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November 28, 2012

Ten years later: A look back and ahead, a decade after the ABA Commission on Billable Hours Report (Part 3 of 3)

Legal Management, the magazine of the Association of Legal Administrators, recently published this article, which I wrote with my brother, Matt Hassett. To download a pdf of the complete article, click here.


Differences of opinion about shadow billing

One of the most interesting findings in the LegalBizDev Survey of Alternative Fees was the split in firms’ opinions about “shadow billing,” in which law firms provide information about actual hourly costs for matters where they are paid a fixed price.

Many firms resist client pressures to provide this information, for fear that it will be used against them.  A deal is a deal in this approach, and the client should not get to look behind the curtain to see whether the firm has won or lost.  As one senior decision maker put it in our survey:

In some cases, what’s happening is that even when there’s an agreement that the fixed fee is going to be allowed, the client wants to reconcile the time that’s put into it and see if they got a good deal or a bad deal. And as long as that’s the kind of relationship it is, it really isn’t an alternative billing arrangement… If general counsel really want to get rid of the billable hour system for billing, then you can’t have all these post-audit questions about it. If you agree on something, and there’s value, and we found a way to staff it differently, we should benefit from those efforts.

Other firms allow and even encourage this sort of comparison.  As one put it:

If we hide things like [hours], it’s not going to work.  We’re interested in this from a partnership perspective.  There has to be mutual trust. If [clients] think we’re just doing this and reaping in additional money, it’s not going to work.


Lifestyle implications of the billable hour

Anyone who has ever worked at a law firm knows that the billable hour can create stress.

In the preface to the 2002 report on the billable hour, ABA president Robert Hirshon wrote:

The unending drive for billable hours has had a negative effect not only on family and personal relationships, but on the public service role that lawyers traditionally have played in society. The elimination of discretionary time has taken a toll on pro bono work and our profession’s ability to be involved in our communities. At the same time, professional development, workplace stimulation, mentoring and lawyer/client relationships have all suffered as a result of billable hour pressures.

A decade later, in a June 22, 2012 article in the Wall Street Journal, Frank Partnoy, Professor of Law and Finance at the University of San Diego, noted that:

In the late 1990s, three researchers—James Evans, Gideon Kunda and Stephen Barley—conducted a 2½-year study of free-agent workers, including contractors, engineers and software developers. They found that, throughout the U.S., one of the most significant differences in how people approach work is whether they are paid by the hour.

For a range of jobs and income levels, people who were paid hourly worked longer and cared less about nonwork activities. They suffered from higher stress during downtime, and they worried more about having enough work. When work was available, they were tempted to work as much as possible. A vacation or a day off meant a loss of money. Other studies found that the problem got worse as people made more money, because they felt that their time was more valuable and therefore more scarce.

According to Partnoy, one possible solution is to:

Stop billing by the hour. Professionals could instead charge a fee based on the service provided: a fixed amount to file a legal brief or complete an audit or repair a leak. Lawyers, accountants and other professionals are increasingly trying to find ways to charge flat fees instead of hourly rates. This is particularly true at large law firms, where the combination of economic pressure and low morale among associates is leading partners to search for new ways to bill.


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