f/k/a . . . the archives

August 18, 2007

broadening the hourly-billing debate — consider yourself, your clients and your ethics

Filed under: lawyer news or ethics,viewpoint — David Giacalone @ 12:43 pm

Yes, I often disagree with those who decry the use of hourly billing by lawyers and make it a scapegoat for all that ails the profession and irks its clients [see, e.g., our prior posts "presumed ignorant" (July 26, 2007); chronomentrophobia (Jan. 7, 2005); and "Value Billing or Venal Bilking?" (Feb. 17, 2004)]. Nonetheless, I’m pleased to see that Scott Turow’s ABA Journal cover article, “The Billable Hour Must Die” (August 2007), has provoked so many webloggers to write about whether or how we can get rid of the billable hour or the billable hour quotas that require unreasonably long work weeks and inspire all the wrong incentives in the lawyer-client relationship.

Participants include Prof. Daniel Solove at Concurring Opinions, Carolyn Elefant at MyShingle, Susan Cartier Liebel at Building a Solo Practice, Andrew Perlman at Legal Ethics Forum, Scott Greefield of Simple Justice, Luke Gilman at Blawgraphy, and many more.

I was especially pleased to see law student Luke Gilman’s follow-up piece yesterday “More on the Billable Hour, Charting Your Own Course” (Aug. 17, 2007) at Blawgraphy, because Luke clearly realizes that whining and opining are not enough: individual lawyers have to take responsibility for the practice setting they choose and its practical and ethical ramifications. He asks “So, law students, what to do?” and suggests:

“First, make yourself aware of the reality of legal practice. You’ve made a tremendous investment in money and time to go to law school. Wouldn’t it be worth investing a little time to figure out what you’ve gotten yourself into? I’m stunned at how much some of my fellow students seem not to know about the practice of law and how little interest they show in learning more.

“Second, know thyself. BigLaw practice isn’t for everybody, but somebody’s got to do it and a lot of those people love it. You might be one of those people. . . . .

“Third, if you do find that it’s not the life for you, figure out your alternatives. There are alternatives.

(1) You might decide to hang out your own shingle. . . . . .

(2) You might choose a practice area with this in mind. ….

(3) Know the culture of the firms you’re interviewing with ahead of time. …. All firms feel the pressure of billable hours, but different firms deal with it differently. Know who you’re getting into bed with. . . . . “

What I am still not seeing enough of, however, is a focus on the ethical and economic realities and pitfalls of the so-called alternative billing mechanisms. From my perspective, although there is great structural ethical peril in the bloated hourly quotas used by most large law firms (see “Sanction This (Firm)!“), there is nothing inherently unethical about billing by the hour. The problems virtually always arise from its abuses, most of which stem from the desire for greater income and profits — a desire that will not go away when you switch to a different method for setting fees. Therefore, if you choose not to bill your clients by the hour, you need to understand the anti-client incentives that inhere in every billing method; and the ethical lawyer and law firm need a theory and game plan that will allow them to avoid economic and ethical traps while setting such fees, and to serve their own legitimate financial needs and the best interests of their clients.

Where is the straight-talk or even sincere musing about the ethics and the practicalities of setting alternative fees — whether they are “flat”, “mixed,” “contingent,” “value-based,” or tied to “discrete tasks”? Lord knows, I have tried to raise the issues and suggest possible solutions at this weblog: See , e.g., “Value Billing and Lawyer Ethics“(Jan. 28, 2004); “Value Billing or Venal Bilking?” (Feb. 17, 2004); “brandLEX” (March 4, 2004); “fee fie foe and fum” (Jan. 5, 2005); chronomentrophobia (Jan. 7, 2005); “LexThink about higher fees (er, value billing)” (April 6, 2005); “ethics aside” (April 8, 2005); “ron baker & price sensitivity” (April 21, 2005); “lawyers and cashews and premium pricing” (May 9, 2006); and “the value-billing babysitter” (March 23, 2006); “contingency fees (part 4): ethical duties“  (April 8, 2006); “presumed ignorant” (July 26, 2007); updates:broadening the billable hours debate” (Aug. 18, 2007); why do lawyers lie (about contingency fees) (Aug. 29, 2007); contingency fees and the clueless fiduciary (Sept.4, 2007); “finally: NLJ on the realities of alternative billing” (Sept. 11, 2007); “time, fees, flu, pumpkins, too” (Oct. 10, 2007), discussing the Boston Globe article “Beat the Clock” and related weblog posts; unconscionable silence over Graubard’s $42 million contingency fee (December 11, 2007);doubts over debt negotiation fees” (July 21, 2008); “ALF#1: other thoughtful voices on the lawyer billing debate” (Feb. 22, 2009)

