Alternative Billing Methods Committee Final Report

Page

I. Introduction

A. Charge to The Missouri Bar Alternative Billing Methods Committee............................ 3

B. Highlights of the 2002 ABA Commission on Billable Hours Report .......................... 3

C. Response of The Missouri Bar Alternative Billing Methods Committee........................ 7

II. Survey of Missouri Practitioners

A. Introduction............................................................................................................... 9

B. Some General Observations....................................................................................... 9

C. Attorney Perception of Client Acceptance of the Billable Hour.................................. 10

D. The Billable Hour—A “Corrosive” Effect on Missouri Lawyers?............................... 11

1. Family......................................................................................... 12

2. Pro Bono.................................................................................... 15

E. Conclusion

III . Alternative Billing Methods

A. General Comments.................................................................................................. 19

B. Fixed or Flat Fee..................................................................................................... 20

C. Contingent Fee........................................................................................................ 21

D. Blended Hourly Rate............................................................................................... 22

E. Fixed or Flat Fee Plus Hourly Rate.......................................................................... 22

F. Hourly Rate Plus a Contingency............................................................................... 23

G. Retrospective Fee Based On Value.......................................................................... 23

H. Unit Fee.................................................................................................................. 23

I. Relative Value Method............................................................................................ 23

J. Statutory or Other Scheduled Fee System................................................................ 24

K. Equity Positions....................................................................................................... 24

L. Summary................................................................................................................. 24

IV. Summary, Conclusions and Recommendations

A. The Billable Hour..................................................................................................... 25

B. Alternatives to the Billable Hour............................................................................... 26

C. Recommendations................................................................................................... 27

D. Ethics and Billing ..................................................................................................... 28

E. A Final Note........................................................................................................... 28

Part I

Introduction

A. Charge to The Missouri Bar Alternative Billing Methods Committee

Dale Doerhoff, President of The Missouri Bar created the Alternative Billing Committee in November 2002. In part the committee was created to examine the billable hour in Missouri and how it might relate to the report of the ABA Commission on Billable Hours which was published in August 2002. In President Doerhoff’s letter to the committee he states “The first part of the ABA report does a good job in identifying the problems but the second part which attempts to suggest alternative billing methods is relatively weak. I think the Missouri ABM committee can perform an important service to Missouri Lawyers by coming up with more useful law ideas on alternative billing methods.”

The committee began its task at its first meeting on January 8, 2003. At that meeting President Doerhoff expressed a need for more information and suggested items the committee might consider. In Missouri about 28% of the practicing bar consists of solo practitioners and another 25% work in firms of 2 - 4 individuals. Almost 75% work in firms of 10 or fewer lawyers. President Doerhoff expressed his concern that the bar should be practicing with intelligence and efficiency, always responsive to consumers of legal services who are searching for better service at reasonable and affordable prices. He suggested that the committee might look at what Missouri lawyers are actually doing and decide whether or not to recommend alternative billing methods to the billable hour.

The committee took this suggestion to heart and began the process of reviewing the ABA report.

B. Highlights of the 2002 ABA Commission on Billable Hours Report

In August of 2002 the American Bar Association released a report from the ABA Commission on Billable Hours. The report was based upon studies by the Commission. The full report can be found on the ABA web-site at http://www.judicialaccountability.org/articles/ABABillableHours2002.pdf

The thrust of that report was to focus on the billable hour and its impact on the profession of law. In the forward to the report The Honorable Stephen G. Breyer, Associate Justice of the Supreme Court of the United States , noted that it is difficult for a practitioner to engage in pro bono work, law reform efforts, and professional activities if trapped on the “treadmill—the continuous push to increase billable hours.” He notes the Commission's attempts to address a key question “...does the billable hour contribute to or undermine a practitioner's ultimate goal—to provide clients with the best legal services possible.”

Similarly, in the preface to the report, ABA President Robert Hirshon provides the underlying theme to the Commission's Report in the first sentence-- “It has become increasing clear that many of the legal profession’s contemporary woes intersect at the billable hour.” After noting ABA studies which “...show that many young attorneys are leaving the profession due to a lack of balance in their lives,” he asserts “The unending drive for billable hours has had a negative effect not only on family and personal relationships but on the public service role that lawyers traditionally played in society.”

After discussing the information gathering methodology, which consisted of several surveys and an on line dialogue, the Commission launched into its report, first providing a history of the billable hour. It was not until the 1950s and 1960s that billing by the hour and time keeping became routine. Once that shift to hourly billing occurred, many law firm budgets were based on billable hours. The only way to increase revenues was to either increase the hourly rate or increase the number of hours worked. The Commission contends that in the 70s and 80s, “...the system based on both lawyer rates and billable hours worked.” However, as competition increased among lawyers, costs increased, and the economy fluctuated, lawyers could not increase their rates significantly; therefore the increase occurred in billable hours. Beginning in the 90s the “...billable hour commitments reached unreasonably high levels in many law firms."

