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August 27, 2010 5:01 PM

The Billable Hour Endures

Posted by Ed Shanahan

By Steven Harper

Drinker Biddle & Reath recently announced the appointment of a new chief value officer. According to this report in The Legal Intelligencer (a sibling publication to this blog), it's the product of the Association of Corporate Counsel's Value Challenge initiative encouraging law firms to look beyond the billable hour model and focus on efficiency, alternative fee arrangements, and leaner staffing.

A law firm management consultant called the move "brilliant--a real culture shift--a business model shift."

This supposedly breakthrough position is not being filled by a lawyer, much less a firm leader. Drinker's new CVO has spent the past decade working as a law firm marketing director at four different law firms.

How can such a person bring about the end of the billable hour? She can't and she won't. But it's not her fault.

With every recession, the billable hour takes another public relations hit and law firm leaders scramble to appear responsive. Regularly over the past 20 years, optimists have declared its imminent demise. Clients detest its perverse rewards for inefficiency; associates crumble under the pressure of ever-increasing annual requirements. Even perceptive big-law partners acknowledge the toll it has taken on the culture of their firms and the nature of the profession.

Yet it survives because it has powerful defenders, including the U.S. Supreme Court's conservative five-man majority. Yes, the obstacles facing those seeking better days are that formidable.

The lawyers in Perdue v. Kenny A sued on behalf of children in Georgia's state-run foster care program. After eight years, the trial court awarded attorneys fees under the federal statute permitting winning plaintiffs to recover from the losers in such cases. In its April 2010 ruling, the Supreme Court adopted a rule that, ultimately, will reduce that monetary award by several million dollars.

Writing for the majority, Justice Alito took offense at the suggestion that the prevailing civil rights lawyers should "earn as much as the attorneys at some of the richest law firms in the country." He seems to think that's a bad thing.

Importantly, the Court rejected the argument "that departures from hourly billing are becoming more common." It noted that "if hourly billing becomes unusual, an alternative to the lodestar method [hours worked times billing rate] may have to be found. However, neither the respondents nor their amici contend that that day has arrived."

But now how will that day ever arrive? In 1983, the Court first adopted the lodestar calculation as a useful starting point for fee awards. Now, its first significant ruling on the issue in almost 30 years has stripped away almost everything but the lodestar in determining a lawyer's appropriate compensation level.

Where's the room for practitioners to experiment away from hourly billing? Nowhere to be found in the majority opinion. In fact, the Court's analysis extends beyond civil rights cases to "virtually identical language in many of the federal fee-shifting statutes." It will influence any federal court evaluating any kind of fee request--fee-shifting or not, including bankruptcy petitions. State courts will continue to use the lodestar approach in probate, divorce, and other proceedings.

As a result, lawyers maximizing their chances for court approval of their fees will adhere to hourly billing. Innovators experiment at their peril because, depending on the type of matter, they risk not getting paid. The Supreme Court's imprimatur on the billable hour regime creates a perpetual loop that won't help the profession jettison it.

But here's the really bad news. Even if: 1) clients succeed in their current efforts to promote alternative fee arrangements in purely private matters, and 2) the Supreme Court revises its position somewhere down the road, the worst aspects of the billable hour system will continue to haunt big law.

Here's why. Accounting for the time that lawyers and other billers work during the day is firmly embedded into firms' data collection systems. Those systems won't disappear; neither will the resulting internal reports used to conduct annual reviews. Freeing clients of the billable hour yoke won't change lawyers' lives--unless it makes them worse.

It's already happening. Even today, a client's agreement to a fixed fee arrangement doesn't relieve the attorneys working on the matter from logging their time. The fact that a special fee client doesn't get an hourly rate-based bill doesn't matter to reviewers. For them, the relevant metric remains the total number of hours spent serving firm clients. It's a common denominator used to compare and evaluate associates (and partners).

So even when their time doesn't result in a direct client charge at an hourly rate, attorneys continue to feel the heat of the billable time metric: "Keep your hours up."

