It appears very little high-end work has moved away from the billable hour so I am now reluctant to predict radical change. I've spoken with lawyers eager to offer alternatives but clients decline. The billable hour will stay for the same reasons it has not yet gone away: risk aversion, lack of disciplined and business thinking by attorneys in firms and law departments, and a failure of imagination.

"As a proponent of best practices and the application of technology to law practice, I wish it were otherwise. A move to fixed fees would create strong pressure for efficiency, which would favor adoption of demonstrated best practices and more technology to automate wherever possible. If e-billing spreads and if general counsels actually analyze the data rigorously (the latter being a BIG IF), then there might be a move toward tighter project management and budgets. This would at least vitiate some of the pernicious impact of the billable hour."

We warned you this group has opinions—"lack of disciplined thinking," "risk aversion," and "a failure of imagination"!—if you can't stand the heat,...

Dennis Kennedy puts the ball back in the clients' court:

"Answer: The future of the billable hours is in the hands of clients. Without client pressure, there is little reason to expect many lawyers or firms to change the current system on their own. Ultimately, however, there will be practical limits for how high rates can go and the number of hours lawyers can work. Until then, I expect alternative billing to remain in the realm of experiment, primarily used by innovative lawyers who will be criticized by some of their peers and praised by their clients. Here's a great experiment: ask lawyers whether they like to have repair, construction or any other services done on an hourly billing basis, without an estimate or cap. If lawyers don't like that approach for their services (and, believe me, they do not), what makes them think that their clients like it any better? Forces for change are building, but the pressure has to come from clients and, even then, change will be slow."

In other words, Dennis, the storied life of the billable hour will come to an end only when it bumps up against "practical limits" on how much revenue it can generate for law firms?  I guess that answers our earlier question of whether it's a better deal for clients or for firms—and as soon as it's not an optimal deal for firms, they'll turn to something else.  Now I understand.

The never-reticent Monica Bay is more confident in predicting change:

"For about the last seven years, I have been preaching that the billable hour will be dead in five years. What's a little hyperbole among friends?

"In all seriousness, I truly, truly believe that the profession is undergoing a sea change, or, to use Andy Grove-ism, a paradigm shift. Fees are one of the touchstones.

"And while, at first blush, many lawyers bristle at the idea, there are so many benefits for clients and lawyers and firms alike that I am frankly stunned there hasn't been MORE movement.

"After all, in an average 24-hour day, you can only legitimately bill about 36 hours via the traditional hourly rate. But if you restructure fees so they vary depending on the assignment, opportunity, etc. -- AND you look for opportunities to leverage your "intellectual capital" so that you can "earn money while you sleep" -- and if you adopt technology to assist you along the way -- you can open up not only more "revenue streams" but happier clients and lawyers (and support staff.)

"From a simple will (why would you want to work hourly, when the bulk of the intellectual processes are done for the first client?) to "bet the farm" litigation -- where savvy firms get a "stake" in the outcome by using a graduated fee structure to reward wins -- to automating "commodity" legal functions, exploring non-billable hours is just plain prudent.

"Obviously, this is just the proverbial tip of the iceberg."

Monica indeed makes it seem so obvious that the billable hour divorces cost from value received, and perverts incentives by pitting the client's interest in (a) efficiency and (b) a financially happy outcome, against the firm's interest in (a) maximizing revenue and (b) avoiding any direct or indirect financial participation in the outcome. 

Econ. 101 is screaming between my ears at the irrationality of this model.  But wait!  There are more unintended consequences to be explored, according to Denise Howell:

"Is the billable hour model a better deal for the lawyer or for the client?

"Let's put it this way: it's a way to help ensure your lawyer will bestow upon your case the time it requires and deserves. I have heard tell of reprehensible situations where clients in flat fee arrangements were provided with a bare minimum of attention from their "counsel." I realize the better solution is to drum such scum out of the profession, but ask yourself whether that can happen in a sufficiently timely and comprehensive manner to eliminate the problem.

"Another thought on unintended consequences. Where my first example involved a lawyer putting too little time into a case, this one arises from the danger of being forced to work too much.

"The existence of a flat fee arrangement could, if the opposing side gets wind of it, motivate the use of harassing litigation or negotiating tactics. In other words, a lawyer or party who knows the other side's counsel will be compensated a set amount no matter how much time is put into the representation could decide it's a useful tactic to launch a blitzkrieg of discovery and law and motion, or otherwise "overwork" the matter. The endgame would be to inflict enough pain on opposing counsel -- whose time is now tied up to an extent not likely anticipated when the fee arrangement was negotiated -- that the lawyer ceases to be the client's zealous advocate and instead becomes the other side's ally in pushing a less than optimal resolution. The litigators reading this might already recognize this scenario from contingent fee situations. Again, this may be more a problem rooted in professional ethics than in the flat fee arrangement itself, but, as with the issue of putting too little time into flat fee cases, a flat fee arrangement could invite abuses from the unscrupulous that might otherwise be avoided."

If you're not confused enough by now, I would only add to Denise's insightful remarks that "flat" and "contingent" fee agreements alike can be crafted to defend the interests of both sides (law firm and client, that is) against "outliers" and abusive tactics visited upon them in hopes of exploiting a rigid fee structure.  Indeed, I would go so far as to say that, with:

• experience over time, and
• a sufficiently large cross-sectional sampling of cases by subject matter, by geography, or both

that firms and clients can arrive at statistically reliable predictions about what it will cost to defend/prosecute the "median" case.  For example, if a firm like Baker & McKenzie wanted to bid on defending Wal-Mart against all employee discrimination cases nationwide for the next five years (at a fixed rate for the five years—think insurance premium here), I bet a three-member team of (a) Wal-Mart inhouse counsel prepared to share the data on such cases for the past five years; (b) smart outside counsel firm's management team; and (c) econometrician/statistician, could come up with a reasonable range of price tags, after which "mere" negotiation would reduce the risk to a single number (contingencies, again, happily included).

But enough of my editorial insertions:  On to Ernest Svenson's inimitable tour of the landscape:

"• As much criticism as is directed at the billable hour, it seems indestructible. Why does it persist as the "default" billing model?

"For the same reason that people climb Everest: because it's there. Or, because 'it's familiar' and change brings uncertainty, which lawyers eschew. But also, (to answer the second question) it's a good deal for many lawyers, mostly those that practice in big firms. Was it Abraham Lincoln who said "it's easier to steal a little bit from a lot of people than to steal a lot from a few"? Well, something like that principle (without the 'theft' part) is in play with hourly billing schemes in that they allow more time to be billed by itemizing than would be possible if the client just got one large bill at the end of a case. By focusing attention on the carefully described little chunks of time entries, you draw attention away from the constant larger question that many large institutional type clients used to have trouble gauging: "Is what I'm paying for my defense worth the overall expense risk/reward of litigation?" I say 'USED to have trouble gauging' because those salad days are coming to an end. Clients became picky about legal bills starting about 15 years ago. Then they started getting mad, and then they started instituting systems and billing codes and other things that annoy the hell out of lawyers. More recently, they have started getting rid of lawyers and law firms that they don't trust to bill properly. And now they are starting to insist on alternative billing arrangements in many situations that obviously call for it.

"• Is the billable hour model a better deal for the lawyer or for the client?

"Generally, and historically, it was a better deal for the lawyer. Although, in the very beginning (see below) it was probably a semi-good deal for many clients.

"•If a lawyer told a client they were open to other types of fee arrangements, how often do you think clients would suggest an alternative? And what would that alternative be?

"I think the savvy clients, especially those with a discreet and definable class of recurring legal problems (i.e. Cisco with patent applications and basic intellectual property questions), are highly motivated and skilled at negotiating alternative fee arrangements. But many other corporate clients are still stuck with a dilemma: they WANT an alternative arrangement, but the front-line decision makers responsible for hiring outside counsel don't know how to properly quantify the risk (which is understandable since quantifying litigation risk is not even classifiable as 'an inexact science'), and they are afraid, given the lack of objective data to support their decision, to state in a formal document that they recognize that a trade off of an alternative arrangement is that their outside lawyers will have to severely curtail discovery and prepared for trial in a 'discount lawyer' fashion. How'd you like to be an in-house counsel telling your top corporate brass "well what we did in this important litigation was to hire a discount law firm to keep the legal fees down, and they are going save money by not preparing as zealously as they normally would"? Somehow it doesn't sound right, does it? Especially when you have no objective way of proving that you are making a sound decision by adopting that approach.

"And yet, really, that's what has to happen in many alternative fee arrangements if the lawyers are going to get interested. In other words, there has to be a way for the lawyer to have a chance to make more money with the alternative fee arrangement or your not going to get him/her interested. Steve Sussman (God bless his self-promoting little heart) has said that a lot of discovery is useless (see article in American Lawyer at http://www.susmangodfrey.com/Articles/TopLitigationBoutiques.pdf). But that statement is heresy to the vast majority of litigators who have learned to prepare cases for trial (knowing that they will likely settle) as opposed to preparing them for trial and then actually showing up in court. In short, a lot of lawyer are afraid to try cases. Not too many are afraid to do discovery. And many in-house counsel are afraid to publicly acknowledge that they are going to let their outside lawyers prepare for trial without a typical discovery carpet bombing approach.

"• Do you have anything nice to say about the billable hour? Somebody, please rally to its beleaguered defense!

"Yes, sort of. I think that the billable hour is a case of 'beware of what you ask for 'cause you might get it.' I think it was instituted when corporate america started telling lawyers who had formerly sent out bills at the end of a representation with a large number and a short description (i.e. 'for services rendered') that this was not something that the corporate accountants could stomach. Corporate lawyers quickly learned that breaking their time into discreet chunks was actually a secret passageway to more profits. More young lawyers could be hired to do things like summarizing depositions and launching MIRV discovery missiles and by responding to the 'multiple independently targeted re-entry vehicle' missiles that were launched at them. As long as your associates could be trained to keep track of their time and break every task down into, say, a minimum time increment of 1/4 hour, things could be good. Especially for lawyers who received a lot of mail.