While recognizing that there are some positives associated with the billable hour the report identifies several results which it calls the “corrosive impact of emphasis on billable hours” because of “over reliance on billable hours” including:

1. A decline of the collegiality of law firm culture and an increase in associate departures

2. Discourages pro bono work

3. Discourages project or case planning

4. Provides no predictability of cost for the client

5. May not reflect value to the client

6. Penalizes the efficient and productive lawyer

7. Discourages communication between lawyer and client

8. Encourages the lawyer to skip steps( where there is pressure on the lawyer to save money or cut costs)

9. Fails to discourage excessive layering and duplication of effort

10. Fails to promote a risk benefit analysis

11. Does not reward the lawyer for productive use of technology

12. Puts client’s interest in conflict with lawyer’s interests

13. Makes the client runs the risk of paying for

a. The lawyer’s incompetence or inefficiency

b. Associate training

c. Associate turnover

d. Padding of time sheets

14. Results in itemized bills that tend to report mechanical functions not value of progress

15. Results in lawyers competing based on hourly rates

The Commission then opines why billable hours have become so entrenched, particularly in those law firms representing law departments in corporations. The reasons the billable hour survives are:

1. It is simple; it provides an easy way to understand and review bills

2. It is a comfortable standard completely familiar to all sides

3. It serves when no one can calculate the value of the service

4. It lets law firms make more money

5. It elevates tension-causing oversight by inside counsel

6. It minimizes transaction costs for both sides in engagements

7. It increases management tools within law firms and departments

8. It works regardless of the volume or type of service

9. It fits with lawyers risk aversion

10. It allows law departments to bask in the comparison of their costs

per hour

In this part of the report, the Commission concludes not only that “hourly billing survives, indeed it reigns supreme.” The reason is that it “rests upon interlocking and reinforcing pressures: simplicity, familiarity, profitability, efficiency, and amiability.”

Part Two of the report examines alternative billing methods. Results were reported from a survey of the 100 largest firms in America (of which 19 firms responded) that 79% of the respondents had used partial or whole contingent fees, 74% had used flat fees, 42% had used result based premiums, 11% used retainers, and 11% used stock in exchange for fees. In order to further examine alternatives to the billable hour the ABA posted a law firm questionnaire on its web-site, which generated about 570 responses. Over 55% of the ABA respondents were in firms of 100 or more. In contrast, The Missouri Bar survey had over 2300 respondents from private practice, with a much different make up —only 18% of MOBAR respondents were in firms in excess of 100.

The Commission then briefly reviews some of the alternatives. It notes that smaller firms (those with less than 50) tend to use fixed or flat fees at almost double the rate of larger firm. However, regardless of size, this method was used far more often for transactional work rather than litigation. After a brief review of the other alternative methods (discounting, blended hourly rate, contingent fees, hybrids (flat fee plus hourly, hourly plus contingency), and other methods (retrospective based on value, unit fees, relative fees based on value, and taking equity) -- all viewed primarily from the perspective of in house counsel -- the report turns to other price and delivery possibilities. The Commission asserts that any “alternative billing program requires a reevaluation as to how the work will be managed and delivered.” For any price and delivery system the following “might be considered as possible goals.”

1. Assure that the legal needs of the clients are met, with successful

outcomes

2. Achieve and even exceed the client’s budget goals while assuring

strong economic and other returns for the law firm

PART II

Survey of Missouri Practitioners

A. Introduction

The survey sent via email too members of The Missouri Bar is set out in Appendix A. It was distributed on March 12, and was posted on the Bar’s Web Site for several days. In early April the page was closed and responses were tabulated.

Over 3300 members of the Bar responded to the survey. However, because the Committee wished to focus on the portion of the Bar that was in full time private practice in Missouri, the database was modified to count only those persons who were full time private practitioners, located in the state, with titles of partner (etc.), associate, solo practitioner or of counsel. That reduced the new database to 2317 — a very significant number which the Committee believes is an excellent representative sample of Missouri practitioners. The responses of those 2317 Missouri lawyers --to most questions-- are set out in Appendix B. Some answers have been left off the printout in this report to save space, or because they did not further our analysis and the 336 written comments are not included due to length, loss of context and some repetitiveness. However, some comments have been set out in this report, and it would be fair to observe that a significant number of those making comments were critical of the hourly billing method and its ill effects on the profession.

The data is further broken down to show responses to selected questions by firm size, title, and by percent of income received from billable hours. These are set out in Appendices C1, C2, and C3.

It is important to note that not all respondents answered all questions, so the responses to each question do not usually total 2317, particularly for the last half of the survey questions where responses often totaled in the 1800-2000 range. However, the numbers are still significant and provide valuable information.

B. Some General Observations

The Committee was surprised and pleased at the response to this survey, the first ever email survey to the members of The Missouri Bar. More importantly the responses seem to be roughly representative of the Bar as a whole based on firm size, title, and office location. Almost 25% were solo practitioners, 45% partners (etc.), 28% associates, and just under 3% of counsel. The greater St. Louis area generated 43% of the responses followed by Kansas City with 34% and central Missouri with 9%. The remaining 14% came from the rest of the state.

Regarding firm size, 25% were solos, 44% in firms size 2-19, 13% in firms size 20-99, and 18% in firms size 100 plus lawyers. Almost all respondents reported revenues in the past year from billable hours (93.4%), and over half of all respondents reported that 76-100% of revenues they generated came from billable hours.

Unlike the ABA results, Missouri respondents came primarily from smaller firms. Moreover, since the make up of The Missouri Bar is far different than the ABA sample, far more respondents reported no billable hour requirements. This holds true even when the 500 solo practitioners (of 568 responding) who reported no billable hour requirement are removed from the data set. That left 779 (44%) of 1756 respondents who reported no billable hour requirement, compared to the ABA figure of 3.8% (22 of 570).

