October 23, 2012

Is it Time to Kill the Billable Hour? Why Death Doesn't Look Imminent

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June 2009 Issue | Volume 35 Number 4 | Page 51

Is it Time to Kill the Billable Hour? Why Death Doesn't Look Imminent

For some types of matters, there is currently no alternative to billing by the hour— for two basic reasons.

Calls for the death of the billable hour are nothing new. They have existed for at least 20 years. This is a long-standing issue that crescendos periodically and then, historically, drops back to a still persistent but less cacophonous level. So will the billable hour finally meet its demise owing to today’s economic and client-driven pressures?

The fact is that a number of alternatives already exist and have existed for years, and more firms have increasingly used them. Yet for various reasons (and not just “lawyer greed”), these alternatives have not replaced billing by the hour for many types of legal services. Why is this so? To begin, let’s look at where alternative billing methods currently apply.

WHERE THE FIX IS IN. The most common form of alternative billing is the fixed fee. Obviously, clients prefer to know in advance what the total fee will be—as long as they feel it is reasonable. And for many types of legal work, lawyers can and do charge fixed fees. Preparing a basic estate plan or a simple will, handling an uncontested divorce or a real estate closing, and forming a corporation are examples of areas where fixed fees are already pretty much standard. Why? For two reasons:

1. The lawyer knows—or should know—the time and costs that will be involved.

2. The market basically sets the price.

Billing by the hour with a “cap” on the total fee is similar to the fixed-fee arrangement. And, of course, there are contingent fees, based on a percentage of the award or settlement, if there is a favorable result.

Other alternative fee arrangements, most commonly used for litigation when the client is a corporate legal department, are blended rates and performance bonuses based on the outcome of the case. Of course, these are really variations on the basic billable hour. However, they often involve considerable negotiation with the client to arrive at a mutually agreeable arrangement.

All of the above, when employed properly, have proven to be viable and desirable approaches to billing for the given type of matter. This is a far cry from the good old days when a lawyer submitted a bill for an amount and described it as being “for professional services” with no further explanation. But there are still basically two reasons why you cannot eliminate the billable hour entirely.

WHERE THE HOUR TRUMPS. The first is that, for many types of litigation, it is just not possible to know how much time, effort or manpower will be required to pursue or defend the claim. This is especially true of “bet-the-company” cases. In these instances, the client doesn’t care, at least up to some point, what you need to throw at the case when the cost of losing the case would be much greater and could even bring down the company. In these instances, firms need the security of the billable hour.

The other reason is that, despite all their statements to the contrary, most general counsels still prefer some form of hourly billing because it enables them to review and audit the time involved. They can then challenge or reject fees based on time they feel is excessive. In many cases, they even publish hourly limitations or “standards” for each level of timekeeper for certain tasks.

Therefore, for some types of legal services, there is currently no alternative to billing by the hour, either because it is the only practical method or because it is what the client wants. So call as folks might for finally killing off the billable hour, it’s the same as the old adage, “People complain about the weather but no one can do anything about it.”

About the Author

Bob Denney is President of Robert Denney Associates, Inc., a management and strategy boutique that has worked with law firms for more than 30 years.