Escaping the billable hours trap

By Jeff Bleich
President, State Bar of California

Bleich

The work of the State Bar ultimately is to protect the public and to ensure that the people of California have access to the legal help they need. Although the bar provides benefits and other services to lawyers, it does this not as an end in itself, but instead to help lawyers better serve the public. And when the bar trains, tests, charges, audits and occasionally disciplines a lawyer, it does so to protect the public.

This mission — ensuring access and justice by all means possible — is what attracted me to the bar. It is also what makes me think we need to re-examine a practice that is threatening the capacity of lawyers to serve the public effectively: billable hours. We all know about the lifestyle burden that billable hours places on lawyers. But on a deeper level, a billable hours system is corrupting to our profession in both obvious and more subtle ways. One of the important challenges of the next generation of lawyers and bar leaders will be to find a way out of the billable hour trap.

Some history

Billable hours have not always been a fixture in legal practice. In fact, this way of calculating fees is relatively new. Thirty years ago or so, most lawyers did not keep track of their hours at all. Instead, a lawyer would submit a bill to a client with a three-word explanation: “for services rendered.”

The amount charged reflected a lot of things: the lawyers’ judgment about how long and hard they worked, how successful they had or hadn’t been, the client’s expectations and ability to pay, and in the end, a desire to charge an amount that seemed fair to them and would be acceptable to their client. While this system usually worked, management consultants beginning in the 1970s complained that this “black box” lacked accountability and was probably inflating the cost of legal work. So they devised the current approach: lawyers set an hourly rate, write down everything they do and how long it takes to do it, and then bill for the time.

While the consultants promised that this would reduce the cost of legal services and make lawyers more accountable, it has done just the opposite. It has made litigation more expensive, and it has largely eliminated accountability for outcomes. In the bargain it has cast an ethical cloud over the work we do, demoralized lawyers and degraded our efforts to train lawyers to solve problems.

Higher cost, lower accountability

The goal of many ethics rules is to ensure that lawyers resolve their clients’ problems as cheaply and efficiently as possible. At its core, however, a billable hours model puts that goal directly at odds with the lawyer’s economic interest. Lawyer/ author Scott Turow has captured this conflict well by describing what a truly candid disclosure to a client might sound like: “If you hire me, I promise that my billing system will reward me for solving your problems at the slowest possible pace, with as much duplication of effort as possible, and where I will face economic penalties for exercising any judgment that limits or focuses our work. I will, under this system, have strong incentives to embrace any opportunity to engage in discovery wars where the work is the easiest and the financial rewards are the greatest. And you can be assured that every member of my team will have a real financial inducement to exaggerate the amount of time they devote to every task.”

While most lawyers (and all good lawyers) resist those impulses, the perverse incentives created by billable hours make every decision suspect. If a lawyer resists settlement, is it because the deal is bad or because they will earn far more — win or lose — if they go to trial? Was a broad discovery demand designed to get at critical facts, or was there also an unconscious desire to keep a lot of high-billing associates busy?

While I honestly believe that I’ve based my own decisions on the best interest of the client, all of us seem to know a lawyer who we think hasn’t. The problem with this system is that even if lawyers are not corrupted by it, it still casts a shadow over the choices we made.

And worst of all, it does not seem to have met the ultimate goal of solving problems more efficiently and at a lower cost. Indeed, given the tremendous explosion in legal costs and the increased profitability of larger firms that bill by the hour, there is no evidence that lawyers since the 1970s have gotten more cost-efficient. There’s also no evidence that writing down tasks makes a lawyer more accountable. Rather than actually having to justify a fee based upon a range of factors, lawyers need only confirm that they actually worked the number of hours they recorded.

Again, this just puts lawyers at odds with their clients in uncomfortable ways. Clients fly speck their attorney’s bills, or propose unenforceable budgets, or demand discounts that they cynically (and correctly) expect will only be absorbed by the next rate increase. The entire process reflects a distrust and a skepticism by clients — precisely what you don’t want in an attorney-client relationship.

The human toll

The destruction brought by billable hours can be subtler in that it affects not merely the cost and efficiency of our work, but the quality of our profession as a whole. Firms now have only three ways to make more money — work longer hours, increase the number of lawyers or raise rates. Predictably, in a profit-maximizing system, firms have been doing all three. Instead of working 1,700 hours a year as lawyers did in the 1970s, today, new lawyers typically bill around 2,100 hours. Those additional hours come out of two places — evenings and weekends. That means less sleep, fewer outside interests, less commitment to loved ones and the crumbling of a decent life. Lawyers feel guilty about doing the very things that we should do to achieve access and justice — such as pro bono work for those in need or service to the community. Instead new lawyers come to view themselves as people who merely rent out their brains for a certain price per hour. And they and their work are degraded by the experience. The trend towards putting lots of lawyers on cases just compounds this. Young lawyers have fewer client contacts, less ownership of a case and fewer opportunities to actually solve a problem. As they advance, they aren’t asking the questions that will allow them to one day lead their firms and the profession: what experience am I getting, what sorts of colleagues are we developing, what is our culture and philosophy? Instead they think more and more about profit targets, hours targets and what their exit strategy is. An entire generation of lawyers has come to believe that their worth as a lawyer is measured not in how they solve problems but in how many hours they need to work. Not surprisingly, this has not made them better problem solvers.

I realize that strong economic forces will continue to favor billable hours, and if a better and equally lucrative alternative existed, it would have been adopted by now. So this will not be an easy problem to solve. But we will eventually reach the outer limits of human endurance and the upper reaches of client tolerance, and if we do not begin addressing the issues now, it will be too late when we do. There are alternatives to billable hours, such as fixed fee arrangements with negotiated bonuses based on performance.