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For about 50 years now the billable hour has been the dominant feature of the legal profession. And for just as long lawyers have been trying to kill it. A group of litigators who usually couldn’t agree that the sky was blue without several footnotes qualifying the shade will gladly sing in harmony about the evils of the billable hour and its partner in crime, the daily time sheet. Yet generations of lawyers have accounted for their work lives in six-minute increments. Both reviled and ubiquitous, the billable hour is the cockroach of the legal world. The basic flaw of the billable hour, say its detractors, is that it puts the financial incentives for lawyers in the wrong place. Back in a more genteel age, grouse many lawyers, when the practice was more of a profession and less of a business, the cost of legal services was determined not by the amount of time a lawyer spent on a matter but on the value he delivered to the client. That model broke down and was replaced by a time-based metric — which, say critics, encourages firms to overstaff matters, lard their bills with marginally useful services, and draw out cases that might be brought to a swifter conclusion. “Their pricing model follows the production costs instead of following the needs of the buyer,” says David Perla, a former in-house lawyer with Monster.com and co-founder of Pangea3, a new company that offers legal services performed by lawyers and scientists based in India at a steep discount to domestic rates. Perla calls the time-based American legal profession “grossly inefficient” and ripe for the competition that companies like his can provide. Offshoring is only one development posing a threat to the long hegemony of the billable hour. Technology in general has allowed firms to automate certain services for which they used to rack up billable hours. At the same time, as associate costs have soared, so have firm billable hour rates, climbing almost 30 percent during the last five years. That has prodded corporate clients, led by the likes of E.I. du Pont de Nemours and Co. and General Electric Co., to be more aggressive in exploring alternative pricing models for legal services, forcing even longtime outside counsel to bid for the right to represent the company. Fifteen years ago elite firms like Skadden, Arps, Slate, Meagher & Flom could get away with padding charges for photocopies and danish. Today sharp-eyed corporate accountants aren’t afraid to put bills from even esteemed outside firms under an electron microscope. Such aggressive auditing, and a growing recognition of the defects inherent in the billable hour-based system, have led many inside the profession and outside to ask some simple but profound questions. What is it exactly that lawyers are selling to clients? Is it their time or their skill? And, if it is their skill, isn’t there a better way to measure that value than by watching a clock?No one has put more effort into trying to drive a stake through the heart of the billable hour than Robert Hirshon, chief executive officer of the Portland, Ore., firm of Tonkon Torp. As president-elect of the American Bar Association in 2001, Hirshon traveled the country taking the collective pulse of the profession. The principal source of dissatisfaction, he says, was the billable hour. Associates complained that outlandish billable hour requirements were ruining their personal and professional lives. Partners resented that the almighty billable had become the single most important measure of their worth to the firm. And general counsel thought the billable hour caused firms to focus more on how much time they could put into a matter rather than to focus on the result obtained for the client. “All these complaints seemed to intersect at the billable hour,” Hirshon says. So Hirshon put together a special commission to examine the impact of the billable hour on the legal profession. The commission surveyed hundreds of law firms and in-house legal departments, quizzing them about their billing practices and reliance on billable hours. The resulting report, issued in late 2002, ran more than 60 pages and fingered the billable hour system for a host of perceived ills in the profession, including bill padding, associate defections and the dearth of pro bono work. The report recommended a host of alternative billing strategies that firms could adopt to replace or augment the billable hour. But three years later, Jeffrey Liss, co-managing partner of DLA Piper Rudnick Gray Cary and co-chairman of the commission, admits little has changed. “You do see increased interest in alternative billing arrangements,” Liss says, “but the billable hour is still supreme.” Liss believes that if firms achieved even the modest goal of moving 30 percent of their work to a non-billable hour basis, the impact on the profession would be profound. But he admits that even within his own firm — which he sees as at the forefront of the alternative billing movement — that goal remains distant. And the resistance to innovation isn’t coming just from hidebound senior partners. Liss