For a list of the Red Flags that have caused us to worry about the ethical and fiduciary soundness of value billing, see “value pricing by lawyers raises many ethical red flags (Dec. 4, 2008); and, our response to an attack by the so-called Greatest American Lawyer, GAL’s alternative universe” (Feb. 5, 2009)

When will we hear other voices taking these issues seriously? [Below the fold (after the haiku, at the bottom of this post) you will find lengthy excerpts from many of these posts, which I hope will spur a broader debate on alternatives to hourly billing.]

Rather than serious discussion of the ethics of alternative methods of billing, we find sweeping condemnation of hourly billing and blind assertions that value billing is totally ethical. And, in virtually all of the writings (weblogs, articles, books, and seminars) of the gurus and svengalis of Value Billing and Premium Pricing, we find promises that the lawyer who denounces hourly billing and follows their schemes will magically and righteously increase income dramatically, while working less and increasing client value. This posting is a plea that those who sincerely want to fix what is wrong with hourly billing spend some serious time figuring out how the alternatives will result in fees (and a work environment) that are fair to lawyer, law firm and client — and how they will function within an economy that, if working competitively, can be expected to drive prices down to their marginal costs (due to technological breakthroughs and an excess of service providers).

for the fat green frog
crouched on the log
time is flies

……………………………….. by George Swede – from Almost Unseen

complaint bill There are two points that I want to make in closing today, to Lawyers who Complain About the Billable Hour, and I hope they are self-explanatory and persuasive:

  1. If you want to work fewer hours (to bill fewer hours), but are not willing to make a smaller income, you’re part of the problem, not the solution.
  2. If you think the vast majority of clients are willing to pay higher fees in order to be rid of the billable hour, you are greatly mistaken.

update (4 PM Aug. 18): Thanks to Idealawg‘s Stephanie West Allen for pointing me to Gerry Riskin’s post today at Amazing Firms, Amazing Practices, “In Memory of the Billable Hour” (Aug. 18, 2007), which reports on the new National Law Journal/Law.com article “Firm Kills Billable Hour for First-Year Associates” (Aug. 20, 2007), which states:

“Ford & Harrison, a 190-attorney labor and employment firm, has tossed out billable-hour requirements for first-year associates. The program aims to close the practical-skills gap of law school education and increase value to clients. . . . .

“The idea is for associates to spend their time observing depositions and witness interviews and attending hearings and litigation strategy meetings. While the firm has no specific expectations of associates meeting the 1,900 billable hours it previously required from new attorneys, it does anticipate that some of the work they undertake during their first 15 or so months will be valuable enough to bill.”