Because the make up of The Missouri Bar practitioners varied so much from the ABA sample, the Committee sought to determine from the survey results if the problems identified by the ABA Commission with the billable hours method were as pervasive or manifest in Missouri as the ABA report suggested exists on a national level. Put another way, does the quality of personal and professional life for Missouri lawyers suffer as much from the negative effects of billable hour as suggested by the ABA report?

C. Attorney Perceptions of Client Acceptance of the Billable Hour

“While our firm has experimented with many types of alternative billing, the clients themselves (including inside counsel) seem to ultimately prefer hourly billing. Its something they understand.”

--Survey respondent

Question 7 of the survey asked “How do your clients accept the billable hours method?” The results may reflect, in part, why the billable hour thrives and is so pervasive. Only 9.5% gave a response of “somewhat negative” or “very negative,” whereas 44% gave a “somewhat positive” or “very positive” response, almost equaling the 46.4% who said “neither positive nor negative.” Most attorneys seem to think clients have a positive or neutral view of the billable hour.

Interestingly enough, the results to this question did not change much when comparing partners to associates, or those who made more than half of their income from billable hours to those who made less than half, as the chart below indicates:

However, some interesting patterns do emerge. In general, associates respond in the negative more than partners, but only by a few percentage points. Partners and associates who earn less than 50% of income from billable hours look almost identical in their responses, whereas partners and associates who earn more than 50% of income from billable hours differ in that almost 56% of partners give a positive answer, compared to 39% of associates. However, in that same group, only 11% of associates gave a negative response compared to 6% of partners. Nonetheless, it is clear that most lawyers, whether partners or associates, and no matter how much of their income is derived from billable hours, tend to think clients either view the billable hour method either neutrally or positively. Analysis of the data also indicated virtually no difference in response to this question based on firm size. In sum, the Bar was remarkably consistent across various categories in their views of client perceptions.

While most lawyers think clients have a neutral or positive acceptance of the billable hour, how does that billing method impact the lives of lawyers? Is there a “corrosive” impact on the lives of Missouri lawyers? The Committee addresses those questions, in part, in the next section.

D. The Billable Hour — A “Corrosive” Effect on Missouri Lawyers?

“Like Churchill's description of democracy, hourly billing is the worst possible system except for all the others. Its occasional unfairness can be tempered by using the required hours as a base, but adjusting (in either direction) relative to all the circumstances of the particular work and parties.”

--Survey respondent

“Billing by the hour (and the associated requirement of minimum yearly targets) teaches and promotes inefficiency in the practice of law, inhibits continuing education, results in over staffing of cases, creates time records that lack credibility, and generates unending tensions between the client and the responsible attorney.”

--Survey respondent

The ABA report discussed the negatives associated with the billable hour and its effect on the personal and professional lives of attorneys. The Committee asked several questions attempting to assess these effects in Missouri . Questions 15-23 asked the respondents to “indicate what effect, if any, your firm’s approach to billable hours has on your participation in” nine different areas.

The overall results are set out below for each of the nine areas:

It appears a sizeable number of respondents indicate that billable hours have a negative effect on their participation in one or more of the activities, although only with the first four listed above were negative responses given by about 3 in 10 of respondents. However, those four areas represent important elements of personal and professional life. CLE, In-firm Training, and Business Developments garnered less than 15% negative responses. In fact, the positive responses exceeded the negative for Business Development and CLE. About 1 in 5 claimed negative effects on Bar Activities and Mentoring.

Further analysis of the responses seemed warranted before drawing any conclusions. The Committee selected two topics--Family and Pro Bono-- and probed deeper. Family was chosen because of its high importance to most people, and also because the patterns were similar with responses to responses on leisure and outside interests; and Pro Bono because of its importance to the profession and its discussion in the ABA Report.

1. Family

“Billable hour requirements make our life center around our work as opposed to our families. I am a newly wed, and it has already caused some problems for me.”

--Survey respondent (associate)

Question 15 asked “Indicate what effect, if any, your firm’s approach to billable hours has on your participation in Family.” The first analysis sought to determine if the negative responses were a function of position, so associates were compared to partners and then each group sorted based on level of income from billable hours. The results are set out below:

The results are striking. Both partners and associates generating more than half their revenues from billable hours are much more likely to report a negative effect on Family, but with associates a majority of respondents (53.9%) reports a negative effect. Even 31.8% of partners in that group reported a negative effect. The effect is more pronounced with associates, particularly for those who earn a majority of their income from the billable hour.

Is the effect, however, explained in some fashion by the size of the firm in which the person practices, since, in general the larger the firm the more likely the respondents were to have larger percentage of income from billable hours (See Chart 3)? In short, is the negative effect of the billable hour primarily a big firm problem?

Text Box: CHART 3 - FIRM SIZE AND REVENUE FROM BILLABLE HOURS
(Shown are the percent of respondents from each firm grouping who generated a majority of revenue from billable hours)

Firm Size Number 76 -100% Revenue >50% Revenue
2-4 489 34.2% 48.0%
5-9 262 47.3% 60.0%
10-19 249 69.1% 81.9%
20-29 119 68.9% 80.7%
30-99 172 85.5% 89.5%
100 + 397 89.7% 93.4%

The answer appears to be both “yes” and “no”. Yes, because the smallest firms generate less income from the billable hour, but primarily “no” because between 60-93% of respondents from all firms (except firm size 2-4) derive in excess of 50% of their revenues from the billable hour.

