The Billable Hour: Dead or Alive?

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Published on 12/13/10

One consistent theme to come out of the Great Recession is that the billable hour, if not dead, is dying as a metric of measuring law firm performance.

The Association of Corporate Counsel's Value Index, which aims to evaluate law firm billings against corporate clients' perceptions of value, is just the most prominent measure of client dissatisfaction with a billing method that many say gives lawyers the incentive to prolong matters and run up costs rather than find solutions.

Earlier, the consulting firm of Altman Weil surveyed hundreds of large law firms and reported that more than 75 percent of firms surveyed indicate that they believe that more price competition, more non-hourly billing and the use of project management to improve efficiency of service delivery will mean permanent changes to the legal landscape.

Some, however, may disagree.

Will the billable hour be missed if it is replaced by alternative fee arrangements?

Many firms have concerns, one of the most prominent being how to evaluate lawyer productivity without using billed hours as the standard. Yet, as clients regularly point out, hours do not always equate to production. The lawyer who takes three hours to do what another can wrap up in five minutes is hardly more valuable.

Perhaps most notably, technology continues to stack the deck against time measurements. The attorney who misuses or underutilizes technology will have higher billable hours merely as a reflection of incompetence or being out of date, not of productivity, which raises the real question: How much technology is needed and at what marginal cost?

Similar caveats apply when measuring the profitability of an engagement.

Hours billed tell the firm nothing. The key is how much the firm collected, minus how much it spent. The issue is profitability, not time.

One qualm that firms have about abandoning hourly rates does have some validity. Rule of Professional Conduct 1.5 requires that a fee must be reasonable, and of the eight criteria for reasonableness that it lists, the first words for No. 1 are "the time and labor required," even before "the skill requisite to perform the legal service properly."

The American Bar Association's Commentary 5 on this rule adds: "A lawyer should not exploit a fee arrangement based primarily on hourly charges by using wasteful procedures."

Where billings are questioned as "wasteful," either by a judge who must approve a fee or an arbitration panel that must settle a fee dispute, the first method of demonstrating what the lawyer has done usually comes back to hourly metrics.

Even if a client agrees to a non-hourly billing method, if the client wants to dispute whether a value charge for a service was reasonable, a time record can provide useful backup documentation. For this reason alone, the Rules of Professional Conduct will keep the billable hour from disappearing.

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