The NLJ article notes: “Most partners liked the concept, [C. Lash Harrison] said, and saw it as a way to eliminate all the hand-wringing — and time — involved in determining which hours worked by associates are valuable enough to bill. Partners also saw the long-term payoff of training new lawyers to become profitable sooner in their careers, he said.” This sounds like a worthwhile experiment and I’m looking forward to seeing the results and the response of other law firms.

umpireS One Important Quibble from Prof. Yabut: Lawyers are supposed to be good at verbal precision. Is it asking too much for them (and the press covering the legal profession) to differentiate between eliminating “billable hours” and eliminating “billable hour quotas”? Clear language really does encourage clear thinking. [update (8 PM Aug. 18): On a somewhat related note, with today's selection in my Far Side Gallery 2007 Off-the-Wall Page-a-Day Calendar, Gary Larson shows the power of a well-chosen word (and the wisdom of consulting a dictionary in a timely fashion when meanings are unclear)]

ooh update (Aug. 19, 2007): Victoria Pynchon of Settle It Now Negotiation Blog thinks F&H’s plan is “an idea whose time has come,” but she wants them to go further and not bill clients for anything a first year associate does. Victoria also advises first year associates to use their bargaining power and negotiate for the same deal with their law firms. As an old mediator and Agent of Reality, I have to say that Victoria’s position seems unrealistic and — frankly — silly (not to mention a “zero tolerance” approach to billable hours that suggests an inability to make judgment calls and important distinctions). The notion that nothing a new lawyer does in her or his first year out of school is valuable enough to be billed at any rate makes no sense (ask the solo practitioner just out of law school). One predicted result: a lot of clients will start requesting that Firsties be assigned to their matters — but, good luck convincing them to pay a reasonable fee for work done by a second-year associate. Of course, any individual newbie lawyer who tries to negotiate VP’s idea will definitely have a learning experience.

update: See our post “finally: NLJ on the realities of Alternative Billing” (Sept. 11, 2007)

Meanwhile, Master Japanese haiku poet Kobayshi ISSA had his own ideas about coping with time:

the rooster flaps and crows
“It’s time!”
morning’s charcoal fire

stinging bug
you too someday, some time…
dewy grass

traveling geese
my lake is crossed
in no time

cherry blossoms–
residents of this world
a short time

autumn wind–
he was good-looking too
in olden times

words
are a waste of time…
poppies

going out to fart
about ten times…
a long night

the bill collector
with shoes on steps inside
to the hearth

……………. by Kobayshi ISSA, translated by David G. Lanoue

———————————————————————–

Below the fold you will find excerpts from ethicalEsq and f/k/a posts dealing with the ethics of alternative billing methods. I hope they will spur the reader to consider the issues and broaden the debate about the billable hour and alternative ways to set lawyer fees.

Value Billing or Venal Bilking?” (Feb. 17, 2004) I’ve been trying to figure out how “value billing” by lawyers could/should work in the context of the average client — a client who is not highly sophisticated or experienced in dealing with attorneys and their fees. . . .

When legal departments of large corporate clients talk about “value billing” they’re basically demanding lower overall fees, because they value lawyer services far less than the amounts produced under hourly billing. When negotiating for value, such sophisticated clients have much leverage, plus they have or will soon have

“the ability to measure efficiency firm-to-firm for similar projects; associates within a firm; rates between firms and geographies; matter outcomes; and any number of other metrics. Standard rates, discounts, alternate billing and fixed-fee arrangements will be tested as to whole case costs by comparing law firm financial information and disposition results. . . . The message is clear: Law firms need to pay attention to their own efficiency and the statistics against which law departments will measure them.” (Task-Based Billing Grows Up, by Sally Fiona King, April 2002, LPM, at 33; you’ll need to scroll down to this article.)

. . . Having found no guidance on how to use value billing ethically, beyond the basics of fiduciary and professional obligations, let me suggest two yardsticks for the reasonableness of alternative billing arrangements:

1. the resulting fees are no more than would be produced by using a fair hourly fee plus a reasonable amortization of any time or money invested in efficiency-creating, service-enhancing technology (this assumes that the hourly rate reflects Rule 1.5(a) factors — experience, complexity, etc.– and that the number of hours reflects efficient and experienced lawyering) (See “It’s About Time: Break the Hourly Billing Habit, Let Automated Practice Systems Power Pricing Innovations,” by Marc Lauritsen, Law Practice Management, April 2002); or
2. the resulting fees do not exceed those that would be produced if the client had engaged a lawyer solely to negotiate fees with the attorney. (see Brickman,, 2003 U.Ill.L.Rev. 1181, at 1185-86)