says many clients talk a good game about wanting alternative billing, but when it comes time to do a deal, they get cold feet. “There is a comfort level on both sides with the billable hour,” says Liss, noting that it provides an easy metric for measuring and deconstructing fees. Still, many within the legal industry think the hours are numbered for the billable hour. Joel Henning, a consultant with Hildebrandt Inc., says corporate clients are increasingly aware of the competitive advantages of alternative billing. Henning says his firm is working with a $35 billion company (which he declines to name) on a soup-to-nuts overhaul of its outside legal services. Henning says the ongoing review is clearly showing that even the best firms are inefficient in delivering legal services. “A huge reason is the hourly fee,” says Henning. “It simply fosters inefficiency.” Henning cites several reasons for this. First, he says, it is inevitable that as associate salaries go up, minimum billing hours go up in tandem. “Partners are going to try to wring every last drop of blood out of associates, and associates miraculously bill whatever number of hours they need to hit bonuses,” says Henning. He says that, “as night follows day,” firms using this system can’t possibly conform to what the client needs. They focus on what the firm needs. But if the billable hour is such an inefficient system, then how did it come about in the first place? The blame can be traced, as you might suspect, to Harvard University. In 1914 Reginald Heber Smith, a recent Harvard Law School graduate, took over the Boston Legal Aid Society and enlisted the Harvard Business School to help him devise a detailed system to track and manage the organization’s finances. One of his innovations was to have the lawyers begin keeping detailed records of their time on different cases. Five years later, Smith, now a well-known figure for his seminal book on legal aid, “Justice and the Poor,” joined the new firm of Hale and Dorr as managing partner. He brought his detailed accounting system with him, including a further refinement: the daily time sheet. Recalling his innovation many decades later, Smith wrote that while he thought “nothing could be simpler” than a form on which you recorded the client, the name of the matter and the time you spent working on it, the lawyers at Hale and Dorr hated his new invention. Indeed, Smith wrote, it “seemed to them little better than a slave system.” In devising the time sheet, Smith was heavily influenced by the theory of “scientific management” promoted by Frederick Winslow Taylor, a businessman and researcher who taught at the Tuck School of Business at Dartmouth. Taylor’s theory of industrial management stressed the importance of monitoring the time it took workers to complete certain tasks. He even suggested that supervisors keep a stopwatch handy to take accurate measurements of their observations. Taylor’s theories of “time study,” developed fully in his 1911 book “The Principles of Scientific Management,” were hugely influential in nascent business academia. But they were also controversial. In 1912 Taylor was called to testify about his unorthodox ideas before a congressional committee, and subsequently a law was passed banning the use of stopwatches by civil servants. Taylor’s critics said scientific management, with its strict emphasis on time, reduced human beings to little more than machines. None of that deterred Reginald Heber Smith in his efforts to promote the time sheet. In 1940 he published a short book on law firm management that gave full voice to his theories. “The statement that a law office needs an accurate cost accounting system seems revolutionary,” Smith wrote, “but if every business concern has to know its costs, why should the law office be immune?” Smith had little patience with those who argued that the law was a profession as opposed to a business. Moreover, Smith had no doubt what value lay at the heart of the practice: “The service the lawyer renders is his professional knowledge and skill,” Smith wrote, “but the commodity he sells is time.” To protect that valuable commodity, Smith gave specific instructions on how the time sheet should be produced, what each line and column should contain, what abbreviations of services should be used and what the basic measurement units should be. “We use the hour and the tenth of an hour because it facilitates not only addition but other calculations. … For convenience in figuring nothing surpasses the decimal system.” Smith’s Law Office Organization was enormously influential, eventually going through 11 printings, but it wasn’t solely responsible for the triumph of the billable hour. By the 1940s, bar associations in most states had in place flat-fee schedules for various legal services. Indeed, it was often an ethics violation to charge less than the proscribed amount. But the revision to the federal rules of civil procedure in 1938 fundamentally altered the landscape for law firms. The dramatic expansion of pretrial discovery made it difficult for firms to estimate the amount of work that might go into