Report of The Missouri Bar

Alternative Billing Methods Committee

 

 

 

 

 

 

Final Report

September 15, 2003

 

 

 

 

 

 

 

 

 

 

Note: The appendixes mentioned within this report may be found on the web site of The Missouri Bar, located at http://www.mobar.org

 

 

 

 


Alternative Billing Methods Committee Final Report

 

Table of Contents

 

                                                                                                                                                      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 “treadmillthe 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 goalto 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


3.                  Assure high client satisfaction with the quality of product and

manner of service

4.                  Provide preventive services, including developing alternative

methodologies to solving legal problems

5.                  Enhance professional development opportunities for both inside

and outside lawyers

6.         Align the incentives to support the objectives

 

The Commission then suggests some alternative pricing delivery approaches, which have been written about in a variety of publications (many of which are referenced in the report).  These include:

 

1.         Fixed price by task, matter or portfolio

2.         Contingency fee for task, matter or portfolio

3.                  Other bonus arrangements (such as an annual or end of project

allocation from a bonus pool based on predetermined objectives

and/or subjective assessment factors)

4.                  Risk corridors (such as used in health care pricing)

5.                  Full-time equivalent (FTE) allocations (such as used by

corporations for virtually all internal functions)

6.                  Work units (a concept of charging a predetermined number of

“units” for a given task no matter how many actual hours it takes)

7.                  Outsourcing/partnering of certain category of work (such as all

intellectual property or anti-trust work), using fixed or budgeted

pricing per matter or portfolio.

 

While this part of the report focuses largely on large firms and in-house counsel and dealings between in-house counsel and large firms, the Commission debunks the belief of most lawyers that the only thing they have to sell is hours, asserting that “nothing could be further from the truth, and our predecessors (that is the general counsels and law firm leaders of 30 years ago and earlier) knew better.”  The Commission rightly asserts that “The real value of a good lawyer lies in the lawyer’s skill set, expertise, wisdom, ability to manage, ability to bring people together and ability to find and implement solutions.”  Alternative billing arrangement will create savings only if the lawyer is able to manage expertise, elasticity and economics.

 

After presenting three alternative based fee budget models (Line Item Budgeting, Individual Revenue Targets, and Profit Margin) this section concludes with three “snap-shots”, or situations where alternative billing methods have been successfully used.

 


In Part Three of the report the Commission examines ways of working within the billable hour system and how it might be improved. The billable hour problem identified as most serious is that “...most lawyers think that there are too many of them.  At the same time, pressures to generate more revenue continue to increase.” Rising billable hours will cause increased burn out and greater levels of unhappiness with the practice of law. The Commission questions if it is a good idea for firms to have minimum billable hour requirements because it shifts the focus of work to logging hours, and can lead to questionable billing practices. An additional concern was “how to encompass pro bono activities within the billable hour system,” since only 32% of the firms gave any credit for pro bono work and increases in required hour would decrease time opportunities for pro bono.

 

The report then examined the “best practices” in associate and partner compensation and how to avoid dealing with some of the more damaging aspects of the billable hour requirements.  The Commission concluded that the worst practice is “Any compensation system that rigidly ties compensation to billable hours”.  Therefore, systems that avoid this rigid tie in of compensation, whether in salary or bonuses, are to be encouraged.  The Commission listed some factors that might reduce the tie in, including:

 

Weigh productivity in some fashion equivalent to hours

Place a ceiling on the number of hours over which no additional compensation will be paid

Give credit for pro bono hours, counting toward the billable hour and bonuses, perhaps with a maximum (e.g. up to 3% of billable time)

Consider separate bonus plans for outstanding pro bono activities or service to the firm

Emphasize quality work over quantity

 

The Commission suggests a “Model Law Firm Policy” regarding billable hours, which incorporates billable client work, pro bono, service to the firm, client development, training and professional development, and service to the profession. The Commission finishes the section with “snap shot” of a 47 member firm that has generally good experiences working within the billable hour system. 

 

Finally, the Commission concludes that there are no easy or clear cut answers to developing successful alternatives to the billable hour system, or they would have already been developed.  However, the Commission asserts “... finding successful alternatives to the yoke of the billable hours is critical to our profession” if we are to regain “quality of life in the practice of law.”

 

C.        The Response of The Missouri Bar Alternative Billing Methods Committee to the ABA Commission Report

 


After studying the ABA report the Committee noted the emphasis on larger law firms and in house counsel.  Even though there were respondents from smaller law firms to the ABA questionnaire, the Committee wished to determine if the “corrosive” effect of the billable hour was as predominant in Missouri as the ABA report suggested.  Further the Committee hoped to determine what alternatives were being used by Missouri lawyers, and if particular substantive areas might be better served by different alternative methods.   The Committee also decided its function was not to start with any preconceived notions about the advantages or disadvantages of any particular billing method, including the billable hour.  As the Committee discussions progressed it became apparent that a survey to gather information would be quite helpful.  Utilizing as a starting point the survey used by the ABA , the Committee designed a questionnaire to be sent to the members of The Missouri Bar.  A draft survey was circulated among the members of the Committee. A follow up meeting was held on February 12, to further refine the survey instrument.  The purpose of the survey was multifold, including collecting information about alternative billing methods, what methods were associated with particular subject matter practice areas, and the effect of the billable hours approach on a variety of personal and professional activities.  

 

The Committee continued to refine the survey and a final instrument was sent by email to all members of the Missouri Bar on March 12. The results of that survey are discussed later in this document, primarily in Part II. A copy of the complete survey instrument and printouts of responses to it are included in the Appendix. 

 

The Committee also decided that it would be useful to survey the members of the various MOBAR practice area list servs, seeking information on the most “satisfactory billing method”, both from the member’s perspective and the client’s perspective. On May 5, the following series of questions were sent to the members of each Missouri Bar practice area list serv:

 

1.                  What is your primary practice area?

2.                  What is the most satisfactory billing method above that you have used for that practice area, from your perspective? Why?

3.                  Is the answer the same from the clients’ perspective? If not, why?

4.                  What is the least satisfactory billing method above that you have used for that practice area, from your perspective?  Why?

5.                  Is the answer the same from the clients’ perspective? If not, why?

 

The billing methods listed for the practitioners to comment upon were:

 

1.                  Hourly fee

2.                  Fixed or flat fee

3.                  Contingent fee

4.                  Blended hourly fee

5.                  Retrospective fee based on value

6.                  Hourly rate plus a contingency

7.                  Unit fee

8.                  Relative value method

9.                  Equity position

10.              Other (Describe)

 

About 180 individuals responded and those materials, coupled with the results of the general survey, provided additional data for the Committee. After the results were assimilated the Committee met on May.  Assignments were made to each Committee member to examine one or more subject matter areas and prepare a brief report on the primary billing methods used and possible alternatives.  The results are incorporated in Part III of this report. A draft of the whole report was circulated in late August, and a meeting was held on September 4 to finalize the report. It was redrafted and this document is the final product.