WitherspoonAsWoods the value-billing babysitter” (March 23, 2006)

Mr. and Mrs. Cliente,

I’ve been very happy being your babysitter, but hope we could talk
about my fees. I really think you will love my ideas. A few days
ago, my parents came back from a conference they attended
called LaxThink. They got lots of ideas about how dad could charge
for his lawyer services and mom for her accounting services, to get
out of the “nasty rut of hourly billing” (because clients really hate
paying by the hour, they told me).

They learned that many clients feel a lot better when they pay more
money for services, because they feel they are getting more value.
Dad is a really sensitive guy (for a lawyer), and he explained to me
how important price sensitivity is when setting your fees. . . . .

Value Billing and Lawyer Ethics“(Jan. 28, 2004)

In our economy, we expect suppliers to produce additional output until price equals marginal cost (see Arnold Klingman). We also expect that competition will motivate suppliers to innovate in order to become more efficient, and thus reduce costs and price. Matthew [Homann] appears to want to avoid the attorney’s marginal cost in the pricing process, and to avoid passing on the benefits of efficiency and competition to the consumer. The “special protection” offered the client would be protection from the forces of competition and innovation within the legal profession.

I don’t see how we can divorce the billing process from the ingrained historical notion that the reasonableness of a fee depends upon the amount of time spent performing a service and the expertise and skill of the lawyer and staff. Now, when a lawyer uses a fixed fee, that fee is presumed to mimic the total fee resulting from multiplying a fair hourly rate by the time the lawyer expects to take to perform the function, after assessing the overall complexity of the client’s situation. The reasonableness of that hourly fee takes into account the lawyer’s skill, human capital investment, overhead, and techological investment, etc. – tempered by comparison to what other’s are charging for similar services.

cashewsG lawyers and cashews and premium pricing” (May 9, 2006)

So, yes, cashews remind me of popcorn, and IBM’s promise to help you achieve
premium pricing reminds me of Ron Baker’s similar siren call for lawyers. The f/k/a
Gang believes that the gurus of value-billing — along with those easily-tempted lawyers,
who buy their books and attend their seminars, and applaud from their websites, in the
hope of obtaining premium clients and fees (with both increased profits and more leisure
time) – have forgotten or ignored the ethical and fiduciary duties of the lawyer to insure
that the client is treated fairly (without manipulation), fully informed, and, in the end,
charged a fee that is reasonable.

No, it’s not okay for lawyers to charge fees significantly higher than their hourly rates as
an ironic response to client complaints that bills are too large under the hourly-fee system.
Fiduciaries don’t manipulate clients to reduce their price sensitivity. Period.

[Ron] Baker is right about one thing: better service will help create client loyalty and attract
new clients. However, where I come from, excellent service is part of the regular fee.

ron baker & price sensitivity” (April 21, 2005)
It seems [according to Baker] that clients, properly ”leveraged,” will offer to pay two or three times as much (sometimes ten times as much) as a professional’s regular fees, and the professional can sit back and rake it in, righteously smoting the evil hourly billing system and increasing the client’s perceived value. (The shrewd professional will even give the client a discount off the 200% or 300% premium fee the client has offered to pay — earning both merits points in ethical-code heaven and the client’s trust and loyalty.)

fiddle bow .. “fee fie foe and fum” (Jan. 5, 2005)

The verse from Jack and the Beanstalk seems more relevant than ever to America’s lawyers. When it comes to fees, our legal profession is fiddling away its scant goodwill, while its clients — and youngest members — scream ”fie” and are treated like foes.

