Billable Hour Transforms the Legal Profession

 

To say that the billable hour has transformed the legal profession is no exaggeration. Though one might quibble over whether its widespread adoption triggered or merely accelerated a sea change in the way law is practiced, its effect is undeniable. But it is good or bad? 

Let us consider for a moment that the change has been for the better. Prevailing wisdom in the 1990s held that the current generation of students had become more materialistic. "Being well off financially" was a goal of 75% of students entering college in 1993, compared to 39% in 1970.[1] It follows, then, that large and growing compensation would attract the top tier of talent-away, perhaps, from investment banking, medicine, or other lucrative professional careers. And isn't best for the legal profession to have the "best and brightest" in the nation attracted to it?

And let us not forget the clients who demanded or at least welcomed the change from inflexible and opaque fixed fees "for services rendered." Surely they are happy to pay only for time actually expended on their behalf, while the detail of an hour-by-hour bill serves their interests of fairness and transparency.

Yet for every big-firm lawyer or general counsel attacking the billable hour, precious few come to its defense. Why would lawyers complain about a system that has brought them and their partners such wealth, and why would clients reject a change their forefathers embraced just one generation earlier?

The Billable Hour is Bad for Lawyers

Attorneys have become an unhappy lot. "[J]ob dissatisfaction among lawyers is widespread, profound and growing worse," writes one reporter.[2] "Lawyers are indeed unhappy," finds another observer, and "the source of their unhappiness seems to be . . . their work as lawyers."[3] But what drives this unhappiness? More work for more pay is not an inherently distasteful proposition: millions of Americans hold two or more jobs, and today's students cannot be so simple-minded as to think their (our) materialistic hunger will be satisfied by working nine to five.[4] 

But, as leading happiness researches continue to find, we (humans) are terrible predictors of what will make us happy. Perhaps new attorneys realize that, while the initial tradeoff appealed in theory, the marginal cost of additional hours is not worth the marginal benefit when experienced first-hand.[5] Unfortunately, the bimodal distribution of associate salaries suggests that opportunities to trade hours for dollars along a smooth downward curve are limited.[6]

Attorneys are understandably and unpleasantly surprised when the demands of their jobs interfere not just with their personal lives, but with basic human needs-what Turow describes as "trivialities like eating, sleeping, and loving other people."[7] While data on attorney eating habits are scarce, almost 40% of attorneys at law firms report averaging less than six hours of sleep per night, a shortage that has been linked to decreased cognitive ability.[8] As for loving other people, studies indicate that the divorce rate among lawyers is higher than among other professionals, and those lawyers that are divorced remarry at lower rates as well.[9]

Even if an attorney can manage to work a reasonable number of hours, many find the practice of recording their daily activity in six-minute increments to be cheap and mechanical. Robert Hirshon, while he was president-elect of the ABA noted that lawyers who had left firms and joined corporate general counsel offices were happy to leave the time sheet behind. Even those who worked the same amount felt "liberated from the demeaning ritual of having to account for their professional lives in tenth-of-an-hour increments."[10]

Still, "when work is pleasure, life is a joy!"[11] Another effect of the billable hour is that, personal life aside, a person billing 2000 hours a year has "less chance to pursue the professional experiences that nourish a lawyer's soul."[12] Chief among these is pro bono representation, which is often not counted towards attorney billable-hour requirements at many firms. While many students enter and even leave law school aspiring to dedicate a significant portion of their work to pro bono clients, very few attorneys actually meet the ABA's guidelines for pro bono work: most lawyers do none at all, and the average for the bar as a whole is less than thirty minutes per week.[13] Also left out of many firms' billable-hour count is mentoring, leaving more young associates to fend for themselves (and perhaps depriving partners of an enriching professional activity).[14]

But one might reasonably wonder whether lawyer dissatisfaction is really enough to justify abandoning the billable hour model, especially if it is in the best interests of clients. Let us examine whether this is really the case.

