***
The Tyranny of
the Billable Hour
by Steven J. Harper
March 28, 2013
“THAT bill shall know no
limits,” wrote one
DLA Piper lawyer to another in 2010 in what the firm is now calling
“unfortunate banter” between associates about work for a client. But what is
truly unfortunate is the underlying billable-hour regime and the law-firm
culture it has spawned.
Lost in the furor surrounding
one large firm’s current public relations headache are deeper problems that go
to the heart of the prevailing big law-firm business model itself. Regrettably,
as with previous episodes that have produced high-profile scandals, the present
outcry will probably pass and the billable hour will endure.
It shouldn’t. The
billable-hour system is the way most lawyers in big firms charge clients, but
it serves no one. Well, almost no one. It brings most equity partners in those
firms great wealth. Law firm leaders call it a leveraged pyramid. Most
associates call it a living hell.
In a typical large firm,
associates earn far less than the client revenues they generate. For example, a
client receives an invoice totaling the number of hours each lawyer spends on
the client’s matters, multiplied by the lawyer’s hourly rate, say $400 for a
junior associate. Most big firms require associates to bill at least 1,900
hours a year, according to a survey last year by NALP, the Association for
Legal Career Professionals.
In 2009, DLA Piper announced
that it had eliminated associates’ billable-hour requirements in favor of a
performance-based reward system. However, the firm’s submission for the
association’s current NALP Directory
of Legal Employersreports that it has a “minimum
billable hour expectation.” In 2011, DLA Piper’s “average annual associate
hours worked” (both billable and nonbillable) was 2,462; the billable average
was 1,831.
At $400 an hour, a
hypothetical 2,000-hour-a-year associate generates $800,000 a year for the
firm. But the firm typically pays the salaried lawyer one-fourth of that amount
or less.
For associates, the goal is
simple: meet the required (or expected) minimum number of billable hours to
qualify for annual bonuses and salary increases. Billing
2,000 hours a year isn’t easy. It typically takes at least 50 hours a week to
bill an honest 40 hours to a client. Add commuting time, bathroom breaks,
lunch, holidays, an annual vacation and a little socializing, and most
associates find themselves working evenings and weekends to “make their hours.”
Most firms increase financial rewards as an associate’s billables move beyond
the stated threshold.
For partners, billable hours
are a key measure of associate and partner productivity. More is better. The
resulting culture pushes everyone harder. Meanwhile, each partner strives to
maximize individual client billings that he or she controls. Those billings in
most cases determine a partner’s annual share of the firm’s profits. Their
clients also become tickets to other firms. That makes partners reluctant to
share too many important client responsibilities with their associates and
fellow partners.
For clients, the consequences
of the billable-hour system can be absurd. Fatigue through overwork can produce
negative returns — the critical document missed during a late-night marathon
review; the error in the draft of a corporate filing that goes unnoticed.
Why do clients tolerate this
perverse system? Periodically they rebel, especially during economic downturns,
but those revolutions have been short-lived and unsuccessful. A 2011 survey by ALM Legal Intelligence, an online data service, found that alternative
fee arrangements accounted for only 16 percent of revenues at the nation’s
largest law firms in 2010. Despite outcries for reform, the billable hour
remains entrenched and the barriers to change are formidable. In many practice
areas, including large and lucrative bankruptcy cases, prior court rulings
(including the United States Supreme Court’s 2010 opinion in Perdue v. Kenny A.) essentially require lawyers to use the
billable-hour approach if they want to assure approval of their fee petitions.
There’s a way out of the
mess. But it requires clients to press harder for alternative fee arrangements,
courts to back away from policies that embed the billable hour, law firm
leaders to stop rewarding excessive associate hours and senior partners to
consider the deleterious consequences of their myopic focus on short-term
profit-maximizing behavior.
However it comes out, DLA
Piper isn’t the first law firm to endure a client billing controversy. While at
a big firm, Webster Hubbell, a former Arkansas Supreme Court justice and
associate attorney general for President Bill
Clinton, was caught billing clients for time that he never worked. He went to prison. A partner in a prominent Chicago law firm got into trouble when
someone wondered how he could bill almost 6,000 hours annually over four
consecutive years. He couldn’t.
In fact, a cottage industry
has now developed in auditing outside law firm invoices to clients. Even so, as
the deceit associated with the billable hour continues undetected, equally
insidious consequences of the entire system endure. The episodes of public
embarrassment will remain infrequent, and the triggers producing them will be
idiosyncratic. DLA Piper’s current notoriety began when a former client refused
to pay his roughly $675,000 bill. The firm sued him last year, and its internal
e-mails about the matter became subject to discovery. Before long, they landed
on the front page of The New York Times.
DLA Piper said that the
comments of its lawyers were “an inexcusable effort at humor.” What’s really
not funny is the toll that the flawed system is taking on a vital profession.
Steven J. Harper, a former partner at the law firm Kirland & Ellis
and an adjunct professor at Northwestern University, is the author,
most recently, of “The Lawyer Bubble: A Profession in Crisis.”
***
