17. Why good lawyers don’t
change a bad system
Why has the billable hour, a product of the second half of the twentieth century, become so entrenched and powerful that few predict its demise despite the barrage of criticism it faces?
Whatever the reason, it isn’t because it enjoys a huge amount of positive enthusiasm. Rather, the reasons involve a mixture of inertia, lack of interest, convenience, and perceived self-interest.
The Excel-ization of the practice of law
One of the reasons for the billable hour’s strength has to do with the trend for law firms to become larger and run more like corporations. From the bean-counter’s point of view, hourly billing makes a lot of sense. If you know how many lawyers you have, you can easily set up budgets and forecasts. You can track who is most productive and whose productivity is trailing.
By analogy, if you’re running a hotel operation, you know how many rooms you have and you strive to get as close as possible to 100 percent occupancy at rack rate. You can track your progress on spreadsheets.
So, too, with law firms. If you have 200 lawyers, billing an average of $300 per hour, your annual revenue goal is to get as close as possible to 200 x $300 x (say) 2,000 = $120,000,000.
Realistically, you won’t hit that goal — there will be laggards within the ranks and write-offs. But you can benchmark your performance, and work on dealing with the parts of the practice that are a drag on the rest. You can play around with your numbers, doing “what ifs?” with regard to headcounts, hourly rates, and billable-hour targets. It is the “Excel-ization” of the practice of law.
The “don’t change the system now” factor
But there are more fundamental reasons, as well. One has to do with the attitudes of those who have ascended into the ranks of partnerships having sweated for years as associates billing huge numbers of hours in the hope that, one day, they, too, would enjoy the spoils. They haven’t toiled all those years just so that they — on reaching the top — can change the system into something kinder and gentler.
Fear of reduced earnings
This last point is part of a bigger issue, which is that there is a widely held view — not wholly unjustified — that lawyers earn more if they stick to hourly billing and that most of the alternative, so-called “value-driven” systems are a fancy way of cutting bills and, hence, hitting incomes. Looked at that way, it’s a tough sell to get law firms to abandon the billable hour in droves.
I don’t think that alternative billing necessarily leads to lower incomes even in the short run. Consider, for example, the earlier discussion in this book about the “under-appreciated brilliant hour.” But the fact is that it often does.
If all the problems with the billable hour didn’t hit the client in the pocket, it wouldn’t be worth all the fuss — at least, from the clients’ perspectives. Unless one were obsessive about the intellectual basis for how a bill was arrived at, one wouldn’t really care. Individual lawyers might not love the billable hour because of the “hour” factor. But for clients, it’s the “bill” that counts.
So perhaps the most fundamental barrier to encouraging lawyers to think again about the billable hour is the fact that — at least in the short term — you appear to be asking them to make less money. Somehow, that doesn’t sound like a compelling rallying call.
That said, even if lawyers look at this issue purely from a self-interested way, they shouldn’t assume that sticking with the billable hour is necessarily the smart business decision.
Self-interest involves looking beyond immediate income. It involves considering how alternative forms of billing might help grow a practice by attracting and retaining clients who, otherwise, might go elsewhere. It also involves thinking about how it helps attract and retain good lawyers.
In a competitive market, law firms can grow by differentiating themselves. Adopting different billing methods offers a more convincing means of doing so than the vague, self-indulgent fluff typically found on law firm Web sites.
The fact is that in other fields of human endeavor, simply extracting as much money as possible out of each customer in the short term may not be the best formula for growth in the long term. Look at Southwest Airlines and compare it with former rivals whose names one no longer even remembers.
And if revenues do fall on given matters, so, too, can costs. Again, consider Southwest. The law firm that thinks differently when it comes to billing methods also has an opportunity to develop alternative approaches to overhead.
That is a subject for another day and another book. For now, suffice it to say that despite the technological revolution of recent years, there has been remarkably little change in how law firms are generally organized. The time may be ripe for the reinvention of the law firm in ways other than billing.
Furthermore, if alternative billing does mean that more people have access to less expensive legal services, that might not be a bad thing. The cost of legal services has become so high in recent years that increasingly few people can afford them. At some level, that cannot be good for the profession in which all lawyers, collectively, have an interest.
Lack of interest and risk aversion
Another reason why the billable hour seems so resilient to any amount of criticism is that many lawyers have surprisingly little interest in the whole subject of how law firms should be operated as revenue-earning enterprises. Lawyers tend to harbor some general notion that they should make as much money as possible, but, beyond that, many aren’t really all that interested in the business model.
Moreover, of those lawyers who do have some interest in the “business side” of running a law practice, many don’t have much of a clue when it comes to things like marketing and brand development. They might be perfectly fine lawyers. They may even be excellent business lawyers. But they may not be particularly inspired businesspeople themselves. Maybe that’s why they became lawyers. And this means that they don’t readily engage with questions about how things could be done differently from what they have grown used to throughout their careers.
Likewise, lawyers tend to be risk-averse. Their work might be stressful for all sorts of reasons, but — usually — not on account of personal risk. Billing by the hour suits that temperament. Stepping off the straight-and-narrow path and thinking and acting differently does not.
Even solo practitioners — who have done something entrepreneurial by setting up on their own (sometimes by choice, sometimes by necessity) — tend to want to emulate bigger firms. Consider, for example, the awkward efforts that many go to in order to make it appear to clients that they are a “firm” rather than a one-person shop.
There is, in short, a remarkably passive attitude within large parts of the profession — an uncritical and almost uninterested acceptance of a way of doing things that has been handed down on a plate. That, coupled with the “if it ain’t broke” — at least from the revenue point of view — “don’t fix it” attitude, means that a lot of lawyers really aren’t all that engaged with the subject of how to bill.
They’d rather be billing than analyzing the billable hour. And when they’re done billing, the last thing they want to think about is the billable hour.
Those are the lawyers who, perhaps most of all, need this book. Unfortunately, they are the ones who are least likely to be reading it.
Acquiescent clients
If enough clients rebelled against the billable hour, it would, no doubt, eventually collapse under market pressures. Part of the reason why it is so enduring is that although a lot of clients grumble about their bills, and mutter criticism about billable hours in general, few demand something different (other than in those areas of the law — such as personal injury and criminal defense — where other forms of billing are common).
Corporate, in-house lawyers who hire and deal with outside counsel typically themselves once worked for law firms where they billed by the hour. They might be aware of the system’s flaws, but they also have a certain comfort level with it. No one ever got fired for signing a fee agreement with outside counsel based on hourly billing. Hourly rates also make it superficially easy to comparison shop. And they fit well into the spreadsheets and management reports prepared by in-house-counsel who need to report to their superiors how much lawyering they are actually buying each month.
As for noncorporate clients, they, typically, don’t have enough confidence or understanding to challenge what appears to be the norm. For example, the one-time participant in the litigation market is unlikely, at the outset, to take on the status quo. Even if that private litigant ends up somewhat the wiser, he or she probably has neither the motivation nor the muscle to change things for others.
The challenge of implementing change
Another reason why hourly billing is particularly entrenched at the corporate level is that although there are alternatives, they can be challenging to implement. In particular, it’s all very well talking about “value-based” billing, but how can one assign “value” to the myriad of services that a law firm might provide to a corporate client?
Would it just be a matter of replacing one form of arbitrary billing system with another? Would the law firm and corporate client have to negotiate endless mini agreements, or would the client just leave it up to the judgment of the lawyers to “do the right thing” when it comes to preparing bills? Neither option seems very satisfactory.
I’ll return these concerns shortly when the focus of this book shifts to examining the alternatives.
Entire contents © 2008 John Derrick