This is the first post in our series talking about the billable hour, specifically:
- the problems with hourly billing (today’s post);
- why hourly billing sucks for the client;
- why hourly billing sucks for the lawyer;
- arguments people use to defend the billable hour (and we’ll pick those apart), and the real reason many lawyers don’t change billing methods; and
- alternatives to hourly billing.
The words “lawyers” and “hourly billing” have almost become synonymous over the past 50 years, to the point that someone hiring a lawyer may just assume they will have to pay an hourly rate and might not even be aware that there are lawyers offering some alternatives. My hope with this series of posts is to highlight the problems with the hourly billing method and show you some of the alternatives that are available.
The ultimate goal in pricing legal services should be to have a price that is fair – fair for both the client and the lawyer.
There are some great lawyers who bill by the hour and charge reasonable prices. If you’re happy with the work your lawyer is doing for you and you are happy with the price, you probably don’t care what billing method the lawyer is using.
But often the billable hour causes problems, for both the client and the lawyer. Most of us know this; whether we want to admit it or not. In a later episode of this series, we’ll be talking about specific arguments lawyers rely on to defend billing by the hour, and why those arguments don’t actually hold up. But most people I talk with, clients or lawyers, readily admit they don’t like the hourly model. They know it’s deeply flawed.
Am I predicting the death of the billable hour? No, I’m not. Not yet anyways. But the number of lawyers and firms moving away from hourly billing to other models is growing quickly. The legal industry in general is dinosaur in a lot of ways, which means it’s primed for innovation. I can almost guarantee that if a firm is innovative in their pricing and billing, they’re innovative in the way they’re doing the legal work. And if you’re like me, that’s the type of firm I want to hire.
In 2002, the American Bar Association came out with a report on hourly billing, and here are some of the problems they listed with hourly billing:
- does not reflect value to the client;
- discourages attorney-client communication;
- penalizes the efficient and productive lawyer;
- fails to discourage excessive lawyering and duplication of effort;
- doesn’t reward the lawyer for productive use of technology;
- creates conflict between clients’ and lawyers’ interests;
- causes a decline of the collegiality of law firm culture;
- discourages lawyers from taking on pro bono work;
- forces the client to run the risk of paying for the lawyer’s incompetency or inefficiency; and
- the padding of time records.
In the report, the president of the American Bar Association says, “It has become increasingly clear that many of the legal profession’s contemporary woes intersect at the billable hour.”
I’m going to spend the rest of the post discussing what I consider the main problems with hourly billing.
- Time ≠ Value
Time and value are not the same thing. Effort and value are not the same thing. This is the biggest problem with hourly billing: it does not reflect value provided to the client.
Imagine you hire a kid to mow your lawn every week. Each week, he shows up with his old school push mower and mows your lawn. It takes him an hour and a half and you pay him $20.
One week, the kid shows up with a fancy ride-on lawnmower and he gets the job done in 30 minutes. Do you pay the kid less since he did it faster? No. That would be crazy. You don’t pay him less just because he was able to do the same job in less time. In fact, it’s probably more valuable to you that the job was done in less time.
Imagine you’re back in school and you’re doing a math test. There are 20 questions. You get all 20 right. Another student gets all 20 wrong, but he spent a lot of time on it and tried really, really hard. Should that student get a higher grade than you? No, because what matters is the right answer. That is what’s valuable, not the amount of time or effort that somebody put into it.
The results are what matters, not the time, not the effort.
For some reason, we expect that the results we get out of something should equal the effort that we put into it, but that is rarely the case. In his best-selling book The Tipping Point, Malcolm Gladwell says this:
“We are, as humans, heavily socialized to make a kind of rough approximation between cause and effect… We are trained to think that what goes into any transaction or relationship or system must be directly related in intensity and dimension to what comes out…
…
…[W]e have to abandon this expectation about proportionality.”
Here’s an example from the legal industry.
You hire a lawyer who bills $300/hour. It’s something within their area of expertise but is going to take some time. It ends up taking them 20 hours and you pay them $6,000.
The next month, I happen to hire that same lawyer for the same thing. This time, the lawyer only takes 4 hours because they just did the same work for you. I pay them $1,200.
