The Billable Hour: Dead, on Life Support, or in Hibernation?
by Ed Poll
There's an important truth underlying every discussion about methods of billing: Value is ultimately determined by the client, and lawyers must educate clients about value.
One legal services question raised, but hardly answered, by the Great Recession is whether the billable hour as it has long been known is dead. Certainly the much-maligned concept of billing for legal services by time increments has negatives that the recession’s cost pressures have emphasized.
As clients regularly point out, more hours billed do not mean a lawyer is more productive or harder working. Reaching the correct solution is the objective, and the lawyer who takes five minutes to do so instead of three hours produces better value for the client while putting the client more in control of costs – or so the argument goes.
That may be a true reflection of what some clients feel, but many clients are too willing to pass on to the lawyers their lack of control because they themselves refuse to become involved. Paying the standard billable hour rate without question puts all of the burden on the shoulders of the lawyer to solve the problem. The client’s response becomes a detached, "That’s what I’m paying you for." That is similar to the patient who expects a doctor to provide the cure to a health problem without the patient changing the unhealthy behaviour that contributed to it.
The Measure of Value
There is nothing inherently wrong with using the billable hour itself to measure the value of legal services. Chapter XI of the CBA’s Code of Professional Conduct says that a lawyer’s fee should "fully disclosed, fair and reasonable." Commentary on this chapter says that the first determinant for these criteria is "the time and effort required and spent." Difficulty and importance of the matter, special skills required, customary fees of other lawyers – all are secondary to this measure.
One good reason for this is that, as the chapter notes, "misunderstandings about fees and financial matters bring the legal profession into disrepute," and such controversies are more likely if the client does not understand the basis for the fee.
If the lawyer uses a different method of accounting, such as value billing or fixed fees, and does not help clients understand why, clients are likely to misunderstand what the lawyer did and how it helped them. Fee controversies are too often the result.
Even if the client accepts the concept of value billing, lawyers may be safer, despite whatever billing methodology is employed, if they keep track of time expended. When billings come into question, the tried and true method of demonstrating what was done usually comes back to hourly metrics. If a client wants to dispute whether a value charge for a service was reasonable, a time record can provide useful documentation and explanation.
So is the billable hour dead? Or, given such practical considerations as circumventing billing disputes, is it just on life support? As it turns out, there is a third option: hibernation.
What is a lower fee?
A recent survey by a major U.S. law firm consultant reported that almost 73 percent of 2009 outside counsel fees were based on arrangements other than the standard hourly rate, up from 66 percent the year before. It is clear that law firms are scrambling with deals to retain clients. But is it also an inescapable conclusion that law firms are moving away from the standard hourly rate?
When looking further into the responses of the large companies surveyed, most of whom exceeded $1 billion in revenue and more than 5,000 employees, it is apparent that the "alternatives" described were basically discounted fees. When the customer pushes hard enough, the supplier/vendor/law firm will react – and in most cases, the reaction was to discount the fee by a percentage. The net effect is to take a $300 fee to a $250 fee, or numbers proportional to this.
There are many ways to disguise the discount: a flat percentage; a blended rate, a volume discount, a fixed fee, and so on. But these are not really "value" billings as discussed earlier. Value billing means the customer/client has more involvement in setting the fee, and the arrangement is more of a partnership than a traditional customer-vendor relationship.
Television programs about lawyers are notoriously unrealistic, but the American television series The Good Wife, demonstrated in an episode late last year how both the discounting and the value billing process can be combined and "gamed."
In the show, a plaintiff law firm celebrated "victory" in a settlement for $35 million after suing for $90 million. This large sum for the plaintiff also meant a large fee for the plaintiff’s law firm. The firm flaunted its big settlement back at the defence firm, only to find that the defence lawyers were just fine with it.
From their perspective they had taken on a case that their client knew could cost $90 million, for which it had reserved $50 million – and ultimately "only" had to pay $35 million. By billing on a reverse contingency basis, the defence firm would receive a bonus for anything it could produce less than the $50 million. In this case, $35 million meant a very large lawyer’s fee!
Whose ox Is being gored?
So, whose ox was being gored? Personal injury lawyers with contingency fee billing (which has been accepted in all Canadian provinces since the mid 2000s) often declare, "no fee unless we win." Here both the plaintiff and the defence firms were billing on contingency, seemingly the ultimate value arrangement. But the legal costs were huge – and perhaps, in a real-life situation, a couple of negotiating sessions billed at hourly rates could have produced the same result.
In transactional work and more traditional litigation work, alternatives are created when both client and lawyer work together to analyze the facts, learn the objective(s) of the client and then determine the strategy to reach those objectives. This includes the fee and the method of determining the fee. These are alternatives, and they’re not based on the time spent on the matters. These approaches are still few and far between, notwithstanding the great amount of air expended in conversation about it.
Will the billable hour ever disappear? Probably not. The larger corporations whose general counsel are more senior lawyers and often come from large law firms are imbued with the hourly rate mentality. Law firms have been built on the hourly rate and the ease of increasing fees by a small percentage increase here and a small percentage increase there. The smaller or individual client, too, understands the idea of hourly rates.
Hourly rate billing will only disappear when lawyers begin to understand the cost of their doing business and can create a "laundry list" of unbundled services for established prices, each of which is determined in a way that produces a reasonable profit for the law firm and a fair price for the value delivered to the client.
Educating firms – and clients
Will we reach that point in the near future? Possibly. More effort is being placed on teaching lawyers professional service cost accounting; more law firms are engaging professionals in other fields to help them understand the needed processes; and more lawyers are learning project management techniques. When these skills come together, we may see a de-emphasis on the billable hour and the delivery of legal services based on the value received by the client. But this addresses only the law firm side of the equation.
Value is ultimately determined by the client, not the lawyer, and lawyers must educate clients about "value." Most clients recognize the importance of a value, and are willing to pay a fair fee for value. What they do not want is to pay too much – to pay for inefficiencies, duplications, or unnecessary services.
The skills of a lawyer and the way in which services are delivered to the client must coincide with what the client wants and needs to have. Providing greater value in legal services produces more effective representation at a lower cost to the client without discounting either the value or the fee of the lawyer.
As noted in the CBA Code of Professional Conduct, deciding a reasonable fee generally involves judgment by the lawyer. Is the amount of the fee proportional to the value of the services performed? Do the lawyer’s skill and experience justify the fee? Does the client understand the amount and nature of the fee and consent to it?
Here we can get into the slippery slope of what the fee should be. If the fee should be low, then is $200 per hour, for example, too high? If so, is $150 per hour too high? The debate over what is value and what is expense can be conducted endlessly on these terms.
Demonstrating value enables lawyers to make a convincing case about the reasonableness of their fee. That requires establishing and achieving benchmarks that define what the client wants to accomplish, and billing in a regular and timely way using statements that contain a full description of work done and results achieved.
"Good service," "value," and "solutions" should not be vague buzz words. All lawyers, in any size practice, should describe what they do to consistently encourage a high client perception of value. © Copyright 2011. Edward Poll. All rights reserved. Reprinted with permission from Edward Poll. Reprinted from 04/05/11 issue of Lexis Nexis Communities
Ed Poll principal of LawBiz Management Company, is a nationally recognized coach, law firm management consultant, and author who has coached and consulted with lawyers and law firms in strategic planning, profitability analysis, and practice development. Mr. Poll has practiced law on all sides of the table for 25 years-- as a corporate general counsel, government prosecutor, sole practitioner, partner, and law firm chief operating officer and been a consultant to small and large law firms for 20 years.
The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.