Since the greatest effect on family was noted by associates, the chart below sorts associates for each firm size into two groups — those with more than 50% billable hour revenues and those who generate less than 50% revenues from hourly billing- to determine if it is primarily associates in large firms who make up the greater than 50% revenue generators.

This data reflects then even in the smallest firms a majority of associates reported that more than 50% of the revenues they generated were attributed to the billable hour. However, the percentage of associates generating greater than 50% revenues grew as firm size grew. Therefore, it appears that while firm size is a bit of a factor, as revenues go up from billable hours, so do the negative effects on Family for all associates in all size firms.

However, there was a significant difference in responses to question 15 based on firm size. Chart 5 shows the percent of each firm group’s assessment of positive, neutral, or negative effects on family. Remember, these figures include both partners and associates.

It would seem reasonable to conclude, based on the survey responses, that the billable hour has a “corrosive” effect on family, and, because the pattern of responses were similar to questions on leisure and outside interests, generally on the personal lives of a significant number of lawyers. The effects are felt more by associates than partners, and the negative effects are more pronounced as firm size increases and as the percent of revenues generated attributable to the billable hour increases, regardless of firm size. While the negative effects are less pronounced in smaller firms, they are nonetheless present. It would not be accurate to conclude that these negative effects are just a big firm problem, although they appear to be more pronounced in bigger firms (firms with 30 or more lawyers).

2. Pro Bono

“As one relatively new to civil law, I think it[billing by the hour] is a horrible practice. It generates unethical behavior by fostering a competitive environment that rewards those who are untruthful in their reporting and punishing people who are honest. It discourages people who would otherwise participate in pro bono or other activities. And, it creates an isolating work environment where people are so absorbed by making their hours that they forget to care about their work product, their clients and/or their co-workers.”

--Survey respondent (associate)

The ABA Commission noted that one of the unintended consequences of hourly billing — particularly where no credit is given for it — is that it decreases the time available for Pro Bono service. The Commission did find that larger firms are more likely to give credit against billable hours for Pro Bono work than smaller firms, ranging from 3.8% in firms of less than 15 lawyers to 50% of firms with more than 500 lawyers. Overall, in the ABA survey 28% of all respondents reported billable credit, 35% reported non-billable credit and 37% reported no credit For Pro Bono service. However, it is important to note that the vast majority of respondents to the ABA survey were from firms over 100.

The Committee asked two questions aimed at measuring the impact of the billable hour on Pro Bono. Question 8 asked, “Does your firm in some way credit the hours you spend participating in Pro Bono” and Question 18 asked, “Please indicate what effect, if any, your firm’s approach to billable hours has on your participation in Pro Bono services.” The results are set out below, and, in general, are consistent with the findings of the ABA Commission.

Text Box: CHART 6
Responses to Question 8 by Firm Size

Firm Size 2-4 5-9 10-19 20-29 30-99 100+
No Credit 379 190 163 48 70 80
Non-billable Credit 76 59 69 45 76 233
Billable Credit 9 11 18 9 10 85
N = 464 260 250 102 156 398

In the smallest firms only 1.9% reported receiving billable credit and only 16.4% non-billable credit. However, in the largest firms, 21.4% received billable credit and 58.6% received non-billable credit. The follow up question, asking the effects of the firm’s approach to billable hours on participation in Pro Bono, elicited the following responses based on firm size:

Text Box: CHART 7
Responses to Question 18 by Firm Size

Firm Size 2-4 5-9 10-19 20-29 30-99 100+
Positive 67 33 27 9 13 33
Neutral 276 135 89 50 58 150
Negative 65 44 82 31 74 165
N = 408 212 198 90 142 348
(Note: totals do not match Question 8 because not all respondents answered both questions)

Even though the smallest firms are less likely to give credit for Pro Bono, far fewer (16%--65 of 408) responded in the negative than in the largest firms (48%--165 of 348). Possible explanations might be that smaller firms are less likely to have high billable hour requirements (or none at all) compared to the largest firms, or perhaps the negative effects of the billable hour manifest themselves even where some form of credit is given. While further analysis of the data might provide some additional insights, it seems clear that a sizeable number of respondents to the survey (almost 29% of all respondents and much higher percentages in the larger firms) see their firm’s approach to the billable hours as having a negative impact on their participation in Pro Bono.

The effect was reported differently by partners compared to associates on this question as evidenced in Chart 8 below:

Text Box: CHART 8
Partners vs. Associates Responses on Question 18

Partners (%) Associates (%)
Positive 119 (13.8%) 57 (11.5%)
Neutral 518 (60.0%) 219 (44.2%)
Negative 226 (26.2%) 220 (44.3%)
Totals 863 (100.0%) 496 (100.0%)

Associates are much more likely than partners to perceive the firm’s approach to billable hours to have a negative effect. This pattern is consistent with the results found for the effect on Family. Therefore, it seems that the billable hour has a substantial negative impact on all respondents’ participation in Pro Bono, with a much more pronounced impact on associates, and on those who are in larger firms, despite the finding that larger firms are more likely to give credit for Pro Bono.