We get the same result, but you paid five times more than me. The lawyer makes five times less for the same result. You can debate whether one of us got overcharged, or one of us got a good deal, but the fact is that there is a huge different in price to deliver the same value. It doesn’t make any sense.
Lawyers sometimes discount their bill to account for learning on the job, but in this example I’m talking about research and work that is just part of the job.
There is also a huge problem in that not all hours are equal, even if it is the same person putting on those hours. We all have times in the day we are more efficient. In his book “When”, Daniel Pink mentions that hospitals’ standard of care and focus of staff drop as the day progresses. Medical mistakes are often a matter of life and death, making this a particularly pressing issue. And studies show that mistakes are most common between 3:00 PM and 4:00 PM. In fact at 9:00 AM, there’s only a 1% chance of slipups; By 4:00 PM, that chance quadruples to 4.2 percent. Furthermore, in the afternoon hospital staff wash their hands 38% less often than they are supposed to. Researchers believe that this decrease in hygiene standards as the day wears on leads to around 600,000 avoidable infections in U.S. hospitals every year, adding up to $12.5 billion in unnecessary costs.
Most of us have a time of day we are most productive, and a time of day where energy and productivity drop and the rate of errors increases. If you’re like me, the most productive time of the day happens to be first thing in the morning and I’m often sluggish in the hour or two after lunch. the value produced in an hour of work at 9:00 AM ends up being much greater than the value produced in an hour of work at 1:00 PM, so why should those two hours be billed the same?
When I worked at big firms, I routinely worked late into the night and also pulled the occasional all-nighter, so I know from experience that the work produced in the middle of the night tends to have more errors than work produced in the morning after a good night’s sleep. But the pressure to bill more hours is very real, and quality often takes a backseat to the number of hours billed, especially when the lawyer can bill the client for the time to review and correct work with errors.
- Hourly Billing Ruins the Client-Lawyer Relationship
Hourly billing misaligns the financial incentives for the lawyer and the client. Some critics of the billable hour even go so far as to say that it creates a conflict of interest.
Firstly, the fee estimate the lawyer gives you at the beginning of your legal project is only their best guess as to what the total hourly fees will be at the end of your legal project, but that estimate is not guaranteed and is more than likely wrong – which means you lose. The client assumes all risk for the poor estimating done by the lawyer since the client has to pay for the additional time spent by the lawyer. If the lawyer spends more time on the matter than estimated, the lawyer gets paid more.
The problem for you, the client, is that lawyers are notorious for underestimating. For example, a matter you were told by the lawyer would cost you $10,000 often ends up costing $15,000 to $20,000 or more, which comes as a nasty surprise for you when you get that bill from the lawyer and have to pay it.
I’m not saying that your lawyer is intentionally trying to deceive you; the hourly lawyer probably doesn’t know that he or she is underestimating. It is likely the result of the “planning fallacy” phenomenon, which says that people underestimate the time it will take to complete a future task, despite knowing that those tasks in the past have generally taken longer than planned.
It’s like eating at a fancy restaurant that doesn’t have prices next to the menu items. This literally happened to Allison a few weeks ago. You order your food and eat, and once you’re finished eating you get the bill. It’s terrible position to be in, because you’ve already eaten the food so there isn’t much you can do, but had you known upfront what the price would be you would have ordered something different.
It’s just as uncomfortable for the lawyer trying to get paid for work that was already done, not to mention it has a hugely negative impact on client satisfaction. It’s been shown that the two things that people remember most are the initial impression or experience, and the final impression or experience – that final impression is usually when the client receives the bill.
Leaving aside the issue of poor estimating, hourly billing also encourages “overlawyering”. Overlawyering includes things like longer than necessary emails, letters, phone calls, excessive reviews of work product, over-staffing files, etc. There isn’t always a bright line test to determine when a deliverable is “done”, as the lawyer can always do one more review of a document and find something to tweak, and there can always be slight improvement to something by spending more time on it, but at some point there is diminishing returns. Firms don’t train their lawyers to be efficient in delivering legal services.
Lawyers who bill by the hour also have no financial incentive to invest in technology to become more efficient. Rather, there is a disincentive to invest in technology. It rewards the inefficient lawyer.
