Are Billable Hours Eroding Trust Between Lawyers and Clients?

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Billable hours have been back in the news over the past month thanks to a dispute between DLA Piper and one of their clients over legal bills. The client refused to pay the bill, claiming DLA Piper overstaffed its files and performed unnecessary work. Emails from former DLA Piper attorneys (“Churn that bill, baby!”) surfaced during discovery, underscoring the problem. DLA Piper called the emails “unprofessional” and “an offensive and inexcusable attempt at humor,” but said that the billing was appropriate for the work performed.

The DLA Piper case was settled in short order after an independent company, Sky Analytics, was retained to take a look at DLA Piper’s actual billing practices and billing data. The settlement is confidential, but at least one lawyer thinks the quick settlement signals that there was some truth to the allegations of overbilling.

The case spawned yet another debate over the issue of hourly billing and whether it’s time for a change. Steven J. Harper, a former partner at Kirkland & Ellis, wrote in a New York Times opinion piece after the news of the suit broke that there

are deeper problems that go to the heart of the prevailing big law-firm business model itself. Regrettably, as with previous episodes that have produced high-profile scandals, the present outcry will probably pass and the billable hour will endure.

It shouldn’t. The billable-hour system is the way most lawyers in big firms charge clients, but it serves no one. Well, almost no one. It brings most equity partners in those firms great wealth. Law firm leaders call it a leveraged pyramid. Most associates call it a living hell.

He goes on to describe the reality of the way many law firms operate: billable hour requirements (even from firms who claim they don’t use hours as a basis to measure performance), increased financial rewards for increased hours, partner pressure to maximize hours, short-term thinking, disincentives to share client responsibilities or information, and more.

According to Harper, change will only come if “clients to press harder for alternative fee arrangements, courts to back away from policies that embed the billable hour, law firm leaders to stop rewarding excessive associate hours and senior partners to consider the deleterious consequences of their myopic focus on short-term profit-maximizing behavior.”

An article in CFO.com, How to Save Legal Costs, comes to a similar conclusion, answering the question, “[I]s the traditional hourly billing plan necessarily the best way forward for both the clients and the lawyers — especially when so many companies are not yet fully recovered from the recession and their CFO is still scratching and clawing to find cost savings?” by saying, “The answer, simply, is no. It’s not.”

The author, Stephen P. Dunn, a litigation partner at Howard & Howard Attorneys, advises CFOs that they need to ensure that lawyers have some “skin in the game”; that they share the risk with clients if the objective is not achieved, and share in the benefits if it is. But the suggestions made in this article still rely on hours as a measure of the work performed, in conjunction with targets reached – changing the rate a firm is paid based on reaching the goal agreed upon by the client. Why should billable hours be considered at all?

D. Casey Flaherty, corporate counsel at Kia Motors America Inc., opines in Law Technology News (LTN) that the problem is that when there is an incentive to bill more hours, lawyers will do just that, but agrees that it is the clients who have the most control over incentives in the legal market, and clients who must demand a change.

As one reader noted in a comment on the LTN article, the billable hour came into widespread use in the legal industry as a result of corporate clients seeking a way to standardize legal bills to make sense of them. But this has eroded the trust relationship between lawyers and clients, resulting in lawyers and clients being on opposite sides, rather than working together.

John Grimley, an international business development advisor, shares the view that lawyers and clients need to return to being allies, rather than adversaries, but does not agree that the billable hour is part of the problem. He claims that the problem is firm culture, puts lawyers and clients on opposite sides. But is it possible to change the culture without changing the incentives and moving the focus away from time spent and towards value and achieving objectives?

An article in Inside Counsel gives five strategies clients can use to prevent “runaway legal fees,” claiming that although more “companies are moving to alternative fee arrangements, seeking either fixed or flat fees to cover legal work over a period of time,…. some types of legal work, including certain types of litigation and other matters, are difficult to forecast costs and do not fit well into these types of arrangements. In many cases companies have no choice but to default back to straight hourly billing.”

The five strategies suggested are:

  1. Ask for a detailed project plan up front
  2. Reserve the right to accept and reject who will bill on the project.
  3. Create go/no-go project checkpoints
  4. Demand weekly billing and status reports
  5. Closely monitor the breadth of discovery and other variable-length projects

As I’ve said before,

While neither lawyer nor client may have been able to predict the specific circumstances in that individual case, based on past experience, lawyers and in-house counsel should have an idea what kinds of things might arise. If this is part of the discussion of scope of work and fees at the outset, an advance decision can be made about how to deal with any such emergencies should they occur during the course of the representation and how the fee will be adjusted.

Why should the billable hour be the fallback position, even for complicated litigation matters, when time spent still has no relation to value to the client, even in those matters? If clients are going to demand that lawyers prepare plans and pricing, implement client checkpoints and discuss the breadth of discovery and review before it occurs, why not bill on a fixed fee basis in stages? After all, with this kind of client review and involvement (which should be happening anyway), why not price as you go along, rather than talking about limiting hours?

The bottom line is that cases like DLA Piper make all lawyers look bad and contribute to clients’ perception that lawyers overbill and that clients should question every invoice and everything lawyers do. Unless changes are made, clients will continue to scrutinize bills and seek to put additional controls in place, possibly employing software and experts to track what lawyers are doing. But this does not accomplish the client’s true aim, which is the successful resolution of the client’s matter, and it puts lawyers and clients at odds, undermining the position of lawyer as trusted advisor. Lawyers and clients should work together, but in order to do so, the emphasis has to move away from the billable hours.

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  • http://lasthonestlawyer.org/ The Last Honest Lawyer

    Great article Alison, although as the “one lawyer” above, I don’t think there was “some truth” to the overbilling allegations, I categorically state that there was billing abuse. But let’s not just pick on DLA Piper (have they taken their $3.1 million celebration cruise yet?), the cold hard truth is that any firm with high minimum billable hour quotas (99% of BigLaw) overbills. In 1958, the ABA stated that 1300 billable hours was what a reasonable attorney could ethically bill over time. Most firms are now at 1900 and up, up and away. Last I checked, humans, especially attorneys, haven’t evolved significantly in the last 55 years. The majority of those extra hours are fudged through a myriad of tricks known by every overworked associate.

    Whose to blame? The clients. They are the ones letting the henhouse be raided every day. If you continue to pay outrageous hourly fees, without demanding real budgets and LPM, then BigLaw has every right to keep sending you their monster bills – and take to the high seas to celebrate their record revenues. Another round of Mai Tais please…

  • http://lawyermeltdown.com/ Allison Shields

    Thanks for your comment, Mike! I agree that clients need to do more to demand some changes, but it seems that there’s outrage when something like this that happens, but then everyone returns to complacency.