E. Conclusion

“Definitely "warps" the way you think about your life--you start viewing everything in terms of billable hours (i.e. lunch with a friend = 1.3 billable hours; movie = 2.4 billable hours; workout= 1.5 billable hours) Quite honestly, billable hours may eventually cause me to get out of private practice---I love the work, hate accounting for every single minute of every day”

--Survey respondent (associate)

Even though the survey respondents from Missouri reflect the smaller firm make up of most of the practicing bar, the results are not striking different than the ABA

results, as far as the negative impact of the billable hour on the personal and professional lives of a significant group of Missouri lawyers, particularly associates in all sizes of law firms. Negative effects are more widely noted in larger firms and among those who generate substantial revenues from billable hours, but they exist in all firm sizes.

Part III

Alternative Billing Methods

A. General Comments

“Despite the current buzz against hourly billing, I still find it the fairest method in most situations. Flat fees tend to encourage clients to demand more than they're paying for and put pressure on the attorney to cut corners….I say that hourly billing has always worked pretty well for me, but that may be because I have always been scrupulously fair in recording my time, [and]resolving any doubts in favor of clients…”

--Survey respondent

This general survey did not directly ask respondents to indicate, as it did for all the alternative billing methods, if they had used hourly billing for the listed major practice areas. The Committee assumed — correctly, as it turned out — that virtually all respondents would have had some income from the billable hour method. However, the failure to include a specific question makes it somewhat more difficult to assert that hourly billing is the primary method used in most practice areas. Indeed, it clearly is not in civil litigation-plaintiff practice. Indeed, of the 1038 responding that they had used the contingent fee in the past year, 949 said they used it for plaintiff practice. Moreover, of the 77 lawyers who reported that 76-100% of their revenues came from plaintiff practice, 59 reported that either 0% or less than 10% of their revenues came from billable hours. Further, of the 149 respondents who indicated no income from billable hours in the past 12 months, most derived their income from fixed or flat fees(in a variety of practice areas), contingent fees (primarily in civil litigation-plaintiff or administrative/workers’ comp/social security), or from statutory or other scheduled fee systems.

However, it is clear that the billable hour approach is the most pervasive method used in most practice areas. That said, several (notably civil litigation-plaintiff, administrative/worker’s comp/social security, real estate, trusts & estates, and criminal defense) show primary or very high usage of other methods, most often fixed or flat fees, or contingency fees.

The survey did not offer definitions of the alternative billing methods, and it was clear that some survey respondents did not know the meaning of some methods. The committee chose not to define the methods in the survey instrument, believing that if someone did not know what a method was they probably did not use it. However, this section will address each of the methods, provide a definition taken from either the ABA Commission Report or from the ABA publication Winning Alternatives to the Billable Hour: Strategies that Work (second edition, 2002), and make some observations about usage in Missouri. More detailed information about usage in the various practice areas can be found in Appendix D-- Billing Methods Used in Major Practice Areas.

B. Fixed or Flat Fee—“…the price charged for defined services. It may be the entire fee for the engagement or may apply to segments of the total services.”

“I use the flat fee rate. I believe its best for attorneys and clients alike.”

“Clients prefer fixed fees where feasible.”

--Survey respondents

In some areas, fixed or flat fees seem to predominate, notably: criminal defense, trusts and estates, and real estate. In the latter two areas the more routine the matter, the more likely a fixed fee will be used. Fixed fees, paid in advance whenever possible, seem to be the norm in criminal defense because of both the problem of collecting if billing hourly after the work and as one attorney observed “the client’s lack of appreciation for the skills and time involved.”

The primary alternative to the billable hour, and the most frequently mentioned, in most all areas of practice is the fixed or flat fee, with 67% of all respondents reporting usage of it in the past year.

Lawyers seemed to recognize that the fixed fee is favored by many--but not all—clients, primarily because it allows the client to know what the cost of legal services will be, even when the lawyer noted a preference for the billable hour.

The use of this alternative seems primarily a function of firm size and practice area, and, based on comments from respondents to the two surveys, a function of how “simple” or “routine” or “predictable” the matter is for purposes of setting fixed fees. The chart below provides interesting data on the use of the alternatives by firm size, drawn from responses to questions 24 and 26 on the email survey, sorted by firm size.

In general, usage of fixed fees went up as firm size decreased. Also the nature of the practice area in which fixed fees are used changed as firm size decreased. Interestingly, the use of fixed fees for trusts and estates was a top mention alternative in every size firm. Several possible factors might lead to the results noted. It might be that smaller firms are more likely to try this alternative, or it may be that they tend to deal in less complex matters, or it may be that the nature of the practice area demands it, or that they have a different client base, or that their budgets are less driven by the billable hour. Most likely, one or more of these factors are at play in any given situation.

“Flat or modified flat fees give the client a better option and expectancy for the bottom line; there are no surprises. Flat fees also encourage lawyer efficiency. As the bar moves to MDP we will be forced to compete and flat fees are a better option. Oh - if only the judges understood that!”

--Survey respondent

C. Contingent Fee “…is a charge that depends upon the results achieved.”

“We utilize strictly contingent fee for plaintiff's personal injury, worker's comp, and employment cases. Clients know up front what they will be charged and we don't get paid until they do.”