a case. In tandem, the rise of the trial lawyer and mass tort cases in the 1960s and early 1970s rendered much of the old flat-fee system quaint and obsolete. Finally, in 1975 the U.S. Supreme Court delivered the coup de gr�ce, ruling that statewide fixed-fee schedules violated antitrust law. The way was cleared for the bastard child of scientific management to dominate the profession. Inevitably, as firms began to use time as the basic measure of their industry, billable requirements for associates and partners became commonplace. As those requirements climbed above 2,000 hours a year at many firms, lawyers and commentators began to talk and write about how the “treadmill effect” created by such high thresholds was ruining the profession. As a baseline, consider a study by the ABA in 1958 when billable hours were first coming into vogue. It found that there were approximately 1,300 fee-earning hours in a year (that assumption included working half-day Saturdays). Studies show that lawyers need to spend about three hours in the office for every two hours of billable time. Ergo, under that measure (assuming an hour for lunch), billing six hours means working a 10-hour day, which in turn generates between 1,500 and 1,600 hours of billable time a year. Turn in those kinds of time sheets at most firms today, and you’ll get back a pink slip. The day hasn’t gotten any longer, so where do the additional 500 hours that many lawyers bill each year come from? Out of their souls, to hear most lawyers talk about billable requirements. To hit billable targets, they sacrifice their personal lives, their public service and often their physical and psychological health. One of the things Hirshon noticed in his travels for the ABA was how lawyers who had gone in-house rejoiced in being free of the time sheet. It wasn’t that they were working any less, Hirshon says, it was that they were liberated from the demeaning ritual of having to account for their professional lives in tenth-of-an-hour increments. Their fate no longer rested on the time they billed, but on the results they achieved. They had been unharnassed from the clock, freed, as Hirshon puts it, from the “tyranny of the billable hour.” The question remains then: If the billable hour is so unpopular, why hasn’t it been replaced? For starters, it’s a huge moneymaker for firms. To a large extent, reliance upon the billable hour is responsible for the pyramid structure of the modern law firm. With legions of associates toiling away on behalf of a narrow band of partners, the modern megafirm generates huge revenue. Take away the billable hour, however, and the foundation of the pyramid collapses. If the basic commodity sold becomes knowledge, not time, then the modern megafirm suddenly begins to look like an obsolete smokestack industry. That’s certainly the view of litigator Fred Bartlit Jr., whose 60-lawyer litigation shop Bartlit Beck Herman Palenchar & Scott, has more or less done away with the billable hour in favor of flat-fee billing. “I go to these legal conferences,” Bartlit says, beginning a well-worn harangue, “and all anybody talks about is increasing profits by taking billables from 2,000 to 2,200 hours. It’s all quantity over quality.” Bartlit says law firms should radically rethink their business model. “Most firms have 70 percent too many associates and way too much real estate, says Bartlit. “But when the basic metric is ‘how long can we take to do something?’ that’s not going to happen.” But the Bartlit Beck “diamond-shape” model, which features small teams with a partner at the center, would seem to have some obvious flaws. Strict flat-fee billing might work for a boutique firm, but wouldn’t it inhibit growth past a certain point? Further, at some point big litigation law firms have to put some wing tips on the ground. Who is going to vet those 3 million pages of documents prior to trial? Bartlit rejects such criticisms. He says larger firms are actually better able to sustain the occasional miscalculations on flat-fee billing. As for discovery, Bartlit admits his firm needs to team up with larger shops on some cases to handle the workload. And here is where Bartlit’s vision meets Pangea3′s vision. He says in the near future, firms will be able to rationalize their structure by farming out such labor-intensive tasks to computers and offshore workers. To some extent, that day has already come. Bartlit says that his firm has run blind tests pitting document discovery software against a document review team of lawyers, and the software performed as well or better than its human counterpart. Bartlit concedes the system may not be perfect — but then neither are associates, and they cost a hell of a lot more. “All these firms are staffed for the 100-year flood,” says Bartlit, “it’s just a bunch of excess capacity.” He says lawyers should let go of the idea that every last stone in discovery has to be turned over by someone with a J.D. on the wall. “I’ve never been surprised by a document in court in my life,” he says, “but even if you had 100 lawyers working on a case, it’s possible it could happen.” Moreover, Bartlit