An example is found in the latest cover story of Washington Lawyer, which is one more lament over The Tyranny of the Billable Hour.” (Jan. 2005) The Billable Hour, rather than lawyer/law-firm greed, is cast as the evil source of lawyer discontent and lousy lifestyles. It’s as if the writer and interviewees honestly believe law firms who shift to other billing methods will gladly allow each lawyer to generate less income. If you happen to see any hint of such an attitude (for instance, here or there), please let us know. Until there’s proof to the contrary, the track record of the profession suggests that lawyers will either charge more while working less, or work just as much while collecting at least as much in fees, which will merely be structured differently.

honestethics aside” (April 8, 2005)

Just as Prof. Yabut decried the abuse of ellipses, f/k/a’s editor emeritus ethicalEsq
is getting a little annoyed by the ”ethics aside” approach of the gurus and evangelists
of law firm branding, marketing and alternative or value pricing. They offer the easily-
tempted lawyer a paradise of premium clients and fees, with increased profits, while
never probing the ethical and fiduciary duties of the lawyer to insure that the client is
fully informed, treated fairly (and without manipulation) and, in the end, charged a fee
that is reasonable for competent and diligent services.

6 Comments

  1. Did you see Gerry Riskin’s post of this morning on this topic? Here:

    http://www.gerryriskin.com/law-firm-economics-in-memory-of-the-billable-hour.html

    Comment by Stephanie West Allen — August 18, 2007 @ 1:56 pm

  2. Thank you for kicking this discussion up a notch. I will be adding your post to mine to broaden the discussion from every direction. Incidentally, there are lawyers (solos) who are doing value-billing litigation in their practices exclusively and doing it very successfully. I’ll be happy to put you in contact one of them if you are interested. I agree, most people eschew the concept. But because the definition of ‘alternative’ and ‘value’ are so subjective it is hard to pinpoint it. Best to see it in action.

    Comment by Susan Cartier Liebel — August 18, 2007 @ 7:13 pm

  3. You are very welcome, Susan. I would very much like to hear what approaches and standards solos and other lawyers are using in establishing fees through value-billing. Realworld examples and satisfied clients should be publicized.

    Comment by David Giacalone — August 18, 2007 @ 7:22 pm

  4. The idea that first years might have a year free of billing was not to suggest that they are incapable of providing legal services worth billing for. A billing-free year would give a first-year associate the freedom to, say, write a simple motion, from scratch, for which the firm undoubtedly has forms; or watch his/her superior argue the more complex motion for which s/he provided only the legal memorandum; or to observe the entire deposition for which s/he analyzed and organized the pertinent documents. Because most of these hours can’t be billed, first years are often deprived of the opportunity to see a motion from conception to resolution let alone to experience a case from client interview to complaint to trial, arbitration or mediated settlement. A first year free of billables would enable a deeper and broader initial year of experience for a new lawyer, justifying a more substantial billing rate for a firm’s second year associates. If our attempts to create new ways of monetizing our services and training our young lawyers are not “silly,” or, even better, “outrageous,” “patently unworkable,” or “absurd,” we’re not likely to achieve the kind of change necessary to substantially improve client relations and lawyer satisfaction. Let’s aspire to lunacy in our brainstorming so that we can hope for an inspired transformation rather than simply a slight improvement. Cheers, Vickie

    Comment by Vickie Pynchon — August 29, 2007 @ 3:10 am

  5. [...] the subject, including those I’ve listed below. There’s also f/k/a’s insightful Broadening the Hourly-Billing Debate – Consider Yourself, Your Client And Your Ethics. Must-reads are The Billable Hour: Are Its Days Numbered? from http://www.law.com earlier quoted and The [...]

    Comment by SPASLAW.COM › Customizing Fees (And Enjoying Watching Our Kids Play Soccer) — September 9, 2007 @ 11:32 pm

  6. [...] Billing by the hour has been the traditional way that lawyers (and other professionals) billed their time, but recently the billable hour has come under attack. David Giacalone at the f/k/a blog points out that some suggested alternatives to the billable hour may make clients and lawyers alike worse off. [...]

    Comment by Blawg Review # 126 » Small Business Trends — September 17, 2007 @ 1:23 pm

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