Monday, February 2, 2009

Lawyers Billable Hour is Tough to Defend

Jonathan Glater of the New York Times wrote an article that examined lawyers are having trouble defending the the billable hour. "Clients have complained for years that the practice of billing for each hour worked can encourage law firms to prolong a client’s problem rather than solve it. But the rough economic climate is making clients more demanding, leading many law firms to rethink their business model. "

“This is the time to get rid of the billable hour,” said Evan R. Chesler, presiding partner at Cravath, Swaine & Moore in New York, one of a number of large firms whose most senior lawyers bill more than $800 an hour. “Clients are concerned about the budgets, more so than perhaps a year or two ago,” he added, with a lawyer’s gift for understatement.

This blogger notes that the difficulty lies in the fact that lawyers trained in the law, not in business. They don't know any other business models besides the billable hour "eat what you kill" approach to lawyer compensation. Law firms are worried about changing business models in difficult economic times. "Two top U.S. firms, Heller Ehrman and Thelen, have collapsed in recent months. Others have laid off lawyers and staff," reports Mr. Glater in his article.

However, some of the more creative firms are utilizing flat fees for handling transactions and success fees for positive outcomes to market their firms, using the down economy as the inspiration for new solutions for clients. The change is welcomed by many corporations since the attorneys' billable hour has been used regularly since the 1960s. Most in-house attorneys have law firm experience and fully appreciate the pressure of attorneys to bill a large number of hours to advance in the firm or hold onto large partner compensation packages.

Mr. Glater's article continues-- “Does this make any sense?” said David B. Wilkins, professor of legal ethics and director of the program on the legal profession at Harvard. “It makes as much sense as any other kind of effort to measure your value by some kind of objective, extrinsic measure. Which is not much.” In this blogger's observation, the fact is lawyers and their clients are not aligned with regard to fees for service since the longer the work takes, the more the attorney bills. Clients want the fastest result possible, but that isn't in the attorneys' best interest. I liken it to taking a car into the mechanic and he says you need a new gazinkazoink. You have no reference to know that this is in fact what you need, but you pay the fee for the part and installation because you have no alternative. The response to such a comparison by many attorneys is to take offense, responding that ethics keeps them from overbilling or worrying too much about the number of hourse they must bill. While a majority of attorneys are ethical in their billing, the temptation is too great for some and there is billing recorded when the time either didn't need to be spent or was marked up to reflect a "value" billing situation that wasn't agreed to in advance. To deny the potential for wrongdoing under the billable hour arrangement is to place your head in the sand.

Mr. Glater notes that greed may also encourage lawyers to change their payment plans... Law firms are running out of hours that they can bill in a year, said Scott F. Turow, best-selling author of legal thrillers and a partner at Sonnenschein Nath & Rosenthal in Chicago. “Firms are approaching the limit of how hard they can ask lawyers to work,” he wrote, in an e-mail response to a reporter’s query. “Without alternative billing schemes, lawyers will not be able to maintain the rapid escalation in incomes that big firms have seen.” A recent study released last year by the Association of Corporate Counsel showed a rise in the number of companies paying by the hour — but that covered the spring and summer, before the worst of the downturn.
Many smaller firms and solo practitioners have long offered to perform services, like mortgage closings, for flat fees. Plaintiff lawyers also often work on a contingency basis, receiving a percentage of any awards. “What we do in our business litigation is charge clients some kind of monthly retainer, which gets credited against an eventual recovery,” said John G. Balestriere, a partner at Balestriere Lanza, a Manhattan firm with five lawyers. “It’s a lot easier for us to tell a client, ‘We want to do this, we want to push for summary judgment,’ ” he said, and so avoid a lengthy, costly trial. When not paid by the hour, lawyers’ approach to their work changes, said Carl A. Leonard, a former chairman of Morrison & Foerster who is now a senior consultant at Hildebrandt International, which advises professional services firms. In one case, he said, Morrison & Foerster negotiated a fixed fee for defending a company in court, covering work up to the point of a motion for summary judgment. On top of the fee, if the case settled for less than what the company feared having to pay if it lost in court, the law firm got a percentage of the amount saved. The arrangement made sense when the goal was to resolve the dispute quickly, Mr. Leonard said. Lawyers on the case negotiated a settlement for much less than the client’s worst-case number, Mr. Leonard said. “The effective hourly rate was something like 150 percent of our hourly rates,” he added. “We made money, the client was happy.”
In litigation, firms that charge by the hour can suffer if they are too successful and end a lawsuit — and the stream of payments from continuing work — too quickly. One law firm that recently collapsed, Heller Ehrman, was hurt in part because a number of cases had settled.

That collapse highlights the risk to law firms experimenting with other payment arrangements: If lawyers set too low a price, they lose money. Many lawyers may not be good enough businessmen to pick the right price, said Mr. Krebs, of the Association of Corporate Counsel.
“The difficulty is, we don’t really know what it costs us to do something,” he said. But the biggest stumbling block to alternative fee structures may be the managing partners at law firms, who will have to overhaul compensation structures to reward partners and associates for something other than taking a long time to do something.

“I don’t think law firms have completely come to grips with that issue,” said J. Stephen Poor, managing partner at Seyfarth Shaw in Chicago. “But they need to start coming to grips with it very quickly.”

No comments: