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The inherent client conflict of interest caused by hours-based billing

|Written By Ralph Baxter
The inherent client conflict of interest caused by hours-based billing

For some time I have been troubled by the potential conflict of interest that hours-based billing causes between the lawyer and the client. The more I focus on it, the more profound the problem appears.

Let me start by saying that I have deep confidence in the dedication to ethical conduct of the members of our profession. My concern here is not with their fundamental professionalism. Instead, it is a concern that, notwithstanding that professionalism, the hours-based billing model can put them at odds with their clients in ways they do not intend, and in ways they may not recognize. It is a structural issue, not a moral issue.

I first noticed the issue years ago when a lawyer friend of mine quipped, after meeting with a client about a new lawsuit, that he had to feign empathy for how upset the client was, given his own personal glee with the prospect of the revenue the new case would generate.

Knowing my friend, I knew he wouldn’t deliberately do something contrary to the client’s interest, but it was, nonetheless, a disturbing exchange. What was bad for the client, was good for the lawyer.

More significant to my outlook was Richard Susskind’s 2008 book, The End of Lawyers?, in which he identified “the curse of hourly billing.”

  So long as the focal point of law firms’ profitability is premised on the number of hours spent advising clients, their motivation will always tend to be to spend more rather than less time on the work, where the clients will prefer precisely the contrary. . . . At worst, hourly billing can tempt lawyers to dishonesty. At best, it is an institutional disincentive to efficiency.

It is not just that what is bad for the client is good for the lawyer. The model incentivizes the lawyer to make it worse for the client.

The incentive to log more billable hours has become pervasive in the hours-based billing model. Lawyers have minimum billable hour requirements; compensation turns on billable hours; so do department and office performance assessments. Most internal measurement systems are aimed at rewarding high billable hours and sanctioning low or even modest billable hours.

A recent article, entitled “What’s Wrong With Law Firms?” by Georgetown University law professor Jonathan Molot suggests that the conflict is now about the model itself. Knowing that clients want a different model with different incentives, law firms adhere to the billable hour model “because any departure . . . might risk reducing current revenues and current profitability.”

Similarly, as I wrote last week, it is clear that the billable hour model is impeding law firm adoption of new technology and process design options that would make firms more efficient. Converting to a method that delivers client service with fewer billable hours might be better for the client, but since it will reduce revenue, law firms are slower to change.

So, where does this analysis take us?

At the minimum, clients and law firms need to recognize that there is a structural problem at work. It warrants serious consideration and appropriate action.

Clients need to be more assertive about the issue. Fees aren’t too high merely because the lawyers don’t stay on budget or because their hourly rates are too high. Fees are too high because law firms hold on to 20th Century business and service models. Clients should demand that their firms perform and price their services differently.

And law firms need to take responsibility for what they are permitting to occur. A material gap has developed between the costs incurred and fees charged and what those costs and fees could be. At some point the fundamental fidelity firms owe their clients and their ethical responsibility not to charge an unreasonable fee require them to revamp their business and service models.

Ralph Baxter is the chairman of the Thomson Reuters Legal Executive Institute and writes a weekly column for the LEI blog, where a version of this article first appeared.

  • Dr.

    Frederick Harris
    I believe Mr. Baxter's lengthy analysis about the moral and structural implications of billable hours can be reduced to two words: flat rate, or fixed fees, or other two-word equivalents.
  • Lawyer

    Matthew B.
    I completely agree with your article. I'm only a third year call and I began struggling with this issue while I was still articling.

    In addition to what you set out above, a further wrinkle I have identified, is the fact that lawyers want to provide the best service possible while clients want to receive the best service possible as cheap as possible. Providing the best service possible, especially in the litigation context, means spending what can seem like an excessive amount of time on files. How many times have we all heard that the key to being a good litigator is obscene amounts of preparation. In my mind, this only adds to the inherent billing conflict. In the world of hour-based billing the only way to provide the best service possible is to bill more time. If you bill too much you're hurting the client's pocketbook, if you bill too little you're likely hurting the client's interests or chances of success.
  • Lawyer

    Paul Harricks
    I am old enough (barely) to remember when the prevailing approach was to issue an invoice with a flat fee, often after discussion with the client. The time expended was only one of several factors taken into account in setting the fee. It was mostly because of client pressure to be more transparent that firms moved to using the more "objective" hourly rate. We are coming full circle, it seems. Not a bad thing, but some historical perspective is always helpful
  • just the facts

    Pablo 5
    The 60 storey office building where I work was built on a fixed price contract between builder and owner. Yes there were unexpected events and changes but they worked it out without drama and gnashing of teeth. Surely no legal issue is so complex and unpredictable that fixed costs or fixed progress milestones payments are impossible? The billable hour merely shifts the risk to the client rather than being born by the lawyer who has more control over the costs.
  • Lawyer

    Kenneth Pope
    Virtually all of my billing is fixed fee. it's a constant process seeing that fixed fees provide a proper return on time and effort. I find that it makes collecting on accounts simple, clients know what the fee will be when they sign the retainer, and don't hesitate to pay accounts when rendered.
  • lawyer

    Peter Waldmann
    The problem with this premise is that the inherent conflict of interest between lawyers and their clients is based on the lawyer wishing to earn more and the client wishing to pay less. Whether the billing is by hour, or by block fee, or by any other method, this conflict is embedded. That is not to say it is unameliorable and morbid. However, the solution lies elsewhere than in shifting the money from a billable hour base to a different paradigm.
  • Lawyer

    Bradley Wright
    What is an hourly rate? It is a fixed fee for one hour's worth of legal advice. I do almost all my work on fixed fees, but much of law does not lend itself to that. In litigation, for example, a fixed fee is a guess. If the guess proves unrealistic, it is changed lest the lawyer lose interest in the file. The best way to ensure that lawyers do not waste time on a file is to make sure that they are so busy that they do not have to. Instead, we are graduating lawyers at a rate five time greater than population growth. Keep that up and someday lawyers will have one client each from whom to earn their entire annual incomes. Too few lawyers is bad for a society. Right behind it in harm is too many lawyers. See the USA. The government wastes money spewing out unneeded lawyers; the law schools do it for the revenue; the Law Society does nothing about it; and everybody, including (especially) the public loses.
  • Lawyer

    Jashandeep Atwal
    we are graduating lawyers at a rate five time greater than population growth. Keep that up and someday lawyers will have one client each from whom to earn their entire annual incomes. Too few lawyers is bad for a society. Right behind it in harm is too many lawyers. See the USA. The government wastes money spewing out unneeded lawyers; the law schools do it for the revenue; the Law Society does nothing about it; and everybody, including (especially) the public loses.
    I strongly agree with this and have always felt the same

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