The Billable Hour

The Adam Smith Blog Contemplates the Potential Consequences of Economic Downturn on the Legal Profession

Bruce MacEwen over at the Adam Smith blog has an interesting post called, “Lessons From The Depression.”  Bruce notes that never in his career has there been a time of greater uncertainty.  “The future is hard to visualize as it is to see the East Side of Manhattan from Central Park West on a deep foggy morning…”  Essentially, Bruce notes that the economic downturn will have impacts on the business of law.  Smart law firms are working hard to guess what those changes will bring so they can be ahead of the curve.

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What Impact Will Barack Obama’s Message of Change Have on Society’s Institutional Bias To The Status Quo and Tradition

I remember one point during the campaign when John McCain repeatedly stated that America needed action not talk.  His overall point was that action was more powerful than ideas. That made me think.

Most of the time, an idea rendered to idle chatter is without substantial import.  But John McCain got it wrong.  An idea rendered to a movement is far more powerful than a single man’s actions.  When and idea is adopted as the norm, armies of followers take the lead.

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The Failure of Billable Hour

Jordan Furlong, the author of, dispatches from a legal profession on the brink and has a great article about why ‘billing by the hour’ fails called, "The failure of billable-hour compensation." Not only does the billable hour technique wreak havoc on the lawyer-client relationship, but is also very destructive to the law firm and employee relationship especially during these tough economic times. 

Furlong states that "the problem, of course, is that every lawyer, from the rawest associate to the oldest partner, is scrutinized annually on the basis of the number of hours he or she has billed to clients. You never outgrow it and you never escape it – it’s a permanent, pernicious blot on the law firm landscape."

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The Irony Of Google Adwords

There was a recent comment on my blog noting that the Google Advertisements which show up in my right sidebar are heavily weighted towards law office billing software.  Because I am constantly blogging about alternative billing systems, Google takes note of that fact.  So Google in its infinite wisdom serves up law office billing software advertisements.

The irony of course is that I am dissing hourly billing.  You don’t need Tabs3 or near as much if you are not billing by the hour.  Google doesn’t distinguish between positive and negative commentary. 

But for those of you who are interested in law firm billing software, feel free to click on any of the ads in the right sidebar.  Some of the software is only $95.00 with a free trial!

The Best Thing about Value Billing…and There Are A Lot of Good Things

The best thing about value billing, hands down, is not what you might expect.  Sure, not having to keep a timesheet is pretty awesome.  The fact that you can talk to your clients on the phone without that uneasy feeling that they sense they’re somehow being billed for the conversation really helps build relationships.  Value billing does allow you to be paid really well for your expertise and grand slam moments.  The fact that you are never capped at some maximum rate makes anything feel possible.  No question, there are lots of good things.  Walking away from all that pent-up hourly billing anxiety that follows you around even on the weekend and evenings is pretty high up the list.  Being measured by your worth as opposed to how long you can sit at your desk is really refreshing.  The sense that both you and your client are on the exact same team and that all of your incentives are aligned with this business goals makes things seem like all is right in the world.

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Hourly Billing Rate of $1,260 Tops National Survey

Many of you may be surprised that I have no problem with the hourly rate that lawyers think their time might be worth.  I do have a problem with billing by the hour.  The distinction is as follows.

I admit that certain things that lawyers can achieve for their clients have value well beyond an hourly rate found on a rate sheet.  When a lawyer delivers a bottom line result for a client that puts hundreds or millions of dollars in that client’s pocket, even $1,260.00 may shortchange the lawyer on the value that lawyer delivered. 

But I did interesting in this article at law.comLaw Firm Fees Defy Gravity, Annual Survey Shows” is that law firms apparently continue to see increasing the hourly rate as the solution to increasing revenues.  Increased revenues are becoming more important for law firms since the volume of work for many firms is severely down.  If you cannot increase the number of hours worked in your firm, your only other option is to increase the hourly rate.

The flaw in this thinking is that law firms keep stepping into the same hole over and over again.  They want to increase revenue, they ought to focus on providing more value to their client and charging for that value.  Multiplying the number of hours worked by an hourly rate will never accomplish that goal. 

Why I Love Hourly Billing!

OK.  So the title of this post brought you in.  You couldn’t resist.  How can GAL love hourly billing?

