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Reinventing The Law Business: In Defense Of The Billable Hour

Should the billable hour really be vilified as something that rewards inefficiency and incompetence, or is it a benchmark with which to judge performance, or is it both?

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Do I have the guts to defend the billable hour? Well, with some trepidation, the answer is yes I do.

I have a perspective on this that is deeper than most in that I have sent out, billed, and negotiated probably over 10,000 legal bills over the past 20 years. Also, in my capacity as de-facto general counsel for my clients, I have reviewed thousands of more bills from other lawyers. None of the foregoing is an exaggeration. Indeed, it is probably much higher.

During this time, I have talked to clients thousands of times about bills. In view of my mission to make my clients “happy,” these discussions have been very introspective. The reason I have been successful overall is that I don’t approach it as me trying to get money out of my client, and I respect my clients enough so that I don’t assume they are trying to just get me to reduce my bill. Instead, my view is that it is me and the client together trying to just figure out what is “fair” against the backdrop of legal services being difficult to price. Let me give some general observations, and then some conclusions:

Let’s first talk about the billable hour, that evil villain. Should it really be vilified as something that rewards inefficiency and incompetence, or is it a benchmark with which to judge performance, or is it both?

Years ago lawyers billed clients by the hour, the lawyers worked hard to make sure they didn’t “screw” their clients on the bills, and the clients overall trusted the lawyers. There was generally peace in the world on all of this.

Then, as I recall, something happened in the 1980’s (when I was just a junior associate). My suspicion is that lawyers got jealous that investment bankers were making more than them so many of them started to overdo it. The problem is … lawyers can’t make as much as the guys at Goldman by charging by the hour – the math just doesn’t add up. So lawyers started working their associates harder and raising their hourly rates. Indeed, at some firms the rates for first-year untrained lawyers are over $500 an hour, which I do think is kind of nutso.

At first the clients put up with all of this, but then they started to get upset about it, and that upset-ness has now reached crescendo proportions in that as a general rule the clients don’t really trust the lawyers on bills anymore.

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But as we dig into this issue, it bears mention that there are some lawyers whose bills don’t generate complaints. The client never, ever, ever complains — not a single time. Clients respect these lawyers. They work very hard and they bill their time fairly. Clients know they kill themselves for the client and add real value to the client’s business. There just isn’t a problem — ever.

Then there are other people whose bills make the client wonder. This is often the case with junior lawyers who the clients don’t see in action. The client has no idea what they really did on the matter … whether they really added value … whether they are worth the money. So the client wonders about it. There is nothing wrong with that wonderment. And the law firm has to justify what the associate did and the overall bill in the context of the work performed. That seems logical to me. If the firm can’t justify a bill and feel confident that it is “fair value for the services rendered,” then the bill shouldn’t have gone out in the first place.

Let me relate a conversation with one of my major clients.

I said, “I am in business to make you happy. Legal bills are always trouble. How about if we just skipped the billable hour and went with value billing? At the end of the deal, we will propose a bill and you will say if you like it or not. If not, we will work it out?”

The client said no. He liked the billable hour.

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I said, “Why? I thought you hated it?”

He said: “No, I like it because it gives me two arrows in my quiver for any bill. If I don’t think the bill is fair as an overall number, I just won’t pay it anyway. And, if I want to object to a bill, I like to look at the hours as it gives me a good idea what went wrong and a way to negotiate the bill lower.”

I was surprised, but as I thought about it, I thought of the hundreds and maybe thousands of bills I have reviewed, in my general counsel capacity reviewing other law firms. And I thought to myself, “Of course I want to see the hours. They kind of keep everyone honest (or maybe they show a problem), and the hours give me a roadmap as to what was done and whether what was done looks logical and reasonable.”

Also, for clients where I am the billing partner, I look at my own bills here before they go out and I look at the hours as it gives me a sense of whether my team has been efficient. If things look wrong or unfair, then I lower the bill before it goes out.

So if one looks at the billable hours as an excuse to overcharge for inefficiency, then of course that is a bad thing – no question about it. But if instead one comes at it from a different direction — namely, that the billable hour is merely something to look at to “prevent” overcharging, and a methodology to evaluate the fairness of a bill — maybe it is an excellent mechanism after all.

Okay, but AFAs are all the rage. This stands for Alternative Fee Arrangements. What is that all about? I have a few thoughts here:

To the extent an AFA aligns the client’s and law firm’s interest, these are a great thing. This includes success fees and/or failure penalties in litigation, fixed fees for commodity work, and many other ideas. I totally agree.

But to the extent a client is paying a lawyer for a complex matter – like trying to buy an asset out of a complicated bankruptcy situation – how does anything other than the billable hour (with a simple dead-deal discount if the client fails to get the asset) make any sense? There is simply no way to judge what the “fair” cost will be ahead of time.

If you look at AFAs that pertain to matters like the one I just mentioned, they typically have a billable hour component with some sort of success/failure premium/discount underlying them. An AFA with this type of structure is hardly a newfangled AFA – it is merely a creative rejiggering of the billable hour.

So to sum this up, I reach the following conclusion…..

If a lawyer goes back to the way things were 20 years ago and tries really hard to be fair on billing. If the client trusts that the lawyer is doing exactly that. If the lawyer honestly and honorably bills his hours and discloses the hours to the client on a bill. If the lawyer’s hourly rate isn’t stupid crazy. If the client has a chance to review the bill and negotiate it, if necessary. And if both client and lawyer have as their mutual goal simply “fairness.” Then why is that so awful? I have certainly spent a lot of time thinking on this and believe that if people don’t abuse the system, it works pretty well — and better than anything else I have seen so far.

To conclude, I have nothing against AFAs and agree they can be great in aligning interests in certain types of matters, but I feel that the billable hour, even with its obvious weaknesses, isn’t always the villain and sometimes can do a perfectly good job for both lawyer and client.

Bruce Stachenfeld is the managing partner of Duval & Stachenfeld LLP, which is an approximately 70-lawyer law firm based in midtown Manhattan. The firm is known as “The Pure Play in Real Estate Law” because all of its practice areas are focused around real estate. With over 50 full-time real estate lawyers, the firm is one of the largest real estate law practices in New York City. You can contact Bruce by email at [email protected].

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