"So what's good about it now? Well, I guess not much. How many lawyers have heard corporate in-house counsel say to them "hey look I need you to charge me a lower than typical rate, but you can make it up in the hours you bill and we won't mind?" Answer: more than one. And why is that? Because we still have clients (who created this mess in the first place) who need a way to save face within their corporate structures. It's like the tax system in the U.S. We all know that it'd be better if we just had a value-added tax. There'd be no cheating and it would be easier to administer. But the system we have now is so complicated that it's too hard for all the important king-makers to figure out a new system that they could all make as much, or more, money in that's also simple. The solution, in the case of lawyers and alternative billing, is that the system has to purge a few king-makers and make the remaining ones scared enough to believe that failure to innovate might be detrimental to their financial health."

Ernie wins the blue ribbon for breadth and depth—not to mention true blue feet-on-the-ground, this is how it really works, insight.

For my money (and I say this as someone who toiled in-house as a securities lawyer at Morgan Stanley/Dean Witter trying to reduce our umpty-ump million $$/year in outside counsel fees—and "succeeded," if success is defined as reducing the growth rate), Ernie puts his finger on the devil's bargain reached between the AmLaw 200 and the F1000:  "[T]he system we have now is so complicated that it's too hard for all the important king-makers to figure out a new system... [until we] purge a few king-makers and make the remaining ones scared enough to believe that failure to innovate might be detrimental to their financial health."  Sounds like a realistic economic prescription to me.  And next up, the value-added tax (just kidding).

Last up, we have a "ringer" I surreptitiously invited to the Savvy Blawgers party on condition of anonymity.  I will identify him only insofar as to confess that I know him through the notorious Princeton alumni mafia, and that he's spent the last 20 years being a Deep Thinker on issues of business strategy and alignment of incentives with objectives.  He is not, I hasten to add, a lawyer.  Try this on for a different take on our conversation so far:

"I can't help but think that the simplest view of the billable hour is the view most likely to make some sense of it.

"Selling time as the "container" of expertise is simply logical when the purpose is to achieve a balance between competing demand for expertise and a limited "supply" of expertise.

"The problem is that the notion of "supply" has changed quite a bit, as numerous new and viable delivery vehicles (especially technological ones) have augmented the solo person as the channel for delivering expertise.

"Since the solo person is no longer the only channel, the end-user and the providers begin to explore what *can* go through the diverse channels as opposed to what *should* go through them.

"This means that, hypothetically, the billable hour should be rated "strictly" in accordance with the kind of "value-add" that is offered by the distinctive channel (e.g., a person), but of course as affected by the current or expected availability of that kind of value-add.

"Expertise in the form of legal knowledge was never the only value being delivered. Representation and Advocacy were also being delivered, but there is the question of how much was provided versus how much was ordered. In other lines of business, this balance is achieved through contracts, and the terms of agreement set forth definitions of the provisions. Theoretically, there is no reason why a billable hour should not be an ongoing version of the contract; the issue is rather whether the contract is a good one or a bad one.

"That suggests the model of "professional services" continuing as the perspective in which value is determined. What does it mean to be "professional", and what is the form (not the content) of the service?

"In that way, pricing issues such as quality, quantity and assurance can be objectively detailed against histories, certifications and reputations. If the prospective buyer wants to negotiate, there should be an outside reference of standards that the buyer can consult.

"But as long as Representation and Advocacy are prosecuted in the form of "Best Effort", there is always only an invented relationship between the cost of an hour and the value of an hour. This is absolutely no different from the considerations that take place when determining how much to pay pro athlete X versus pro athlete Y, to get on the field and play the same kind of game for 60 minutes for "your team". In this scenario, the law firm is "staffing" the customer's "team".

"The other side of the issue is within the firm -- namely, the engagement revenue accounting and service capacity management involved. This is really not the buyer's issue at all; instead, it is the "shareholder's" issue.

"So as for the future of the billable hour, isn't the problem first of all about how firms manage their internal costs against shareholder value? Then secondly, isn't it about how Best Effort is cost-justified to the customer?

"By the way, feel free to correct me, and/or cite me (on Adam Smith), of course..."

:[X]

Yes, that's worth reading again (and possibly again) for its elliptical but genuinely deep insights.

But I can't leave you on such an empyrean plane.  The final word does come from one of the Savvy Blawgers, whose anonymity I will choose to safeguard for purposes of this public posting (but you know who you are), and who wins the blue ribbon for the fastest turnaround/response to my initial query—as I recall, 10 minutes or less:

I have to admit that my initial response to this question was to recall the ending moments of a memorable song from Johnny Rotten.   Allow me to quote:

"We’re the flowers in the dustbin
We’re the poison in your human machine
We’re the future your future

"God save the queen we mean it man
There is no future in england’s dreaming

"No future for you no future for me
No future no future for you"

Further your humble editor sayeth not.

Posted by Bruce at April 1, 2005 7:48 AM
Posted to Compensation | Cultural Considerations | Finance | Globalization | Leadership | Practice Group Management | Strategy

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