Is it time to review the “tyranny” of billable hours?

When Benjamin Franklin coined the immortal phrase “in this world nothing can be said to be certain, except death and taxes”, he clearly did not have lawyers in mind. Otherwise, he would have undoubtedly added “and billable hours”.

Like them or loathe them, billable hours have been a fixture on the legal scene for as long as most lawyers can remember and are still widely used by practitioners to determine how much they charge for their services.

In some cases, the billable hour is divided up into ten six-minute segments, meaning lawyers have to account for every six minutes of their working day, a regime that many have described as “a living hell”.

US lawyer Barbara Hendrickson, for one, describes it as “a form of economic tyranny that has controlled most lawyers working and personal lives”.

“Recording our time, getting our time in, billing out our time, collecting for time billed – these are our preoccupations. We hate reducing our relationship with our clients to billable units but are nervous about changing our billing model.”

Such is the nature of the system that some lawyers even bill clients for the time spent thinking about their cases while having a shower or commuting to work, according to a US legal survey. So it is no wonder there have been repeated calls over the years for a complete overhaul of a model that is seen in some quarters as being inefficient, punitive and open to abuse.

Even some in high places, like the Chief Justice of Western Australia, Wayne Martin, are backing moves to give billable hours the boot. In a speech a few years ago, he said the thirst for billable hours – and the money they brought – clashed with the interests of clients, rewarded inefficiency and over-servicing, and placed mounting pressure on lawyers to meet billing targets. This resulted in customer dissatisfaction and disillusioned lawyers who were left working excessive hours and were less able to take part in professional development or pro bono work.

Chief Justice Martin said time-billing carried an inherent clash between the client’s desire to quickly resolve his or her case and the law firm’s interest in maximising time spent and money made. It also left some lawyers with an incentive to “pad” their timesheets and charge clients for thinking about their case while undertaking unrelated activities at home or elsewhere.

Here in New Zealand, the debate over billable hours has traversed much the same ground as the ongoing discourse in Australia and the United States. And like those countries, it appears this much-maligned model will be around for a while yet, according to Stacey Shortall, a litigation partner with Minter Ellison Rudd Watts in Wellington.

Stacey Shortall

What makes her perspective especially pertinent is that she spent ten years working as a lawyer in Wall Street and is well qualified to assess the merits or otherwise of moving from billable hours to other models, such as alternative fee arrangements (or AFAs).

“While the hourly billing model has been widely criticised by commentators and some clients in the US for years – including the decade I worked in New York as a Wall Street litigator – it continues to exist,” she told Law News.

“Notwithstanding the growth in AFAs, there seems to be widespread acceptance that they will never entirely replace billable hours in the US legal profession and I have no reason to believe the outcome will be different here.”

Ms Shortall says there are several common variations on the traditional billable hour model in New Zealand, such as discounted hourly rates, which also appear too ingrained to ever totally disappear.

“For example, it is not unusual in this country for discounting to happen at the front end when clients negotiate reduced rates. And different or additional discounting can also happen at billing and collection time.”

On the other hand, she says that according to the American Bar Association, AFAs “are about charging an appropriate fee based on what value the client receives and how that client perceives value”.

“So whether a client demands an AFA or accepts a billable hourly rate will largely, in my view, depend on how much the client trusts the lawyer to provide value. Where the client trusts that the billable hour model is not incentivising the lawyer to work slowly or be inefficient, the client accepts that total hours worked is a good measure of value. But where the client does not believe that he or she is getting efficient service, and that unnecessary time is hitting the clock, criticism quickly grows.

“My point should be obvious – unless hourly billing is aligned with client satisfaction, it quickly becomes a problem that requires an alternative solution, which is where AFAs can come in.”

Ms Shortall says it is axiomatic that New Zealand clients are seeking more efficient legal services and more predictable legal fees.

“Flat or fixed fees can be particularly useful in this regard. They have been recognised as AFAs in the US for decades and I saw plenty of these fee arrangements in action during my time as a Wall Street litigator. Fixed or flat fees are relatively easy to negotiate with a client when the scope of the work can be defined and these arrangements simply involve charging for a piece of work at a pre-determined, set fee.”

However, Ms Shortall says there has been a recent trend away from these models to hybrid alternative variations in the US. Such variations can include:

• blended hourly rates, where one rate is used for all hours billed on a file regardless of whether a partner, senior associate or solicitor is doing the work;

• fee collars at hourly rates but with maximum and minimum fees agreed; or

• fixed fee plus uplift, for example when a success fee is charged in a securities offering file if the offering closes.

Ms Shortall says she has worked files with all these types of billing arrangements and seen them to be very successful for both lawyers and clients.

“For what it’s worth, I am a firm believer that leading law firms and rich client relationships can thrive using either a billable hour or alternative fee arrangement. It just boils down to how much the client trusts that he or she is paying for value.

“I would offer another thought based on my US experience – make underlying timesheets available to clients. Be transparent with clients about what the clock shows and why, and if you as the lawyer are uncomfortable looking at the timesheets, plainly you should not be billing for that time.”

Ms Shortall says accusations of billing abuse, such as lawyers padding their hours in order to hit fee targets, have long been rife in the legal profession.