--Survey respondent

“If plaintiff's attorneys were required to bill by the hour, access to the courts would be limited to the very rich or the very lucky. And if defense attorneys billed on some sort of contingency basis, many more cases would settle”

--Survey respondent

The contingent fee showed little usage, either as a primary or alternative method, beyond its use in three areas: civil litigation — plaintiff, administrative/workers’ comp/social security, and employment/labor. All of those areas include representing those who may not be able to afford access to the legal system unless the attorney is willing to take the case on a contingency. Few involved in the defense of civil litigation were willing to use a contingency fee (only 34 respondents from firms of all sizes reported such usage in the past year).

Text Box: Chart Y
Use of Contingent Fee by Firm Size with Top 3 Usage Areas

Firm Size 100+ 30-99 20-29 10-19 5-9 2-4 Solo
Yes 73 41 46 128 157 294 319
No 276 107 43 81 58 113 141

Top 3 Number of responses (fewer than 5 responses omitted)

Civil Litigation
Plaintiff 63 38 39 112 150 264 282

Administrative/Worker’s Comp/
Social Security 20 49 102 115

Employment/Labor 10 15 38 31

Larger firms were less likely to use contingent fees and those that did so almost exclusively with Civil Litigation- Plaintiff. Smaller firms were more likely to use it but also for plaintiff work, or litigation in the other two areas where individuals with claims are represented as plaintiffs. There is little chance the contingent fee will see much expanded usage beyond the areas listed, primarily because of the high risk involved to attorneys in taking the case and the lack of a corpus from which to extract the fee if the attorney wins the case. The contingent fee cannot be used in Criminal Law and only in rare situations in Family Law.

D. Blended Hourly Rate – “…is a hybrid of the hourly rate. Instead of specific hourly rates for individual fee chargers, one rate applies to all hours billed on a matter.”

“When I did use the blended method the client feedback was positive.”

--Survey respondent

The blended hourly rate (used by 26% of all respondents during the past year) was most used in civil litigation, both on the plaintiff and defense sides. One hundred eighty four (184) respondents reported using it on the plaintiffs’ behalf and one hundred seventy four (174) on the defense side. The next most mentioned was usage in the corporate area (70), although all practice areas reported some usage. One of the primary values of this method is that it encourages more efficient usage of individual skills in the firm, and can encourage delegation to those with lower hourly billing rates.

E. Fixed or flat fee plus hourly –“ In this hybrid method, the portions of the

services that have a definable scope are charged on a fixed-fee or flat-fee basis, and the portions of the services that are not capable of being defined because of variables or uncertainties are charged on an hourly or a time-rate basis.”

“I will often take a dissolution of marriage case that the parties say is uncontested for a flat fee with a provision of charging an hourly rate if the matter at some point becomes contested. The trigger to hourly rate must be defined to the client and agreed to prior to commencing representation of the client.”

--Survey respondent

Fixed plus hourly (used by 25% of all respondents during the past year) was mentioned most frequently for plaintiff (132) and defense (109) civil litigation. It was also was widely used in family law (133), criminal defense (89) and corporate (75).The primary value of this method is that it provides the client with some predictability of fee but also gives the lawyer some leeway to charge on an hourly basis on matters that are uncertain in the case.

F. Hourly Rate Plus a Contingency –“...the client and the lawyer share risks within

the limitation of the representation agreement. Because a certain portion of the fee is based on hourly billing, the lawyer is guaranteed a minimum amount that guarantees the lawyer some payment, but also leaves the client with some risk.”

Hourly plus a contingency (used last year by 12% of all respondents) was primarily popular in plaintiff civil litigation (187) with a smattering of use in civil litigation — defense (29) and employment labor (24). This method usually raises the minimum total fee but lowers the maximum potential fee.

G. Retrospective Fee Based on Value –“…differs in approach from most of the alternative billing methods, in that the exact amount of the fee is not known to either the lawyer or the client until the matter is concluded. It is possible to provide either a maximum or minimum fee that will be charged. The amount of the fee should be determined by the lawyer not the client.”

“When I bill, I consider the time charges in relation to the result achieved. At that point, I may bill the time at regular rates, discount it if a feel a discount is appropriate, and, occasionally, if the result achieved greatly exceeds the time expended, bill something higher than regular rates. I have virtually no collection problems, and when I do, I tell the client to pay me whatever he or she feels the work was worth. In over forty years of practice, I don't think I've ever lost a client over fees.”

--Survey respondent

If applied fairly this system “offers the best way to relate the fee charged to the value to the client.” It should cut both ways with the fee being reduced when value is not achieved. Of those responding to the survey only 6% reported usage of this method in the past year. The areas of practice most mentioned were Trusts and Estates (35), Corporate (32), and Real Estate (29).

H. Unit Fee—“…is a subspecies of the fixed or flat fee, in that the lawyer charges a

fixed amount for a specific service, regardless of the actual time spent in providing that service….This approach is normally combined with hourly billing for services not included in the unit billing. For example, a lawyer could have fixed charges for each letter, phone call, and deposition.”

Only 3.2% of all survey respondents reported using this method in the past year. The areas of practice most mentioned were Corporate (18), Trusts and Estates (15) and Real Estate (13), although most areas received some mention. This method does encourage efficiency and requires a clear explanation of what the unit charges will be.