The Billable Hour is Bad for Clients

Does not accurately reflect value of services to client

"[F]irms using this system can't possibly conform to what the client needs. They focus on what the firm needs."[15]

As mentioned above, hourly timekeeping was originally conceived as a method for lawyers to measure their costs of doing business, not the price of their services.[16] But because of the centrality of the billable hour to modern practice, the value of a lawyer's services is now understood simply to be her hourly rate multiplied by the number of hours spent on behalf of that client. This ignores the other forms of value that lawyers routinely deliver to clients other than brute-force effort, and may produce a fee that has scant relationship to the value of the work to the client.[17] The results are sometimes unfair to the client, sometimes to the lawyer, and sometimes both.[18]

Some may be tempted to believe that the billable hour correctly aligns the incentives of the client (who wants the most thorough representation) with the attorney (whose service gets more thorough with each passing hour). This is correct only insofar as the two are pointed in the same direction: no lawyer will harm a case by working more on it. The trouble is that the cost increases linearly while the benefit increases nonlinearly. I address this further at "Overworking," infra.

Competition on rates

Take a hypothetical client who wants to shop around for attorneys, and has narrowed the field to two. She then discovers that Attorney A charges $300 an hour, while Attorney B charges $400. In theory, the client will save 25% by working with Attorney A. But in practice, Attorney B's rate may reflect expertise in a relevant area, and he may do the same work in half the time. The billable-hour "sticker price," then, is useless until multiplied by a number of hours.[19]

However, the reliance on hourly rates as a rough proxy for expertise is also problematic for the obvious reason that lawyers then have a reason to inflate their rates to seem more qualified.[20]

Barrier to communication

Clients may be concerned that the lawyer's billing clock will start running as soon as they initiate a phone call or e-mail.[21] This impediment to communication is a win-win for the lawyer-either she can work uninterrupted or can bill for the call-but does not seem to be in the clients' best interests. It also reduces the client's ability to monitor the attorney for case planning or overworking (described infra).

Inefficiency

"The hourly rate neither encourages nor rewards efficiency [but instead] penalizes it."[22]

As documented at length in the literature, the billable hour penalizes efficiency and rewards inefficiency. What is surprising is just how many forms of inefficiency are routinely seen in large law firms.

Shirking

"[S]hirking is more than a problem of not putting in enough hours; the more difficult aspect arises with respect to lawyers who put in the time, but do not try hard enough to be effective."[23]

Measuring the number of hours indicates only how long a particular lawyer spent to produce some quantity of work. It measures neither the quality nor the quantity of that work. Another lawyer might have produced the same quantity and quality of work in half the time, which by most measure of productivity makes this lawyer twice as productive. But by measuring and rewarding only hours spent, the latter lawyer is considered half as productive.[24]

Long hours

"[By relying on the billable hour,] firms may be creating an atmosphere which actually increases the likelihood of professional negligence."[25]

The long hours that lawyers work first affects their personal lives, as discussed supra. But ample evidence suggests that long work hours can impair judgment and critical thinking skills, increasing the likelihood of error.[26] Even the sharpest minds grow dull when overtaxed, and an emphasis on quantity will necessarily impair quality beyond a certain threshold.

Lack of planning

One source of inefficiency is execution without planning. Without a client request for the lawyer to produce a project or case plan, lawyers can simply begin working-and begin billing the time-making up a plan as the matter unfolds.[27] This can lead to false starts and wasted time as lawyers seek a viable approach to a case without an incentive to minimize search time.

Overstaffing

"Rates don't drive costs, [inefficient] staffing does."[28]

Especially when workflow is low, firms may assign too many attorneys to staff a case. Even if each attorney works efficiently, the team itself will accumulate inefficiencies resulting from the need to communicate with each other: assigning, reporting, reviewing, and meeting are all tasks that require multiple attorneys, each of which can easily justify billing the time.

This is another area that is particularly difficult for clients to monitor, especially because staffing cases can be a source of increased efficiency as well. For instance, it is better that an associate spend five minutes on the phone with a partner than two hours in the library, assuming the correct information is gathered. But even if we give firms the benefit of the doubt and assume that they staff their cases to increase efficiency rather than decrease it, we cannot help but notice that adding another attorney to a case team might help the client but will help the firm.