Here’s an example adapted from Jonathan Stark:
A client approaches a lawyer with a legal project. The lawyer estimates a 20 hour job at $500/hour for a total of $10,000. To complete that project, one of the things the lawyer needs to do is produce a certain package of documents. A software tool exists to largely automate the production of those documents and cut the lawyer’s time down to 5 hours. The price for the software is $2,500. Consider the following options for the lawyer:
- Lawyer buys the tool for $2,500, works 5 hours, and bills the client for 5 hours. Result: The lawyer makes no money but owns the tool. The client is happy.
- Have the client buy the tool for $2,500, the lawyer works 5 hours, and bills the client for 5 hours. Result: Lawyer worked 5 hours, made $2,500, the client owns the tool and may or may not be happy depending on whether the tool is useful to them.
- Lawyer buys the tool for $2,500, works 5 hours, and waits 15 hours to deliver to the client, and bills the client for 30 hours. Result: The lawyer works 5 hours, nets $5,000, and the client is happy that it was faster and cheaper than promised.
- The lawyer doesn’t buy the tool, delivers the work in 20 hours, and bills the client $10,000. Result: The lawyer worked 20 hours, makes $10,000, doesn’t own the tool, and the client is satisfied.
All of these options suck. The 3rd option is clearly unethical since the lawyer would be billing the client for hours that the lawyer didn’t work. It’s dishonest. There is a moral dilemma, though, because the unethical option produces a better result for the lawyer and the client than option 4.
A lawyer who bills some other method, like fixed fees or value pricing, won’t hesitate to invest in tools that make them become more efficient.
Here’s what Jonathan said about software consultants, but it could just as easily apply to lawyers:
“A software consultant who bills by the hour has no financial motivation to build or purchase tools that would save time, to participate in professional development, or to stay on the cutting edge of industry research. In short, they have no incentive to get better at what they do.
When an entire industry consists of people operating in this manner, there is little hope of progress for the group. No one will forge ahead in a groundbreaking way because there is a financial disincentive to becoming better at solving problems faster.
Therefore, an industry that bills by the hour will never get any better at what they do.
Truth.
- Hourly billing involves many arbitrary decisions
That brings us to problem number three. Hourly billing involves a ton of arbitrary decisions.
The first arbitrary decision is the minimum billing increment. For most lawyers, six minutes (0.1 of an hour) equals one unit of time, meaning it is the smallest amount that they can bill. A one-minute phone call will cost you at least six minutes.
You end up with some really weird results. For example:
- A seven-minute phone call costs twice as much as a six minute phone call.
- If the lawyer does ten two-minute phone calls for different clients, the lawyer bills an hour even though they worked a total of 20 minutes. If the lawyer does ten two-minute phone calls in a row for the same client, the lawyer only bills 20 minutes. Very different results for the same work.
Lots of time shouldn’t even be recorded at all, let alone put on your bill, for example, time spent looking for files, time spent managing the lawyer’s time, distracted time, time for another lawyer in the firm to get up to speed on the file, the time after you get back from lunch when the lawyer is struggling not to fall asleep while reading your legal documents, and so on. There is debate over whether a lawyer should keep your time clock running when they go to the restroom.
There is also the problem that low-skill tasks are billed at the same rate as high-value tasks. Low-value tasks could include travel time or photocopying. The argument is that the low-value task (travel time, photocopying, etc.) is taking up time that the lawyer could be doing other high-value work, but that argument assumes that the lawyer has enough high-value work, and that the lawyer would actually be doing that other high-value work at that time.
There’s also a problem with inaccurate timekeeping, which could be the result of things like interruptions, multitasking, or lawyers recording time the following day or at the end of the week. Some lawyers record all of their time for the month at the end of the month. How do you accurately remember and record what you were doing 30 days ago? This can favor the lawyer, but often lawyers tend to under record time when they forget tasks.
To reiterate the ultimate goal in pricing legal services should be to have a price that’s fair for everyone involved, and hourly billing is just not a great way to get there.
In the next post in this series, we’ll dive into why hourly billing sucks for the client specifically.