I. Relative Value Method – “…involves creating schedules that separate the

lawyer’s services by subject matter and by task, and assign a “relative value” or multiplier to each. Each fee charger can be assigned a different basic rate or charge, which is then factored into the equation….Inherent in this approach, is a determination or judgment of the value of each component service or task. This assumes that tasks performed by a lawyer differ in value….”

About 4.2% of survey respondents reported use of this method in the past year. Once again Corporate, Trusts and Estates and Real Estate were the practice areas most mentioned. This method clearly requires “a determination of value in the production of legal services” which “may or may not coincide with the client’s perception of value.”

J. Statutory or Other Scheduled Fee System

The statutory or other scheduled fee system option is really not an “alternative” in the sense that attorneys choose it — the attorney is usually required by statute, court rule, or other outside organization to use it in a particular practice sub-area. About 34% of all respondents indicated usage in the past year. The most frequent usage by far was in Trusts and Estates (362) and Administrative/Workers’ Comp/Social Security (205). Others areas showed s a smattering of use with Bankruptcy and Probate being the next most often mentioned.

K. Equity Billing – typically occurs where the lawyer takes the fee in stock of the client rather than cash. This may reflect value to the client where the fee is directly tied to results, but in other situations it may reflect the responsibility or potential liability associated with the project.

Only 1.9% of survey respondents (35) reported use of this method last year, and most of those in the Corporate area (20). This method has limited possibilities for usage and some potential for conflict, if not carefully crafted.

L. Summary

In summary, most Missouri lawyers (over 93% of respondents) received some income from hourly billing, in almost all practice areas. In fact over 65% of all respondents said more than half of the revenues generated in the past year came from the billable hour method. Yet many Missouri lawyers have extensively used the more traditional alternatives — fixed or flat fees, and (where appropriate) contingent fees. A significant number--about 25%--have made use of hybrid versions of the hourly fee: blended hourly rates and the fixed plus hourly. None the less, every alternative found some usage, which indicates that lawyers are willing to experiment and try different methods where appropriate and agreeable to the client.

It should be noted that the methods listed in the survey and described above are not exhaustive, but they tend to be the more common. A number of other methods including availability only retainers, task-based fees, percentage fees (similar to contingency fees), the lodestar method and other are described in Winning Alternatives to the Billable Hour: Strategies that Work (second edition)( ABA, 2002).

PART IV

Summary, Conclusions and Recommendations

A. The Billable Hour

“The billable hour should be a thing of the past - it puts a finite limit on the amount a lawyer can produce without raising the hourly rate. Billable hours encourage cheating and lack of job satisfaction.”

--Survey respondent

“Any method for billing other than by the hour must provide protections for the client against the temptation by attorneys to sacrifice quality for either an increase in volume of work or profit. The client also must recognize that seeking the cheapest legal services is not likely to produce services which meet the high standards of commitment and quality to which ethical attorneys have subscribed.”

--Survey respondent

“Detailed hourly billing appears to avoid all difficulties between the lawyer and client. I believe it to be a superior form of billing.”

--Survey respondent

In general, the Committee found from its surveys that the Billable Hour System is widely used in most areas of practice, and that the negative effects of it on the personal and professional lives of lawyers, discussed in much greater detail in the ABA Report, are replicated in Missouri , but with several caveats.

1. The “corrosive” effects appear greater on associates than partners, greater in larger firms than smaller, and greater among those who generate more than half of their revenues from billable hours.

2. Most lawyers — associates or partners, big firm or small — believe that clients generally view the billable hour system either positively or neutrally. In short, most respondents think clients accept it, even though a significant minority of respondents believes it has negative effects on their personal and professional lives.

3. The billable hour system is deeply entrenched, and alternatives to it are unlikely to be widely used, except where lawyers perceive an advantage to those alternatives.

4. The system works quite well in some practice areas and makes sense to use where it is difficult to predict the time that might be associated with a particular task.

5. The overall consensus was that the billable hour problems exist to a lesser extent in Missouri , primarily because of the nature of the make up of the Bar, with more practitioners in smaller firms where less revenue is derived from billable hours and where goal requirements tend to be lower or non existent. However, the “corrosive” effects do exist within a significant group in the Bar and The Missouri Bar should continue to encourage firms to consider alternative methods, as well as recognize and attempt to ameliorate the negative effects of the billable hour, particularly on associates.

B. Alternatives to the Billable Hour

“Alternate billing methods might be more attractive if the BAR provided some objective estimates of what a total fee for certain engagements might be. The fear is always that the flat fee would be totally inadequate. An attorney might guess what he thinks it would be but other attorneys might be substantially higher or substantially lower. He has no frame of reference. I'm speaking from the solo or small practioner's point of view. Large firms have their own database to draw from to set fixed fee engagements and also have much more work to absorb the "cost" of a badly underestimated fee.”

--Survey respondent

Like the ABA Report, the Committee found that the primary alternatives in use were the fixed or flat fee and the contingent fee, followed by two variants on the hourly approach, the fixed fee plus hourly and the blended hourly rate. Other methods received very limited use. Statutory or other scheduled fee systems received significant mention, but it really isn’t an option, it is mandated in certain matters.

