The Life and Death of the Billable Hour
Insight Michael Moradzadeh · June 13, 2011
The evolution of alternative fee arrangements and value billing.
In 1904, George Heber Smith, a recent Harvard Law School graduate, became the head of the Legal Aid Society in Boston. Smith found the lawyers working there overwhelmed with work for the Society’s indigent client base and sought to devise a method to improve the efficiency of the legal staff. He developed a system whereby lawyers recorded the time they dedicated to each task during the course of the day. The system was designed solely as a management tool to improve lawyer efficiency.
Several years later, Smith joined the venerable Boston law firm of Hale & Dorr, where Smith rose through its ranks to become the firm’s managing partner. At Hale & Dorr, Smith again instituted the system of having lawyers record their time. And, again, the purpose was to improve efficiency. Hourly time recording was not intended for billing purposes.
In fact, during the nineteenth century and the early part of the twentieth century, lawyers generally billed clients on a variety of different bases: (1) a fixed fee on a per matter basis; (2) a monthly retainer for all legal work; (3) contingency fees; and (4) a percentage of the value of the value of the transaction. In fact, bar associations throughout the country published fee schedules and ruled that it was unethical for lawyers to depart from these fee schedules.
The Smith time recording system became popular among law firms and its use as a management tool became widespread.
Then, in 1975, the United States Supreme Court, in a series of opinions, held that the bar association mandated fee schedules violated antitrust laws and barred their use. Law firms struggled with finding different methods for billing clients. Bar association fee schedules became merely recommendations. Open free market competition forced some changes in the bar association rates. More significantly, various law firm consultants encouraged to utilize a system of charging clients by the hour on the theory that hourly billing would benefit clients and fees would be reduced.
The billable hour's appeal as a management tool is also its greatest threat. Treating legal services as a commodity that can be measured in units of time diminishes the importance of both the quality of the work produced and the results achieved. For example, one could not reasonably argue that an hour spent quietly preparing a routine corporate document has the same value as an hour spent closing complex transaction involving many disparate players. Few other industries would thrive if they measured productivity by the time their workers spent without regard to what those workers created. The standard invites inefficiency and perhaps even in some instances fraud. The potential for conflicts of interest is obvious—it's in the firm's financial interest for lawyers to spend as many hours as possible, while the client's interest is best served by limiting the time spent.
To improve productivity, law firms began adopting policies requiring attorneys to bill a certain number of minimum hours each year. It seemed like a harmless enough step—until the number of those hours began to rise steadily beginning in the '80s. Firms raised their hours billed requirements to maximize the profits of partners. By 2001, large law firms typically asked associates to bill between 1,950 and 2,000 billable hours a year.
These standards exert serious pressure, whether they are openly described as "quotas" or euphemistically referred to as "targets." Often, they are enforced with financial incentives or penalties. Associate bonuses are routinely tied to billing a specific number of hours, which means that when a bonus kicks in at 2,000 billable hours, few associates will end the year with less. Partners are also often required to bill a set number of hours, usually slightly lower than those expected of associates. Even where that's not the case, a partner's hourly output still matters for important firm decisions like compensation, hiring needs, and, in a firm with several offices, evaluation of the overall performance of the office where a lawyer works.
In light of all of the foregoing, Rimon has taken a far more enlightened approach to billing arrangements with clients. The cornerstone of our billing model is that clients pay for the value of the services they receive. This model, frequently called Alternative fee Arrangements, or AFA’s serves our clients best. Rimon also does not have any minimum hourly billing quotas or targets for our lawyers. Lawyers’ compensation at Rimon is based solely on the quality of the services they deliver.
Our system is straightforward: At the outset of an engagement, we sit down with our clients and discuss the scope of a particular engagement and we reach a mutual understanding as to exactly what our clients are asking us to do. We offer a variety of billing alternatives, including fixed fees, a reduced hourly fee against which a premium fee is paid upon the successful conclusion of an engagement, contingency fee arrangements, capped fees and yes, hourly fees where our clients feel it appropriate. We avoid any surprises by having enabling our clients to log in at any time on our extranet and see exactly what is happening with their matters. We monitor our billing budgets closely and are happy to remit bi-weekly billing summaries.
Please call our managing partners, Michael Moradzedeh at 800-930-7271 ext. 201, (email: Michael.Moradzedeh@rimonlaw.com ), Yaacov Silberman at (415) 683-6876 (email: Yaacov.Silberman@rimonlaw.com ) or any of our partners ([url=http://www.rimonlaw.com]http://www.rimonlaw.com[/url] ) and see how our evolved law firm can benefit your business.