It has been said that the billable hour is the worst form of attorney compensation…except all the others that have been tried.
This is probably what Winston Churchill might have said about billable hours if he were an attorney, especially in the United States in 2012.
As I reach the decade mark in the practice of law, and following other professional experience, including a career as a military officer and business consumer of professional services, I certainly cannot say that I am an expert in the economics of legal services, and I am certainly not as smart as Winston Churchill.
But my observation at this point is that the billable hour is an inherently flawed way to convey value in terms of providing legal services. That said, it is hard to necessarily think of an alternative way of conveying and “metering,” if you will, the provision of legal services, something that may be true with other professional services as well.
To those who may not be experienced consumers of legal services (and congratulations to you), a “billable hour” is a unit of time for which an attorney usually bills his or her services.
Most billings capture the billable hour in terms of tenths of an hour, and it is supposed to reflect the amount of time spent on that particular task. It is usually written up in a monthly invoice and is typically detailed enough that the clients should have a very good sense of what their attorney is charging them for on that particular task. Therefore, it would stand to reason that the longer it takes an attorney to accomplish a particular task, the more value it provides the client, right?
Obviously, the answer is “wrong”. Now you can see the obvious fallacy with the paradigm.
To make matters worse, in large, traditional law firms, attorneys are typically required to achieve at least 1800 billable hours per year. This equates to 150 billable hours per month, which, manageably, is approximately seven hours per day. If one begins subtracting time for vacations, doctors’ appointments, errands, or time that an attorney spends that is either simply not billable at all or cannot billed in good conscious because it was too inefficient, that number easily tops eight hours per day. In some law firms, attorneys have an annual billable requirement of 2000 hours per year and 2100 or 2200 is not unheard of in large markets like New York, LA, or even Dallas. When one begins to crunch the numbers, one sees that attorneys are expected to bill over ten hours per day, which is either hideously unsustainable or downright fabricated.
If you have friends who work in these types of firms, they are probably wishing they never went to law school. For business consumers of legal services, you should definitely understand the mechanics of how the law firm you are using sets those requirements, because while the perfect solution has yet to emerge, there are better ways to do business.
In more progressive law firms, while the billable hour may not be able to be completely jettisoned in favor of some other metric, there may nevertheless be a sophisticated recognition that the billable hour should be a proxy not for merely the time spent on a task, but the value that it provides the client. Certainly, that is our focus at Albuquerque Business Law, and there are many other firms across the country who have evolved beyond the purely traditional model that rewards economic inefficiencies and has no real focus whatsoever on value. After all, the value of the services provided must be the focus of both the attorney and the client in order to achieve the most value for the least possible economic input.
So, having pontificated some of these somewhat sublime philosophical concepts, let’s bring it down to the ten-foot level and talk specifics about what a client, especially a business client, should be looking for in order to identify a progressive, value-oriented firm focus. I don’t pretend to have all the answers, but here are some of the variables that I have found to be helpful indicators:
Look for firms who offer flat fee structures, especially for relatively predictable transactional work, such as drafting business formation documents, estate planning, or patents, copyrights, or the drafting of power purchase agreements. Some firms, including our firm, will offer flat fee arrangements, sometimes even broken down by month, for more or less predictable litigation or regulatory matters. Other times, litigation can be like remodeling a 100-year-old house—you have no idea what lurks behind the walls. In those cases, it is sometimes impossible to offer a flat fee arrangement, but you should ask. Flat fee arrangements obviously encourage efficiency on the part of the law firm, but they also offer predictability to the client. On the downside, the attorney might not work as hard feeling that there may be no upside to adding further resources to a fixed recovery. Other matters are also able to be billed on a contingency basis, which also highly encourages efficiency and puts both attorney and client on the same path in achieving the best possible outcome. For more information on such fee arrangements, see this blog post.
Bigger isn’t necessarily better. I have worked in both a relatively large law firm, as well as a four-attorney law firm, and have even practiced law myself (for a brief period) as a solo practitioner. I know many more solo and small practice practitioners, and there are some general observations about firm size that should be taken into account. The large firms (25 attorneys or more) often have fairly sophisticated administrative support systems, the advantage of which is that it allows attorneys to spend most of their time practicing law with very little time wasted on administrative functions. Those firms will often have entire accounting departments, they will have on site word processing support, office management support, receptionist, and certainly a decent sized contingent of legal assistants. The downside in all of this is that it increases overhead in terms of salaries, office space, health care, and all of the costs associated with a relatively bloated staff-support structure. In many of the large firms in Albuquerque and larger cities, it is not uncommon for the attorney to total employee ratio to be one to three, which in my view is rather inefficient. This is translated to the client in terms of much higher hourly rates, which are not justified by improved quality or efficiency. In essence, you are paying for that top-floor rental premium and the giant staff that comes with it. It may be prestigious, but I can tell you from experience, the results often have nothing to do with the hourly rate you pay for legal services.
On the other hand, the other end of the spectrum can also be somewhat inefficient, although there are many solo and small practice attorneys that have developed systems to promote efficiency. The problem with the solo or very small practice is that the attorneys sometimes end up doing many of the administrative functions. In some firms, attorneys end up doing even functions like running to the courthouse to file documents, take documents across town, marketing, and even billing functions. Or worse, those functions don’t get done at all or are done poorly. While those functions don’t usually get billed to the client, you can imagine that an attorney while is toiling away typing up his or her own documents, or acting as their own runner, probably isn’t as focused on the case as they should be, and they may be forced to play “catch-up” on the billing too.
There is a firm size at which the level of staff support, including office management, bookkeeping functions, reception, and legal assistant functions, is approximately one to one. I found that number of attorneys is typically four to twelve attorneys, beyond which a more robust support structure is needed.
Supporting the Practice with Outsourced “Off-Site” Support
In some “lean and mean” firms, which I will be immodest enough to count ourselves among, many of the “big firm” functions are outsourced to vendors who are not on payroll and, thus, achieve the same functions more efficiently. This includes word processing/transcription, some accounting functions, and even case-related functions such as document management and paralegal support. Using our firm as an example, because it is the firm I know the most about, we are always striving to find the most efficient balance between employee support and vendor support, and usually use vendors unless it becomes so regular and predictable that an employee would perform the function more efficiently.
So why does all of this matter?
It matters because, as a client, especially a business-owning client, the name of the game is getting more for less while still achieving the highest quality possible. When it comes to litigation, this is also a strategic advantage, since litigation is really a socially acceptable equivalent to war. Just like a military conflict, if you operate more efficiently than the other side, it forces them to expend more resources to match your effort, which is often the difference between winning and losing. Sadly, some litigation simply comes down to which litigant runs out of money for a litigation. If you are unfortunate enough to find yourself in unavoidable litigation that must be undertaken, a law firm that employs all of the efficiency mechanisms above is going to be able to provide the best offense or defense at the least amount of resources, which, in addition to many other factors, is often a determinate of the outcome.
The same is true with respect to transactional engagements, such as contracts or other documents. They are tremendously important, usually their value is in preventing later disputes or giving you every advantage should they occur, but they nevertheless should be accomplished as efficiently as possible.
The billable hour is indeed the worst form of attorney compensation, but it may be unavoidable. The more important inquiry for any client is that of efficiency and value. Hopefully, this has provided you with some insight as to what to look for in finding that value.