The use of alternatives seems primarily a function of firm size and practice area, and, based on comments from respondents to the two surveys, a function of how “simple” or “routine” or “predictable” the matter is, at least for purposes of setting fixed fees.

In general usage of the fixed fee went up as firm size decreased. Also the nature of the practice area in which fixed fees were used changed as firm size decreased, although fixed fees for some aspects of trusts and estates practice was in the top three alternatives for every size firm.

Similarly, larger firms were less likely to use contingent fees, and those that did so almost exclusively with Civil Litigation- Plaintiff. Smaller firms were more likely to use it but also for plaintiff work, or litigation in the other two areas where individuals with claims are represented as plaintiffs. There seems little chance the contingent fee will see much expanded usage beyond the areas listed, primarily because of the high risk involved to attorneys in taking the case and the lack of a corpus from which to extract the fee if the attorney wins the case.

The fixed fee alternative seems to offer the best alternative for lawyers who wish to increase income, but only if they can accurately project the time associated with various tasks. Based on comments particularly from respondents representing individuals or small businesses, these clients prefer a fixed fee. It is understandable, budgetable, certain, and makes sense to them. Most people want some idea of what a service will cost. For the lawyer it places a premium on doing quality work efficiently. However, the lawyer must be able to set the fixed fee based on a knowledge base which allows her to predict the approximate amount of time it takes for any particular task. Clearly, the more “routine” the task the more it lends itself to a fixed fee approach. The dangers, listed by respondents, are that clients may “demand” more of the attorney’s time (because there is no additional cost to the client), and there may be initially hidden circumstances that consume more time than expected, thus reducing profitability.

The use of other alternative methods will require greater familiarity with those methods, demonstrable ways in which they can be used, a clear showing of profitability, and encouragement to use them.

C. Recommendations

“I would like to learn more about alternate billing methods. In family law, it is often difficult to estimate the ultimate cost of litigation, which makes it almost impossible to bill on a flat fee basis. Contingency fee is not an option.”

--Survey respondent

“The billable hour seems a fixture in the legal marketplace, but, in my view, restrains lawyers and clients from engaging in more efficient and effective remuneration options. The inertia of billable hours as the way that business is conducted with a law firm would be difficult to overcome. Experimentation and discussion takes away from an established way of doing business, and the successful firms are not very likely to dedicate the time that would be necessary to change the direction of billing methodology, because they have become comfortable and accustomed to billing for services by the hour, and, more importantly, the constraints of billable hour requirements (published and unpublished) make such an investment unlikely. With the chance for adoption so remote, why would anyone with any power in a firm (i.e. large billable book of business) invest the time in researching alternative methods of billing?”

--Survey respondent

1. The Committee believes that part of what has to occur if Missouri lawyers are to alleviate the pitfalls of the billable hour system, and to avoid running faster on the “treadmill,” has already started — education of the practicing bar on potential problems of the billable hour, and encouragement to consider alternatives. That process, already begun at previous MOBAR seminars and conferences, continued when this questionnaire was circulated. The education process will continue when this report (and follow up articles being planned by the reporter) is disseminated to the Bar.

The ABA Report does an excellent job of discussing problems with the billable hour and in proposing some suggestions for living with it, however some may tend to downplay it because of its focus on large firms and in house counsel relationships. It is not likely to be read by many Missouri lawyers, but this report and the survey results in the Appendix should be, as part of an ongoing dialog on how to insure that the practice of law continues to b enjoyable and rewarding to lawyers.

Report of The Missouri Bar

Final Report

September 15, 2003

Alternative Billing Methods Committee Final Report

Table of Contents

I. Introduction

A. Charge to The Missouri Bar Alternative Billing Methods Committee............................ 3

B. Highlights of the 2002 ABA Commission on Billable Hours Report .......................... 3

C. Response of The Missouri Bar Alternative Billing Methods Committee........................ 7

A. Introduction............................................................................................................... 9

B. Some General Observations....................................................................................... 9

C. Attorney Perception of Client Acceptance of the Billable Hour.................................. 10

D. The Billable Hour—A “Corrosive” Effect on Missouri Lawyers?............................... 11

1. Family......................................................................................... 12

E. Conclusion

A. General Comments.................................................................................................. 19

B. Fixed or Flat Fee..................................................................................................... 20

C. Contingent Fee........................................................................................................ 21

D. Blended Hourly Rate............................................................................................... 22

E. Fixed or Flat Fee Plus Hourly Rate.......................................................................... 22

F. Hourly Rate Plus a Contingency............................................................................... 23

G. Retrospective Fee Based On Value.......................................................................... 23

H. Unit Fee.................................................................................................................. 23

I. Relative Value Method............................................................................................ 23

J. Statutory or Other Scheduled Fee System................................................................ 24

K. Equity Positions....................................................................................................... 24

L. Summary................................................................................................................. 24

A. The Billable Hour..................................................................................................... 25

B. Alternatives to the Billable Hour............................................................................... 26

C. Recommendations................................................................................................... 27

D. Ethics and Billing ..................................................................................................... 28

E. A Final Note........................................................................................................... 28

Introduction

A. Introduction

B. Some General Observations

C. Attorney Perceptions of Client Acceptance of the Billable Hour

B. Alternatives to the Billable Hour

C. Recommendations

E. A Final Note