“But that has not been my experience at all. I simply have not seen any such conduct at Paul Weiss (where I worked in New York) or at Minter Ellison Rudd Watts.”

Sole practitioner Claudia King has a different take on billable hours, believing fixed price fees will become the norm in the next five to eight years.

Claudia King

Her view is based on her experience as director of New Plymouth-based Dennis King Law, which she describes as “our more traditional commercial and dispute resolution/litigation brand” and Legal Beagle which “is our non- traditional online brand”.

She leads a team of around 14 people, which comprises lawyers, legal executives, secretaries, client relationship manager, trust accountant, office manager, software developer and marketing co-coordinator.

Ms King says her client base is quite varied, ranging from retirement villages to tech startups.

“I provide fixed fee, value pricing and hourly billing options to my Dennis King Law clients, while all my Legal Beagle work is fixed fee. We provide a fixed price guarantee for all our fixed fee work, which is given on the basis that our price will stay the same as long as the job quoted for stays the same, but that we reserve the right to review the price if the scope of the work changes.

“This means our team needs to be really clear about the scope for each job so that we don’t lose out due to ‘scope creep’. This is an ongoing challenge but we’re getting better at it all the time. Cost blow-outs happen quite regularly but the ‘overs’ and ‘unders’ tend to balance themselves out. We have a dedicated, full-time client relationship manager whose role is to look after clients, provide quotes and help manage projects to reduce scope creep.”

Ms King is in no doubt that fixed price law firms are more financially viable than those just offering billable hours.

“The fantastic thing about our Legal Beagle fixed fee work is that it is all paid for in advance so we have no debtors – this is a huge financial advantage. Our Dennis King Law side of the business is definitely more profitable at the moment, but its growth remains steady, whereas Legal Beagle is growing quickly and the only thing really holding it back is finding the right people to do the work.

“We are looking at taking on contract/freelance lawyers and legal execs so that we can keep up with the demand for Legal Beagle without taking on more responsibility in terms of staff members. Contract and freelance lawyers are not really a ‘thing’ in New Zealand like they are in the UK and the US, so it will be interesting to see how this initiative goes!”

Ms King believes all legal work can lend itself to fixed fees, but accepts that more straightforward transactions (such as wills, trusts, conveyancing and contracts for services) are much easier to price than litigation.

“Fixed fee litigation is something we don’t offer yet, but my brother, who is a litigator currently living in Holland, plans to return to New Zealand later in the year and work with me, and we have already had some good discussions about offering fixed fee litigation. I’ve done some recent research and it doesn’t look like New Zealand law firms are offering it or, if they are, don’t appear to be marketing it in a meaningful way, so there are some good opportunities here.”

Ms King says the upside of fixed fee litigation is that it “creates efficiency and certainty for clients and incentivises lawyers to settle a case at the right time rather than going all the way”.

“A downside is that it could mean lawyers don’t put their heart and soul into a case to find that needle in the haystack that could prove to win the day.”

So taking everything into consideration, why has it taken so long for the legal profession to fully embrace fixed fees and move away from billable hours?

Claudia King thinks she knows the answer.

“Billable hours is an easy billing method for us as lawyers as all we have to do is record time without really scoping a job at the start, and it has meant we have been able to get away with being inefficient. Efficiency is great once you have it but it takes time and effort to get there. Spending time working on efficiency is not billable work, but it does have wonderful longer term benefits.

“Billable hours don’t promote efficiency and are not really in the interests of clients, although interestingly there are some clients who would rather pay based on time as they perceive that a fixed fee includes an element of padding for contingencies that they don’t want to pay for.”

All of which begs an important question raised earlier in this story – to what extent do lawyers pad their timesheets by charging clients for time taken thinking about their case while in the shower or on the way to work?

Ms King is intrigued by such a proposition.

“This is an interesting one because, as lawyers, we are paid to take on the problems of our clients as if they were our own problems, and this means we end up thinking about our clients’ problems when we probably shouldn’t be, such as in the shower, in the car and in our sleep.

“Often, when we’re more relaxed, we’ll come up with a great solution to a client’s problem, and some might say that if you come up with this fantastic solution while driving your car then why shouldn’t a client pay for that?

“At the end of the day most experienced lawyers will have a feeling about what a reasonable fee is for a piece of work or a certain job, and if the time on the clock reflects that, then great, but if there is too much time on the clock then there will be write-offs.”

Clearly, there are compelling arguments for and against the retention of billable hours, but if the legal profession is to retain some of its best and brightest young lawyers then it might do well to take heed of Chief Justice Wayne Martin’s sobering observations.

“Clever young lawyers are leaving the profession in droves, or shifting to corporate, government and NGO roles where their motivation is provided, and their performance assessed by outcomes other than the production of billable hours.”

And pointing to what he termed the high levels of depression and substance abuse amongst lawyers, he went on to say: “Time billing can have alienating – and worse – impacts upon lawyers.”

“Those many lawyers who come to the profession motivated, at least in part, by idealism, altruism, and a desire to help the clients they serve, may instead find a competitive and relentlessly demanding environment driven by commercial imperatives.”

The time had come, he concluded, for the profession “to enthusiastically embrace the pressure for change, and generally adopt alternative methods of charging for services rendered”.

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