says the psychic toll the modern discovery practice takes is huge. “I don’t have a single friend who is really happy in a big firm,” says Bartlit, “and being a trial lawyer should be the greatest job in the world.” Using his model, Bartlit says, firms wouldn’t have to hire 80 lawyers a year, could do proper mentoring and training and could work in small teams that produce higher-quality work. “We do all that [at Bartlit Beck],” Bartlit says, “and it all comes from abandoning the billable hour.” But not everyone is ready to do away with the trusted hourly rate. J. Warren Gorrell, managing partner of Washington, D.C.’s Hogan & Hartson, says his firm is open to alternative billing arrangements, but he doesn’t foresee the end of billable hours anytime soon. “That structure may work for more routine stuff, high-volume work or repeat work, but on bet-the-ranch matters, you are going to get a premium.” Gorrell says that it is precisely Hogan’s ability to muster a big contingent of lawyers over a large geographic area that makes the firm valuable to many of its clients. He notes that Hogan is currently handling a piece of litigation for a client that involves 30 lawyers in ten different offices. Gorrell does agree, though, that more and more clients are exploring alternatives to the straight hourly billing: “I’d say that the number of RFPs [requests for proposals] on major projects is probably ten times higher than it was five years ago.” Clients are looking to cut down on the number of firms they use, consolidate the knowledge base and shift some of the financial risk over to outside lawyers in return for repeat business. Gorrell also says he sees a lot of interest in a sliding scale on fees. “We are seeing a lot of ‘we want a 2 percent discount for prompt payment’ or ‘we want a 10 percent discount if we give you $10 million in business,’” says Gorrell. That squares with what Liss at DLA Piper Rudnick is seeing as well. Liss says he meets with firm clients often and pitches alternative fee arrangements, but has relatively few takers. Liss says he’ll talk about flat fees for an individual case or transaction, or a flat fee to handle a whole portfolio of business, or a flat fee to do all the client’s legal work, or a flat fee with a cap on the high and low end so that both the firm and the client are protected or a flat fee with a performance bonus for positive results. “They always appreciate the offer,” Liss says, “but usually they stick with the hourly rate — with a 5 percent discount.” Why firms remain wedded to the time sheet is understandable. But it’s more surprising that corporate clients don’t have a bigger appetite for alternative billing. Anastasia Kelly, MCI Inc.’s general counsel, co-chaired the ABA’s committee on the billable hour. She thinks alternative billing is great, but admits she hasn’t done much of it in her two-plus years of running the legal division for the telecom giant. In part, that’s due to circumstances — MCI has been mired in bankruptcy, and been a takeover target for both Qwest Communications International Inc. and Verizon Communications Inc. Even so, Kelly says that part of the impediment to alternative billing is just inertia. “The billable hour is easy, that’s the reality of life,” says Kelly. “It doesn’t always reflect the value of the work being done, but it’s predictable and familiar.” In her former job as general counsel for Sears, Roebuck and Co., Kelly says the company did do value billing on commodity-type legal work, such as certain repetitive contracts and agreements. “Those don’t take a rocket scientist,” she observes. But for more complex transactional work, she says getting the valuation right for a flat fee would be difficult. “You never know how a transaction is going to go, how long it will last, and what might get in the way,” she says. Kelly thinks such an arrangement could work if a company did many small acquisitions, but for big-ticket deals she remains skeptical. Still, she is optimistic about the future of alternative billing. “We had a toe in the waters, and now we are up to an ankle,” she says. “In a couple of years we’ll be up to our knees. But someone is going to have to dive all the way in [in] order to get a breakthrough.” But before they do that, lawyers need to make sure there is enough water in the pool. The essence of alternative billing is risk shifting. While trial lawyers are used to the vagaries of the contingency system, defense firms remain much more risk averse. So long as they keep submitting time, lawyers are highly paid service workers with little exposure. As soon as they break the bonds of time, they become more independent and free of time-sheet-induced drudgery, but also free to fail. Accepting more risk will entail a basic shift in the relationship between lawyers and clients. For now, relatively few firms or clients seem inclined to make that change. Until they do, lawyers will have both predictability and chronic dissatisfaction. They will have unsatisfying work, but they will have steady profits. In short, they will have the hours.

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