Lost in the furor surrounding one large firm’s current public relations headache are deeper problems that go to the heart of the prevailing big law-firm business model itself. Regrettably, as with previous episodes that have produced high-profile scandals, the present outcry will probably pass and the billable hour will endure.It shouldn’t. The billable-hour system is the way most lawyers in big firms charge clients, but it serves no one. Well, almost no one. It brings most equity partners in those firms great wealth. Law firm leaders call it a leveraged pyramid. Most associates call it a living hell.
Saturday, March 30, 2013
It's more telling when someone who's been a partner at a major law firm complains about the billable hour than when an academic does it.
In yesterday's New York Times, Steven Harper made some very good points about billable hours (here) in light of the DLA Piper fee litigation (here and here). I write about fees a lot (see here and here, and I have another piece coming out in a symposium issue of the Akron L. Rev. this summer). My favorite part of Harper's opinion piece?
The fact is that billable hours create perverse incentives, because the way to make more money is to take more time or throw more humans into a project. But billable hours evolved in part because the old way of billing ("$x for services rendered") didn't give the client a feel for how much work went into the bill. If we want alternative billing to take hold, two things have to happen: law firms have to figure out a way to calculate an alternative billing method that, at least on average, gives the firm a reasonable profit on its work, and law firms have to give clients some transparent information on what type of work they did on the client's matter.
One possibility is a flat fee that still records billable hours. If the flat fee bears a reasonable relationship to the work done, then the client can see who did what, but the incentives for throwing bodies at a problem decrease. The flat fee becomes a cap that controls costs.
The fear--and it's a legitimate one--is that many types of legal work involve unpredictable possibilities. Let's say that a matter involves litigation. Some of the expense of litigation involves responding to what the other side is doing. So if one side is billing by the hour and the other side has a flat fee, then the flat-fee firm may well be held captive by the firm that is billing by the hour.
On the other hand, major law firms are experienced in doing complicated work--and that experience is reflected in their billable rates. If a firm is very experienced in, say, debtor-side chapter 11 work, then it can predict many of the actions that the other parties in the case may take. It won't necessarily be able to predict the timing of those actions or their intensity (although, if it appears opposite those other firms all the time, it will have some idea of what they routinely do), but it has a feel for what's likely to happen in the case. It's at least possible, then, that the experienced firm can establish a likely range of the fees and expenses that a matter might engender. ("In the last several chapter 11 cases, our fees and expenses ranged from $x to $x+n.")
So perhaps flat fees might not work, but rough (and I mean "rough") budgets might act as a cap on a firm's choices for how to handle a matter. Of course, some unpredictable events might make a budget inaccurate--but a firm can bring those unpredictable events to the client's attention and recalculate the rough budget accordingly.
The fact that a former Kirkland & Ellis partner is calling shenanigans on billable hours is significant. Let's see how others respond to Harper's opinion piece.