Beyond the daily headlines of layoffs and reductions in force, the current recession has made another impact on the legal profession: seriously questioning the viability of the billable hour. The straws in the wind seem to be everywhere:
- A major story in The New York Times asserted that “lawyers are having trouble defending the most basic yardstick of the legal business – the billable hour system,” adding many clients believe its use does nothing but “prolong a client’s problem rather than solve it.”
- The presiding partner at Cravath, Swaine & Moore in Forbes magazine called for killing the billable hour, saying that because of it, “clients feel they have no control, that there is no correlation between cost and quality.”
- The Association of Corporate Counsel is developing a Value Index that will evaluate law firm billings against corporate clients’ perceptions of value, defined by such criteria as a demonstrated understanding of the client’s goals and objectives, the use of client service teams, and efficiency of a firm’s management processes.
Billable Hour Trap
Certainly the billable hour has plenty of negatives associated with it both for lawyers and clients. Lawyers who bill by the hour are in no different a position from other hourly laborers, and often account for their professional lives by producing bills that simply say, “This is what I did, this is the time I worked and this is what you owe me.” Businesses that do not bill on the basis of time can earn more for their service or product when they become more efficient. The more efficient lawyers become, in our current business model, the harder we have to work to earn the same money as before.
Is the billable hour the trap? Or is the desire for economic rewards in a society whose cost of living continues to increase the real trap? Lawyers, like any other participants in the economy, want to earn a “reasonable” living. A lawyer’s fee, whether expressed in billable hours or some other measure, must be reasonable for the value provided, and that is a matter of agreement between lawyer and client.
Lawyers work hard, though not necessarily harder than other people. The thought of 2,000 or 2,500 or more billable hours is one indication of workload. But in this instance, the billable hour is only a method of accounting; it is not the reason we work long hours . We work long hours because we love what we do, we want to help people, and we want to earn money to better take care of our loved ones. Billable hours merely provide a method of accountability for those clients who may not otherwise see the value of what we do. If clients, in fact, fail to understand our value, we have failed to properly communicate with them and we have failed to understand the value to the client of what we do.
Keeping Track
If we use a different method of accounting, such as value billing or fixed fees and do not help the client understand why, they will continue to fail to understand what we do, why we do it, and how we helped them. And, they will then procrastinate or refuse altogether to pay our bills. And, we will continue to work long hours because we want to do more and earn more.
Value billing demonstrates to clients the worth as well as the cost of the legal services they receive, and billing them accordingly. Even when using the concept of value billing, lawyers may be safer, despite whatever billing methodology is employed, when keeping track of time expended. Where your billings may come into question, either by a judge needing to approve the fee, or because of a fee dispute needing to go before an arbitration panel, the tried and true method of demonstrating what you’ve done and its “value” usually comes back to hourly metrics.
One might ask, if a client agrees to value billing, why should it matter whether we keep track of time? The most important reason is the ethical requirement, under the ABA Model Rules of Professional Conduct and all state bar regulations, that fees charged must be “reasonable.” If a client wants to dispute whether a value charged for a service was reasonable, one side or the other will point to the time records idea in the Model Rules and request documentation.
One way to enhance the client’s knowledge of value is to prepare a budget of events, time and costs for each matter of significance, and get client acceptance. You can bill for the value provided based on passage of time (e.g., monthly), passage of benchmarks noted in the budget or other appropriate methods. But, the bill is still for value as measured by specific benchmarks.
Who Determines Value?
Value is ultimately determined by the client, not the attorney. But, it is the attorney who must educate the client about “value.” Most clients recognize the importance of 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. Collaboration in the context of providing greater value in legal services produces more effective representation at a lower cost to the corporate client without discounting either the value or the per hour fee of the lawyer.
This, of course, brings us back to the need for communication, trust and rapport between client and lawyer. Value billing ultimately is best applied to legal services that are perceived to be unique because of the attorney-client relationship or because of the special skill required to deal with the challenge. The key is to understand the value to the client, expressed either in units (money) or some other format clear to the client.
Deciding a reasonable fee generally involves ethical questions of professional conduct. Is the amount of the fee proportional to the value of the services performed? Does 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 lawyer’s true obligation is not to be cheap, but to be fully committed to a collaborative client relationship that builds trust over the long term. That way, clients will see you as valuable, not expensive, and as a partner, not a vendor.
The Firm as a Business
Many lawyers charge less than $200 per hour. Though faced with competition from other lawyers (and now paralegals), lawyers must fight to find ways to increase their fees, whether by the hour or otherwise. Like every other profession and trade and business, the practice of law is a business. That means we're governed by the same formula: P = R - E. Profit (take home pay) equals revenue collected less expenses. If you make widgets, the question becomes, “Can I sell enough widgets to cover all my costs and have something left over?” Replace “widgets” with “hours” (or other billing metric) and you have the question that goes to the heart of “The Business of Law®.”
So, are lawyers who charge $1,000 per hour “reasonable”? How about $100 an hour? Ultimately, the rate that most lawyers charge is based on a “gut feel” after evaluating such factors as their years of experience (more years out of law school mean a higher billing rate), their practice area (large mergers and acquisitions work, bankruptcy or intellectual property, for example, are valued higher than family law), their geography (New York lawyers charge more than those in Des Moines), the number of lawyers in their geographic and practice area near them (the more lawyers there are, the higher the price competition, and type of billing method (hourly rate, flat fee, contingency fee, and so on).
The simple fact is that too many firms often don't know their costs of operation. Thus, the fee figure chosen often is a "by guess, by golly" fee, not one based on a cost benefit analysis. Your firm cannot aspire to set an appropriate fee unless you understand the operation of the firm as a business (budget, collections, profit, loss), the firm’s billing structure, and how each attorney impacts law firm profitability. Any fee ultimately can be justified if you know the cost structure behind it, and if the client accepts the value that the fee represents.
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