LAWYERS & THE BILLABLE HOUR (Part 1) - LEVERAGING TIME & OTHER PRACTICES
May 18, 2016
The billable hour is a problem.
If you asked a lawyer to visit this blog post, just clicking on the blog post would cost you “0.1” in your lawyer’s billable time.
A “0.1” means 1 to 6 minutes of a lawyer’s billable hour.
Almost every lawyer bills this way.
Most lawyers bill each block of 60 minutes from 0.1 (for 1 to 6 minutes of work) to 1.0 (for 55 minutes to 1 hour of work).
What’s more, lawyers really profit from the margins of billable time. So a phone call may have only taken 8 minutes of a lawyer’s time, but they can still bill you for 12 minutes (a “0.2”) nonetheless.
This approach to billing helps lawyers “leverage” their time. In other words, it is profitable for lawyers and it allows them to bill more for less of their time.
With this approach to billing, over the course of a day a lawyer is able to bill for more minutes than they actually spend working.
How much can a lawyer leverage his/her time?
It is a common joke among lawyers that “this hour has 90 minutes”. The thing is, leveraging lawyers’ time through a shrewd use of the billable hour (or 6 minutes) means that lawyers can bill far beyond the actual time they spend working on a client’s file.
If time is money, leveraged time is a lot of money.
If a lawyer is able to spend 1 minute on the phone and bill a 0.1 (which equals 6 minutes of their time), with 10 separate entries of 1 minute of work they could bill for 1 hour of their time.
Lawyers reach legendary bragging status within their own firms when they can boast that they billed more than 24 hours in a single day.
But there’s more. Some lawyers refuse to ever record less than a 0.2 of their time, some even more than that.
This means that if you call them and they do not write-off their time, they will bill you for 12 minutes of billable time (or 0.2 of their billable hourly rate) for a phone call that was much shorter than 6 minutes.
Some lawyers claim never to bill less than 0.3 of their time on a task.
Is it any wonder many people are reluctant to contact a lawyer?
VALUE BIDDING AND OTHER PRACTICES
With all that said, we are talking about just the practice of billing by the hour. We have not broached the practice of “value billing”.
Value billing can take a variety of forms.
Sometimes value billing can be positive for clients, when a lawyer feels a file has too much billed time recorded, the work doesn’t justify the billable time, and some time or some of the overall bill is written-off.
The folks in accounting and senior management hate this, however, and there are always safe-guards in place to prevent this practice.
The other “value billing” is the exact same as “premium billing”, which means a lawyer starts off recording his or her time on a file, hopefully as agreed with the client. Then at the end of the day, perhaps the month, or once the file has been completed, the lawyer looks at the amount of time billed and the amount of money owed for this billable time, and that lawyer chooses to increase the amount of time recorded or the amount charged by the law firm for that file.
The argument in support of this practice is that the law firm’s work in providing that service was worth more than the billable time recorded, so it goes, so the firm was justified in arbitrarily charging the client more money for their work.
Sometimes an example of “value billing” may be a lawyer adding some more time at the end of the day (also referred to as “padding hours”).
Other times a lawyer will simply look at the total amount owing at the end of the month or upon completion of the file, and the lawyer will simply increase the amount owed.
Yes, the overall amount of the bill can be arbitrarily increased without consulting with the client, according to a lawyer’s personal view of the value of his or her (or their firm’s) contribution.
Alarm bells, anyone?
When I started practising law I spoke to a lawyer who worked in New York City. When he was a junior lawyer he spent months working long days and nights to complete a commercial transaction. Once the deal closed, he was called into a senior partner’s office. The senior partner was reviewing the law firm’s bill that was to be sent to the client. He was not pleased. The junior lawyer worked day and night over a long period of time and duly recorded his time – this was not in question. The senior partner looked at the junior lawyer and simply asked “is this what you think your time is worth?” The senior lawyer then scrawled a line through the amount listed at the bottom of the invoice and wrote in a new amount, substantially higher than the previous total.
How did law get this way?
I admit – I don’t know.
Some may blame the billing culture that has developed at law firms.
Others may say that there is no problem.
And others may say that any problems are limited solely to a few bad apples. (Don’t blame the system, blame the lawyer.)
Consistently, complaints around lawyers’ fees and billings tend to centre on the use of the billable hour billing model.
ORIGINS OF THE BILLABLE HOUR
The more I think about the billable hour, the more it makes me curious.
Who determined that the value of 1 to 6 minutes of a lawyer’s time was worth a certain amount of money?
Who determined that lawyers are entitled to bill the same hourly rate for every task and for minute of their work day?
How did the billable hour come to be?
Even that isn’t entirely clear.
One explanation is that, in the United States, law was practised on a fixed fee model. Fixed fees then developed into minimum fees for legal services, which was eventually struck down by the Supreme Court of the United States of America in Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975) on the basis that minimum fees constituting price fixing in breach of the Sherman Anti-Trust Act. The billable hour was then created as a replacement to fixed minimum fees.
Another explanation is that the billable hour was adopted by law firms before the Goldfarb decision as clients demanded more transparency in legal bills.
Yet another explanation is that consultants and accountants encouraged law firms to adapt the billable hour in order to better measure lawyers’ productivity, offer clients’ accountants a means of valuing the legal work done, and allowing lawyers at traditional firms to maximize the value of their time.
Whatever explanation, lawyers moved to embrace the billable hour by the 1970’s. And the billing practice which may have started in the United States was adopted by Canadian lawyers.
And why wouldn’t lawyers bill by the hour?
Law firms have found that they could be very profitable using the billable model.
The billable hour enforced and entrenched an ethos in law firms that they should always keep the billable meter running.
You may hear a lawyer purr: “A-B-B, baby”. (That means Always Be Billing, for normal people.)
The billable hour rewards law firm partners handsomely for it.
For clients, the benefit of the billable hour was that it allowed clients to justify in more detail the legal fees, as they could point to the amount of recorded work of their lawyers, as opposed to seeing a bill for a flat fee issued in relation to a certain file or amount of work.
For clients, the benefit of the billable hour was it provides clients with a basis upon which they can audit how they are being billed. In other words, it allows a more detailed breakdown, even if it provides less value for money for the client, because it shows money paid by measurable increments of time.
Nowadays, traditional law firms rely heavily on the billable hour and they are not looking to change their business model unless there is a shift in the market place.
That shift can come from regulators, clients, or it can come from disrupters in the legal market itself.