The answer is pretty simple and straightforward.  Our competitors who bill by the hour regularly piss off their clients so much, that those clients switch their services to us. 

This morning, I received a call from someone who had another local firm handling their IP work.  She explained that she had received a letter from that attorney indicating that an additional filing with the trademark and patent office was coming due.  The last line of the letter indicated that “the letter was free of charge.”  The client contacted the attorney to ask what the fee was.  This telephone call and the resulting follow-up letter resulted in $200.00 in additional billing.  Just to find out what the filing fee is for a rudimentary process at the trademark and patent office?

We of course hear these stories all the time.  We always encourage attorneys who are billing by the hour to never bill for client phone calls or administrative type letters.  These always piss off clients.  If the call or letter was important enough, it will most certainly end up generating additional work which is substantive.  That substantive work can be billed for. 

The best part about our alternative billing approach is that our clients can contact us at any time and speak to us as long as they want for no fee.  We have eliminated the walls between us and our client which would otherwise tend to preclude client contact.  Again, if it is an important enough conversation or letter, there will most certainly be work coming your way.  The old saying “pigs get fat, hogs get slaughtered” applies to hourly billing as well.   Of course, we love the hogs.  Their clients typically end up at our door. 

Three-Quarters of the AM Law 200 Predict Fixed Fee Arrangements with their Law Firms Over the Next Ten Years

The Am Law Daily blog, sponsored by the American Lawyer, has an interesting article written by Aric Press concerning changes which will be coming to large law firms over the near term.  While the concept of alternative and fixed fee arrangements have been discussed for over a decade, GAL has been predicting an accelerated adoption of such fee arrangements by law firms and their clients given the economic downturn.  Mr. Press, against his own better judgment, tends to agree.

One area that may be an exception is the advent of fixed--or alternative--fee arrangements. Even as I type those words, I can't help but chuckle. "Stop writing that story," one managing partner insists in the magazine. "It's not going to happen!" If it doesn't, there are really only two interested parties to blame, the law firms and the clients. The zeitgeist certainly seems to have changed. In our annual survey of the heads of the Am Law 200, we asked whether over the next ten years they thought that "many if not most" big firms will have to change their billing practices. About three-quarters said yes. And two-thirds of them volunteered that fixed-fee deals were in the offing.

And that’s not all.  “…84 percent of the lawyers working at companies with revenues of at least $1 billion predicted a move toward value billing.”  A link to that article can be found here.

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Alleged Hourly Billing Fraud against Wilmer Law Firm: This Is What Happens When Legal Budgets Are Not Reviewed and Approved Ahead of Time by the Client

My friend Patrick Lamb over at the In Search Of Perfect Client Service blog has an interesting post “Both Sides: You Reap What You Sow.” 

Patrick is commenting on an article at noting McAfee Sues WilmerHale for over $12 Million in Legal Fees.

It is hard to imagine any client entering into a legal services agreement with a law firm without first identifying the budget.  Obviously, litigation is more challenging to budget.  However, it certainly appears that the Wilmer law firm and McAfee failed to discuss expectations going in.  A law firm can always, consistent with the ethical duties of protecting the client’s interest, scale up or down its activities consistent with the budget expectation from the client.  Hourly billing is ripe with possibility of overbilling allegations since it is a system built around simply “paying whatever it costs” after the work is done and after the bill arrives. 

90% of the work that we do at Traverse Legal is on a flat fee basis.  We set forth defined deliverables and a flat fee cost for the client to review and approve.  As noted in the previous post, our retainer agreement is simply an email exchange between us and the potential client.  There is very little room for problems because the client’s expectations and fee are approved before the project even begins. 

The above allegations of attorney fraud and hourly overbilling are yet another example illustrating why hourly billing is bad for both law firms and clients. 

2008 Report on Law Firm Billing Practices has published a report analyzing law firm billing practices.  The 2008 Report titled Fees and Pricing Benchmark Report: Law Firms & Legal Services Industry 2008, outlines the key elements for growing your law firm.  It provides keen insight into what the most successful law firms are doing with regard to hourly billing rates, alternative billing methods and other related billing practices.

Here are a few key insights from the report that may be of interest to your firm:

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