Overworking

This is perhaps the most difficult area of efficiency to control, for the major reason that the practice of law is often an exercise in risk avoidance. A completely rational model would allow the attorney and client to calculate how much is at risk and the probability that a certain measure will forestall that risk, and determine whether to pursue the measure based on weighing its cost against the expected value of the incremental risk avoided. But even in this model, it is in lawyer's best interests to overestimate or overstate legal risks.[29]

Overworking is also difficult to monitor. Clients rarely have the information necessary to determine whether their lawyers' marginal efforts are necessary. High-level strategic choices are easy enough to influence, especially by a well informed general counsel, but the day-to-day decisions made by attorneys in the proverbial trenches cannot be reliably monitored by outside parties.[30]

Two, while attorneys in theory have better information, their incentives are skewed. Let us assume that the value of an attorney's service to a client can be reduced to one metric: the percentage likelihood of successfully defending a suit. Obviously, the attorney's benefit increases linearly: every hour billed increases the benefit by the hourly rate. But the client's benefit is nonlinear: every dollar spent does not result in the same increase in the probability of success. It is fair to assume that to move a client from a zero to ten percent chance of winning, for example, is a much simpler (and cheaper) matter than moving from ninety to one hundred percent.

I illustrate a marginal example in Figure 2 below:

Figure 2. In a hypothetical situation, a lawyer is preparing for litigation by taking depositions on the client's behalf. Because the witnesses being deposed work in the same company, the value of each deposition to the client is half the value of the one before it. But because the lawyer is charging by the hour, he or she does not stop at the efficient number of depositions (three) but instead continues to depose witnesses and bill more hours. This is easily justifiable under the cloak of "zealous advocacy" or as a precautionary measure, but the fact remains that the lawyer is in charge of determining how much legal service is necessary, while at the same time standing to benefit if more than the optimal level of service is provided, as long as the excess is only to an unobservable degree.

Unpredictability

There are inefficiencies inherent in every industry, and the billable hour is far from the sole cause of law-firm inefficiency. The problem with the billable hour's role in law-firm inefficiency is that it shifts all the risk of internal inefficiency on to the client. After all, why should the attorney care whether a task takes four or eight or twenty-four hours if the costs are passed directly to the consumer? The result shifting risk to clients is that legal bills are unpredictable. Clients seek to reduce costs, but also crave clear-cut projections because predictability aids their budgeting process.[31]

 Lack of technology

Technology in its many forms provides myriad ways for lawyers to do their jobs more efficiently, and most firms stay current with technological trends. But hourly billing "actively discourages those efficiencies" because they increase costs and reduce revenues.[32] To stay abreast of technological developments, firms must incur costs that cannot be passed directly to the client and must be treated as overhead. At the same time, online research and teleconferencing can drastically cut down the amount of time an attorney spends on a matter, thereby reducing the amount she can charge the client.[33]

Of course, there are aspects of the market for legal services that disincentivize law firm inefficiency. Clients dissatisfied with their firms' fees can always go elsewhere, and attorneys are bound by an ethical code, violations of which can have steep consequences. Attorneys themselves may "vote with their feet," preferring an efficient law firm as a matter of principle. Each of these factors is a strong counterweight to the perverse incentives that flow from the billable hour, but switching costs are not insignificant, and, given the ubiquity of billable-hour fee arrangements, clients cannot guarantee that the next firm they hire won't put them through the same ordeal.


[1]
                Schiltz, supra note 28, at 896. See also Deborah L. Rhode, The Profession and Its Discontents, 61 Ohio St. L.J. 1335, 1341 (2000).

[2]
                David Margolick, More Lawyers Are Less Happy at Their Work, a Survey Finds, N.Y. Times, Aug. 17, 1990, at B5

[3]
                Schiltz, supra note 28, at 881.

[4]
                Supra Part I.

[5]
                See Schiltz, supra note 28, at 903-06 on the "Game" "[L]awyers have spent their entire lives competing against others and measuring their worth by how well they do in the competitions. And now that they are working in a law firm, money is the way they keep score." Id. at 906.

