Billable hours as a Source of Conflict in Law Firms
Editors note: This post is the final in a series of reports on the state of the billable hour.
All of this adds up to a surprisingly stark conflicts between the interests of law firms and those of their clients. On this point, attorney and author Scott Turow wonders whether hourly billing runs afoul of ethical guidelines:
[Model Rule of Professional Responsibility] 1.7 provides in part that "a lawyer shall not represent a client if the representation involves a concurrent conflict of interest," which the rule defines as occurring when "there is a significant risk that the representation of one or more clients will be materially limited by . . . a personal interest of the lawyer." I ask you to ponder for just a few minutes whether that rule can really be fulfilled by hourly based fees.
Turow goes on to argue that the problem is not one of intentional overworking but, "like every other conflicts issue [. . .] is one of appearances and temptations." Which underscores another layer of problems with the billable hour: if clients recognize that it is bad for them, but they do not see their lawyers as willing to change the system, clients can begin to distrust the lawyers even if there is no actual impropriety occurring. This damages the attorney-client relationship. This and other costs to the firm are discussed infra.
The Billable Hour is Bad for Firms
"[B]illable-hours pressure is driving many attorneys out of private practice."
According to National Association of Legal Professionals (NALP), attrition from firms is high: about two thirds of new associates left within five years, and three quarters did so within seven years. The data do not suggest that these lawyers are simply moving laterally to other firms: a North Carolina study indicates that half of all lawyers-not just big-firm associates-seek to leave the practice of law before the end of their careers.
The costs to the firm come in many forms. There are tangible costs involved in recruiting and training a replacement and time spent catching other attorneys up on the matters left undone. Each incidence of attrition can cost a firm up to $200,000. Then there is intangible damage to firm morale flowing from the loss of colleagues and talent, and damage to relationships with clients, who routinely name associate turnover as a major concern. Within the firm, institutional knowledge and personal relationships also suffer. Observers note a loss of collegiality, which they trace directly to billable-hour requirements.
But while firms have shown a resilient ability to recruit talent even while seventy percent of it walks out the door within five years, the pool of clients is not so bottomless. Thus, damage to a client relationship resulting from actual or perceived overbilling can be irreparable.
And despite the strict ethical code under which attorneys operate, the temptation to overbill often supersedes. High-profile cases emerge every so often, such as the attorney who famously billed 6,022 hours in 1993 (i.e., 16.5 hours on each of 365 days). But more common is overbilling on a smaller scale, as detailed by Lisa Lerman in 2001. Attorneys are driven by desires for money and status, and unencumbered by fading notions of loyalty and firm culture.
Thus far our concerns have been limited to concern for lawyers, the firms that employ them, and the clients that hire them. But the harm of the billable hour does not stop there. It touches every aspect of our society reached by the legal profession itself. Harm done to the legal profession is harm done to the entire community.
Indeed, while the billable hour has had foes all along the way, it has stubbornly remained as the prevailing means of billing for legal service. A few reasons-such as inertia, flexibility, and mistrust-explain both why law firms are in no rush to change as well as why clients might also prefer the current system. Others-such as internal management, compensation, profitability and risk aversion-shed light on why lawyers' critiques of the billable hour can ring hollow.
Alternative fee arrangements may represent better deals, but among both firms and clients there is a longstanding comfort with the billable hour. But the familiarity and inertia are not just psychological. To move to any other sort of arrangement would involve high transaction costs as both parties warily enter uncharted territory. But to stick with a familiar system requires no thought or judgment, and therefore remains an efficient means of doing business.
Even in the early twentieth century some legal work was billed by the hour. Fixed-fee schedules existed for routine transactions, but not everything could be prescribed so neatly. The billable hour, by contrast, can be applied to any type and any amount of services, which is in large part why it took hold as legal issues increased in complexity (as described supra) and partly why it remains ubiquitous today.
A troubling aspect of the billable hour that-ironically-works to perpetuate its use is client mistrust. Some corporate counsel oppose fixed-fee arrangements because they assume the lawyers who propose them will be using it as an opportunity to overcharge. While this can in theory be solved by presenting the client with a choice between standard hourly billing and a flat fee, one begins to see why existing tensions between law firms and clients may retard progress away from hourly billing, in spite of its shortcomings.
The widespread adoption of the billable hour was fueled in part by mid-twentieth-century trends in organizational theory, which showed that records of time billed were a simple tool for internal management. These notions remain true today: whatever the shortcomings of using it as a basis for billing, time is easy to measure, monitor, and compare. Work can even be administered in time increments ("Research this issue and tell me what you have after three or four hours"), making time a useful prescriptive and descriptive tool.
"[T]he biggest stumbling block to alternative fee structures may be the managing partners at law firms, who will have to overhaul compensation structures to reward partners and associates for something other than taking a long time to do something."
Like most white-collar professions, law rewards its employees with variable compensation-a bonus-related to performance. Hours are a convenient proxy for value delivered, and it is much simpler and more objective to count hours than to evaluate work qualitatively. Right now, while law firm bonus structures vary considerably, most consider the number of hours billed by an associate as a major factor in determining bonus pay.
Profitability and Risk Aversion
Many of the incentive misalignments described supra weigh in the law firm's favor. It stands to reason, then, that firms would cling to a model whereby partners can increase their personal wealth by hiring associates, for example, or run up the bill under the cloak of zealous advocacy. Also, the billable hour shifts the risk of the law firm's inefficiency onto the client in the form of variable costs, and given that law firms are generally risk-averse institutions (often more so than their clients), this arrangement works in their favor.
  Turow, supra note 23.
  Id.
  Fortney, supra note 52, at 189.
  Schiltz, supra note 28, at 926 (quoting NALP Found. for Research & Educ., Keeping the Keepers: Strategies for Associate Retention in Times of Attrition 53 (1998)).
  Schiltz, supra note 28, at 882 (citing N. Carolina Bar Ass'n, Report of the Quality of Life Task Force and Recommendations 4 (1991)).
  Fortney, supra note 68, at 284.
  Id.
  Id. at 284 n.276.
  Fortney, supra note 52, at 190.
  Rosner, supra note 44, at 70; ABA Comm'n on Billable Hours, supra note 12, at 5.
  Jones & Glover, supra note 20, at 296.
  Lisa G. Lerman, The Slippery Slope from Ambition to Greed to Dishonesty: Lawyers, Money, and Professional Integrity, 30 Hofstra L. Rev. 879 (2001).
  See, e.g., Gilson & Mnookin, supra note 1.
  McCollam, supra note 11.
  Id.
  The Billable Hour Debate is Not About the Billable Hour, AdamSmithEsq., Mar. 22, 2011, available at http://www.adamsmithesq.com/archives/2009/08/the-billable-hour-debate-is-not-about-the-billable-hour.html
  Bruck & Canter, supra note 8, at 2094.
  Kuckes, supra note 4.
  Jonathan D. Glater, Billable Hour Giving Ground at Law Firms, NY Times, Jan. 30, 2009.
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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