1. Billable hour basics
Most lawyers charge for their services according to the amount of time they spend delivering them. The idea is that a lawyer records time spent on a matter, usually in increments of one or two tenths of an hour. At the end of the month, bills are prepared that multiply the number of hours logged by the lawyer’s hourly rate.
“Seems simple and logical,” you might be thinking. “So what’s the problem?”
Read on and you’ll find out. But first, some further introduction.
Hourly rates
Less experienced lawyers generally have lower hourly rates than the more seasoned, to take account of the fact that they supposedly perform less sophisticated work or take longer to perform the same tasks. (That said, some who are not so seasoned charge high hourly rates in order to appear more experienced.)
Hourly rates vary considerably, with big-city and big-firm rates generally being higher than others. Across the board, rates are generally between $150–$600 per hour depending on location, firm size, and experience, but they can be lower or higher.
“Blended rates”
Sometimes, law firms offer something called “blended hourly rates.” This means that the firm offers a client a fixed hourly rate regardless of which lawyer is doing the work (and, as with regular hourly rates, regardless of the nature of the work being performed). Not many firms offer that as a matter of course, but some clients with clout demand it and get it.
I don’t have particularly strong views on the “blended rate” concept. Arguably, it makes budgeting a little easier, because the client doesn’t have to factor in the variable about which lawyers in a firm will end up doing what work. But it doesn’t seem to address any of the fundamental problems with the billable hour that will be discussed in this book. And it can give a law firm an economic incentive to assign its least experienced attorneys to a particular task — so it’s not that clear why clients would want it anyway.
Log-’n’-bill
As lawyers perform their work, they keep a log describing the tasks as well as recording the time spent. In the olden days, this was done on paper “timeslips.” Today, it’s done using timekeeping and billing software.
At the end of each month, bills are automatically assembled from the time entries that were entered over the course of the month. If more than one lawyer worked on a matter, all of the different lawyers’ time entries are consolidated on a single bill.
Typically, one of the lawyers — probably a partner or someone else in a supervisory role — will then review the bill before it’s sent out. This provides an opportunity to edit or remove certain time entries.
However, the reviewing lawyer is not necessarily looking out for ways of reducing bills. Moreover, that lawyer may have had little — and perhaps no — involvement in the case during that month and so may not possess a good, first-hand sense of exactly what work was done or needed to be done.
Thus, unless time entries seem obviously in need of downward adjustment, they will generally be left as they are. In that case, the bill that goes out is not the product of some assessment of value. Rather, it is simply a mathematical function of the time entries.
So if there were 24.3 hours recorded by lawyers charging $275 per hour, a bill will issue for 24.3 x 275 = $6,682.50. “Ka-ching” goes the cash register.
But, as this book will show, the recording of those 24.3 hours turns out to be a more arbitrary and questionable procedure than the apparent precision of the number might suggest. I’m not just talking about “bill padding” (although that can be part of the problem). Rather, there are problems inherent in the process of measuring a lawyer’s time.
The four types of time
When I first became a lawyer and joined a firm, I was presented with a simple directive: “Record all your time.” But the more time I spent lawyering, the more I realized that a lot of “time” should not even be recorded, let alone put on bills. Time spent looking for lost files, time spent managing my time, time spent distracted, and so forth.
Even though information about this time might aid a law firm administrator’s efficiency analysis, there’s a good chance that, in practice, once recorded, it would find its way onto a bill — especially if euphemisms were used to refer to what was taking place (e.g., “investigate status of matter” instead of “look for mislaid file”).
So not all time is — or should be — “billable.” And, later in this book, I’ll be discussing what a realistic ratio is of total to billable time.
So far, therefore, we have got “time spent” and “billable time.” However, time can also be categorized in two other ways.
The term “billable hour” does not necessarily refer to the time for which a client actually gets charged. Rather, it refers to time that a lawyer logs in a timekeeping system. But — as pointed out above — some of this time may be written off, such that it never finds its way onto a bill. To put it another way, there is a difference between “billable hours” and “billed hours.”
In some environments, there is little difference between what is “billable” and what is “billed.” Just about all time that gets onto the time logs ends up on a bill. In others — and especially where those in charge are sensitive to the issue of “value” — the spread can be greater.
Then there is a fourth measure of a lawyer’s hours. As well as “spent,” “billable,” and “billed” hours, there is also the measure of what is “collected” (i.e., paid by the client).
Ideally, what is collected will match what is billed. In reality, that isn’t always the case. Sometimes, clients challenge bills and lawyers then issue credits. On other occasions, clients simply don’t pay — and lawyers write off balances.
Generally, when people in the legal profession talk about “billable hour targets,” they refer to the goals for billable time that is recorded — not to goals for billed or collected time (although separate targets may exist for these). Thus, if a law firm expects junior lawyers to bill for, say, 2,000 hours, it doesn’t necessarily expect that they will generate 2,000 times their hourly rates in actual revenue.
However, the larger the gap between the number of hours recorded and the numbers billed and/or collected, the more of a question mark may hang over the quality of a lawyer’s work.
That might be unfair. A lawyer with a very low billable-to-billed spread might simply be benefiting from a general policy of writing off very little, whereas a high spread might be indicative of a more value-driven billing approach.
Even within the same law firm, some partners may be more prone to writing off time than others. (Decisions about writing off time can become very political, incidentally. Partners or senior associates can draw bitter resentment when they write off their subordinates’ time and not their own.)
Theoretical transparency
To some, the attraction of hourly billing is that, theoretically, it removes the more subjective aspects of certain alternatives. The client essentially buys a lawyer’s time, during which that lawyer devotes best efforts to advancing the client’s interests.
Because lawyers are obliged to account for time, they keep records that show not only the duration, but also the nature, of the work performed. There is — in theory, at least — transparency and accountability.
The reality, however, is somewhat different. But I’ll get to that later. First, some history.
Entire contents © 2008 John Derrick