[6]
                See Henderson Results or Resumes at 10. See also id. at 8-9 (discussing "several harmful incentives" set in motion by high associate salaries.)

[7]
                Turow, supra note 23.

[8]
                Susan Saab Fortney, The Billable Hours Derby: Empirical Data on the Problems and Pressure Points, 33 Fordham Urb. L.J. 171, 182 (2005).

[9]
                Schiltz, supra note 28, at 878.

[10]
                McCollam, supra note 11 (quoting Robert Hirshon, president-elect of the ABA).

[11]
                Maxim Gorky, The Lower Depths act I, in Four Modern Plays 289 (Henry Popkin ed., Alexander Bashky trans., 1961 (1902)) quoted in Schiltz, supra note 28, at 881.

[12]
                Turow, supra note 23.

[13]
                 Deborah Rhode, Pro Bono in Principle and in Practice, 26 Hamline J. of Pub. L. and Pol'y 315, 323-30 (2005).

[14]
                Bruck & Canter, supra note 8, at 2101; ABA Comm'n on Billable Hours, supra note 12, at 5.

[15]
                McCollam, supra note 11.

[16]
                See deKeiffer, supra note 6, at 28; Mark A. Robertson & James A. Calloway, Winning Alternatives to the Billable Hour: Strategies that Work 16 (3d ed. 2008).

[17]
                See Robertson & Calloway, supra note 60, at 3-4 for a list of ways that lawyers deliver value that cannot be measured by rates or hours, including risk avoidance, ongoing support, peace of mind, acceptance of responsibility, exclusivity, and efficiency.

[18]
                ABA Comm'n on Billable Hours, supra note 12, at 6.

[19]
                Press Millen, In Defense of the Billable Hour: Bad, or Just Misunderstood?, Nat'l L. J., May 18, 2009.

[20]
                See ABA Comm'n on Billable Hours, supra note 12, at 7.

[21]
                ABA Comm'n on Billable Hours, supra note 12, at 6.

[22]
                Gina Passarella, For Large Law Firms, Alternative Billing Makes Inroads, Nat'l L. J., May 26, 2009 (quoting William B. Lytton, senior counsel at Dechert, LLP).

[23]
                Gilson & Mnookin, supra note 1, at 336-37, n.39.

[24]
                Susan Saab Fortney, Soul for Sale: An Empirical Study of Associate Satisfaction, Law Firm Culture, and the Effects of Billable Hour Requirements, 69 UMKC L. Rev. 239, 277 n.234 (2000) (quoting Francis H. Musselman, Abandon the Billable Hour!, N.Y. St. B.J., July/Aug 1995, at 28-29.

[25]
                Id. at 273 (2000) (quoting James J. Alfini & Joseph N. Van Vooren, Is There a Solution to the Problem of Lawyer Stress?, 10 J.L. & Health 61, 66 (1995-96)).

[26]
                Id. at 273-75 (marshaling evidence from several sources to demonstrate the detrimental impact of fatigue and stress on mental work).

[27]
                ABA Comm'n on Billable Hours, supra note 12, at 5-6.

[28]
                Fortney, supra note 52, at 189.

[29]
                Donald C. Langevoort & Robert K. Rasmussen, Skewing the Results: The Role of Lawyers in Transmitting Legal Rules, 5 S. Cal. Interdisc. L.J. 375 (1997).

[30]
                See Gilson & Mnookin, supra note 1, at 329-30 n.30 (suggesting that low-level tactical decisions are even hard to monitor within law firms).

[31]
                Katherine L. Brown & Kristin A. Mendoza, Ending the Tyranny of the Billable Hour: A Mandate for Change for the 21st Century Law Firm, NH Bar J. 66, 68 (Summer 2010).

[32]
                Jones & Glover, supra note 20, at 296.

[33]
                Id.

 

Building a Better Legal Profession (BBLP) is an organization based at Stanford Law School.   BBLP is a national grassroots movement that seeks market-based workplace reforms in large private law firms. For more information, visit BBLP's Web site at www.betterlegalprofession.org.

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