The billable hour - dead, or on life support?

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Published on 09/27/2010

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 Altman Weil consulting firm 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 be permanent changes in the legal landscape. Though some may disagree.

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

Certainly many firms have concerns. One of the most prominent is how to evaluate lawyer productivity without using hours billed as the standard. Yet, as clients regularly point out, more hours do not mean a lawyer is more productive.

Reaching the correct solution is the objective, and the lawyer who takes 5 minutes to do so instead of 3 hours certainly is more productive. Technology also stacks the deck against time measurements. The lawyer who does not use or misuses technology will have higher billable hours, but this may be a reflection of incompetence, not productivity.

Similar caveats apply when measuring the profitability of an engagement.

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

Knowing how much time was spent on a matter is a valid metric to evaluate whether the firm can do the same work more quickly in the future. But there are plenty of other contributing factors - for example, were the right people assigned, and was technology properly used?

Technology is again fundamental. If with more or better technology, the firm could have handled the matter more efficiently, that raises the real question: how much technology is needed, and at what marginal cost?

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 ABA'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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