In fact, another metric--client billings--can make some alternative fee regimes even worse. Senior partners compare time actually spent on fixed fee matters to budgets they developed when negotiating the arrangements in the first place. When an associate or younger partner’s actual time exceeds what the senior partner had assumed, the junior attorneys sometimes feel pressure to record less time, appear more efficient, and render the matter more profitable.

In other words, eliminating hourly fees can cause younger attorneys to work more hours than they report to the system.

How will a real chief value officer handle that one? Not in a way that makes affected lawyers feel better. After all, there's still no metric for attorney well-being.

 

Steven J. Harper is an adjunct professor at Northwestern University. He recently retired as a partner at Kirkland & Ellis, after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at www.thebellyofthebeast.wordpress.com. A version of the column above was first published on The Belly of the Beast.

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Although the author makes some useful perceptions, especially concerning internal measure of performance, he does not, in my view as informed by experience over the past few years, adequately address how the market for big law services has turned against hours as the overwhelming metric in calculating fees. It cannot be possible that other "big law" partners are not at the mercy of clients seeking "alternative billing" arrangements.

Interesting observations. For obvious reasons this article is expressing a very US centric view of what is going on and what is likely to change or not. Nothing particularly wrong with that it’s the appropriate point of reference.

What recession? We are not and have not been in a recession we are in a period of global adjustment. That is what is at the root of the pressures and changes that we see. But it is the main reason that this issue along with so many in the US economy cannot be equated with a recessionary cycle.
What proportion of attorney fees billed in the US are related to litigation? I know litigation is the drug of choice for most lawyers in the US, as litigation and the adversarial approach is a significant part of the American way and often a licence to print money, but there is an increasing backlash against this approach to resolving disputes.

Those who don’t seek alternatives because they have a vested interest in the status quo can just keep on recording time for litigation fees. Those who are seeking change just have to grudgingly record time for fees relating to litigation....for the moment. I think most proponents of change understand this and see that change in this area at least will be slow. It is simply not relevant to reforms and change in other areas.

With a Supreme Court from the Middle Ages no doubt this will be the last bastion to come under review and change. Not so elsewhere see Australia for example http://bit.ly/9pfXuG.

Fees? Billable hours? That’s the sideshow. What you highlight in the second part of your article is the real important issue. The structure and culture of Big Law in the US and the legal market as a whole including clients.

I think you are absolutely right. Big law won’t change simply because they can’t change and in some quarters this is exacerbated by a vested interest not to change. Very sad for those who want to change but can’t.
The culture, style of management and motivation model in Big Law is simply not going to change as the majority in control lack the motivation, skills, experience and imagination to lead this change and are not supported by their clients. Don’t get me wrong there are glimmers and there are some enlightened clients (not just the big ones) who get it. But in the main Big Law is sleepwalking on this aspect of change and the clients frankly don’t give a damn about their lawyers. That’s a really fundamental issue, why don’t they?

There is a squeeze here. Law firms (almost exclusively small) with real capable leaders are pushing new approaches to client relationships and more importantly staff engagement and motivation (it’s not just about fees) and on the other side you have the clients (small and big) who “get it” that the conventional model is not actually in everyone’s interest especially theirs and that there are real viable alternatives to the Big Law approach. The pressure of the squeeze is still relatively light but it is increasing and this time it will continue to increase because it is not just about the way we bill anymore.

Mr. Stein is correct. Clients are demanding alternative fee arrangements -- as they have for years -- and many are now getting them. But the Supreme Court isn't facilitating (or even recognizing) the trend. Perhaps more importantly, even in firms using such new fee arrangements, the billable hour metric continues to thirve internally. There's little evidence that the alternative fee systems have improved lawyers' lives in that regard.

Although the billable hour does not seem to be dead as yet, its days are definitely numbered. Clients are increasingly demanding reduced legal costs, forcing the law firms to innovate. One solution to the high legal fees problem is legal outsourcing.

With the advent of legal process outsourcing, legal work is now being done at a fraction of the cost in countries like India, without compromising in quality. Companies like SDD Global Solutions are helping buyers of legal services in the U.S. reduce costs dramatically by providing cost effective legal solutions.

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