Is the billable hour dead?

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 An IBA Law Firm Management Committee debate at the Annual Conference in Dublin suggests that support for hourly rates is falling.

Ori Wiener of Møller PSF Group, a former head of Business Development at Linklaters, noted that law firm margins are under increasing pressure, due to rising market competition and increasing success by corporate counsel in procuring external legal services. Institutional clients, he explained, are increasingly resisting fee rises, and some are applying aggressive tactics to reduce their legal bills.

A largely (but not wholly) private practice audience heard a number of different perspectives. Stephen Richman of Duane Morris addressed the session from a US perspective, focusing on several key aspects of the lawyer-client relationship.

Stephen Richman

These were negotiation (whether lawyers understood how to negotiate fees appropriately); fairness (whether clients were acting fairly in respect to the work they got from lawyers, and if all their complaints were justified, asking whether clients acted tactically to reduce compensation for work unfairly); practical considerations; different billing methods; and potential abuses of power by both sides.

Richman expanded on Wiener’s early address. One limitation he pointed out was that, in the case of larger firms, fee structures may be set, based on experience and geography, with a limited ability to effectuate discounts. Clients should ‘remember that the engagement is a contract. Clients have obligations as well, and the scope of the

agreement will determine responsibilities…not all client complaints are justified, and on occasion, clients will act tactically to reduce compensation for work unfairly,’ he warned.

He went on to explain that ‘if a client shows an obsession with fees, questioning each minimal entry, then one solution is a candid discussion at that point – and it may be that withdrawal is the preferred option.’ The reverse of that situation, of course, is no less true.

Victoria Rees, director of professional responsibility at the Nova Scotia Barristers’ Society, looked at the ethical issues stemming from the use of the billable hour, and whether it resulted in fair and reasonable fees.

She suggested that alternative billing models should allow for a better balancing of client and lawyer interests in the interests of fairness. One key point Rees made was that ‘whatever the disadvantages associated with alternative fee models…the drawbacks and ethical issues related to the billable hour…outweigh those associated with alternative fee arrangements.’

In her supporting paper she wrote that ‘alternative fee arrangements are about risk sharing…clients and companies are now in the driver’s seat. They are attempting to shift more risk of legal service delivery to law firms,’ in endorsing general counsel to consider such strategies over hourly rates.

However, she warned, law firms were only agreeing to this risk transfer as long as the arrangements were still profitable.

Nonetheless, ‘the billable hour may remain as the dominant fee model for some time, as we are seeing a shift towards alternative fee arrangements, leaving [it] as simply one of a number of fee models to choose from’, she added.

In his presentation, Jack Pierce of Barger & Wolen recommended a range of flexible options for clients to consider; particularly for long-term clients, where, for example, spreading costs in monthly instalments, or adding incentives or disincentives for performance were both appropriate.

He floated the possibility of reverse contingency fees, where, for example, percentage fee discounts might apply in appropriate cases. Richman had previously defined these as fees based on savings to a client permitted in civil cases, subject to reasonableness.

Pierce said lawyers should step into the clients’ shoes, particularly in adhering to client billing guidelines. In the US, most large companies had outlined their expectations for billing by their lawyers in a published set of ‘billing guidelines’. Thoughtful adherence to those would prevent departures from the norm, potentially affecting the client relationship, and losing work and money.

That might mean, for example, ensuring work was delegated down to the correct level, avoiding inflationary practices, such as block billing, which had been criticised – in some instances – in the US courts, leading to percentage reductions of between ten and 30 per cent. Block billing, Pierce said, was disliked by clients, courts, and nearly all clients’ billing guidelines, as it was an ‘imprecise practice which inevitably leads to inflated legal fees.’

He also criticised vague billing descriptions, which were frequently ‘a means by which a timekeeper can disguise billable hours,’ together with the practice of passing on the costs of administrative staff, traditionally included in law firm overheads, and over-lawyering by junior lawyers.

Armen Khachaturyan of Asters spoke from a Ukrainian perspective, relating how he had seen bodies like the Association of Corporate Counsel develop ‘best value guidelines’, and also draw from the evolution of multinational business practices to introduce greater in-house support for legal services, with Shell being a good example.

Yet in a debate considering the demise of ‘billable hour’, and the merit of that demise, in-house lawyers were left in no doubt that it was a positive development. Rees called the billable hour ‘an anachronism which can lay a path for unfair, unreasonable and unethical billing practices.’

Richman quoted lawyer-turned-novelist, Scott Turow, who wrote: ‘My greatest concern is not merely that dollars times hours is bad for the lives of lawyers – even though it demonstrably is – but that it’s worse for clients, bad for the attorney-client relationship, and bad for the image of our profession.’