Billable hours not so tyrannical?
“Is it time to review the ‘tyranny’ of billable hours?” asked an article featured in a recent issue of Law News (Issue 11, 22 April 2016) and, “should billing by the hour be a thing of the past?”
Here, an ADLS member responds to these and other questions raised in the article, from the point of view of her own experiences in practice and in view of new technologies.
I read with interest with viewpoints expressed in the article “Is it time to review the tyranny of billable hours?” in Law News Issue 11 (22 April 2016). The views expressed below are my own.
My experience in practice has led me to the conclusion that it is vitally important to record your billable hours irrespective of the mode of billing.
A frequent argument raised by clients about the legal fees charged is that the clients did not get the result they wanted, which in itself justifies either not paying what has been invoiced or paying what the client perceives is the fee for the value they received. This can be as little as $200.00 plus GST for a matter that the lawyer instructed spent five or ten times more in billable hours. Common sense says that there are always two sides to a transaction or dispute. Leaving it entirely up to clients to make an assessment of the value of a lawyer’s work may serve to devalue that work from the lawyer’s perspective. There are clients out there who genuinely believe that they should not be billed for attendances on the other party and/or the other party’s lawyer!
Fixed fee arrangements can be problematic. Because the client believes that the client will only be charged the fixed fee, some clients expect and demand far more from their lawyer because the fee is fixed, resulting in the lawyer spending far too much time on that client where the actual time recorded is two or three times more than the fixed fee. Where clients are advised that the fee is based strictly on a time and attendance basis, it is my experience that clients make better
cost conscious decisions as to when they require a lawyer to charge them.
Often, management wants lawyers to record all their time, whether it is administrative or work that a lawyer is authorised by statute to provide, for the purposes of determining recovery rates, costing, profitability, and also as a means of finding out what their employees have been doing each day.
With technology, there is an increasing trend for small- to medium-sized firms to make use of technology rather than labour to carry out most functions, which in turn increases efficiency, productivity and reduces overheads. There is now legal software in the market into which the firm’s precedents (under typical transaction headings) can be stored and immediately copied by the software to a client project matter when it is opened (e.g. when a matter is created for a sale of a house, all the firm’s inbuilt precedents relating to the sale are automatically loaded onto that matter, such as settlement statement, letter requesting discharge, etc.). There is also software that allows a fee earner to dictate and have the dictation typed up at the same time without the need to employ a transcriber. You can do the same with Smartphones – dictate your text to your Smartphone and the Smartphone types your messages. The younger generation are more technologically savvy and work using technology.
To avoid billing abuses, guidelines should be set by management on recording the employee lawyer’s time. For example, the time recording function of the firm’s software should also have a ‘Non-Chargeable’ work type which allows the employee lawyer to record administrative work and/or strictly non-legal work (e.g. opening files, time spent photocopying court proceedings for filing and service, etc). The Non-Chargeable work type should be set to record the time charged as ‘0’. Alternatively, if there is no Non-Chargeable work type on the time recording software, the lawyer can simply change the time charged to ‘0’. This satisfies management’s need to know what their employee(s) is/are doing each day and the client is assured that the client is only paying for legal services.
In the firms I have worked for that are more technology- than labour-intensive, and want to move away from paper storage, time sheets are sent with each invoice. While I am a firm supporter of doing so, if a matter turns litigious at some point in the future, then there is the possibility that privilege may have been inadvertently waived as time sheets contain detailed file notes if a client, who more often than not is not legally trained, makes the time sheets available to a third party.
It is also well-known that a law firm’s business model is that the remuneration paid to a lawyer is ⅓ (or ¼) of the yearly fee billed by the lawyer with ⅓ of the fee earned allocated to the firm’soverheads (which includes administrative and support staff) and the other ⅓ profit. There is therefore pressure on lawyers to charge out as much of their time and recover as much of their time in fees to meet their budgets and to justify a salary increase in the next financial year. The
question that needs to be asked is whether it is fair to expect each employee to contribute as much as ⅓ of their fee to the firm’s overheads bearing in mind that overheads may have already been met or exceeded when every fee earner’s ⅓
contribution is taken into account. Employees are not the business owners. Employees who work for other businesses are not expected to contribute towards overheads. Most, if not all, businesses undertake a detailed costing on all spending and their profit margin in their business plans, and employ staff on the budgets they set in their business plans.
A better model would be to set realistic budgets for employees. A realistic budget would typically allocate overheads to the business owners. Perhaps it would only allocate a small percentage of the profit to the employee. As an example, the employee who is paid $90,000 would have a budget of $120,000. This requires a shift away from the business model practiced by the legal profession. In addition, in technology intensive firms where lawyers undertake their own administrative and support work, expecting the employee to contribute to ⅓ of the firm’s overheads is no longer justified. Re-thinking the typical law firm business model may prevent ‘billing abuses’.
There has also been a lot of talk recently about access to justice. Recently, I was contacted to make an appointment for a recommended medical check-up. I asked how much it would cost. I declined to have that medical check-up on being advised of the cost.
It is a sad reality that prices have increased post the Global Financial Crisis, the so-called housing crisis in Auckland and the Christchurch earthquakes. Most salary and wage earners I know say that they earn roughly what they were earning ten years ago. Yet, the legal profession is under constant pressure to make access to justice affordable. The only way that can be done is if the charge-out rates of lawyers decrease. The question should then be asked – what should a lawyer’s hourly charge-out rate be? With the increase in prices in other sectors, lawyers cannot really afford to reduce prices. Lawyers are also in business and like any business they are in trade to make a profit. This may also be a factor on ‘billing abuses’.
Access to justice can only be achieved if the economy is healthy. At the moment, it is skewed with high property prices in Auckland which in turn has an impact on disposable income, mortgage payments, leases, rent, rates, insurance, and everything else.
Gibbs Mills Livingstone