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August 13, 2007

The Cockroach of the Legal Profession - The Billable Hour

(UPDATE:  Gerry Riskin at Amazing Firms Amazing Practices tells us one 190 lawyer firm has tossed billable hour requirements for first year associates or read the original Law.com articleDavid Giacalone of f/k/a brings us more valuable resources and fine opinion about the Billable Hour.

(UPDATE: 8/17/07 - Lisa Solomon of The Billable Hour has a terrific resources page on the many articles written pertaining to value billing and the billable hour - make sure you scroll down the page for an impressive list.)

(UPDATE:  8/16/07 Luke Gilman culls excellent articles and commentary to further add to the conversation.)

(UPDATE:  Stephanie West Allen of Idealawg adds an interesting article to the conversation.)

It's been said in a nuclear explosion the only life forms that would survive are the cockroach and Cher.  Well, apparently the billable hour has been described as the "cockroach of the legal profession" in this archived Law.com piece as it explains the history of the billable hour and why it, too, will probably survive a nuclear explosion.

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.

Back in a more genteel age......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....

So, here is the history lesson:

."... 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 grâce, ruling that statewide fixed-fee schedules violated antitrust law. The way was cleared for the bastard child of scientific management to dominate the profession.

There are many talented lawyers who care passionately about their clients and breaking free from the billable hour.  They, too, don't want to sell time but value to the client as this can be emminently more profitable for the enterprising solo when technology is fully utilized and remain equally beneficial to the client. It would appear those who have the loudest voices in this century old argument want to go back to our professional roots.

However, the billable hour model seems so firmly entrenched in the profession to remove it completely today could be likened to ripping the spine out of a body and expecting it to stay erect. 

"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." 

But it is not only the profession which needs to relinquish the notion of the billable hour, clients have been so conditioned to think in terms of billable hours they could actually be the harder sell when it comes to understanding and then accepting alternative fee arrangements.  Clients are so mistrusting of attorneys' fees already and it is the root cause of that unspoken negative tension which exists in all attorney/client relationships.

One reason today's voices may actually be heard and have an impact is the internet.  The power of the internet to amplify voices of dissatisfaction so others must respond cannot be denied.  The power of the internet to educate the end user, the client, cannot be denied. As the cacophony gets louder and louder there may acutally be a chance to severely weaken the grasp of the billable hour on the profession. Probably not in our professional lifetimes....but one can only hope.  Solos, however, can be Picassos. They can carefully craft alternative fee structures today if they are meticulous in the way they draft their retainer agreements, ensuring they will stand up to challenge from client and/or court.

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» Is Appellate Law Suited to Alternative Fee Structures? from Texas Appellate Law Blog
A recent post from Susan Cartier Liebel over at Build a Solo Practice, LLC (entitled The Cockroach of the Legal ProfessionThe Billable Hour) has spurred me to comment on the continuing viability of the billable hour as it relates to appellat... [Read More]

» Is Appellate Law Suited to Alternative Fee Structures? from Texas Appellate Law Blog
A recent post from Susan Cartier Liebel over at Build a Solo Practice, LLC (entitled The Cockroach of the Legal ProfessionThe Billable Hour) has spurred me to comment on the continuing viability of the billable hour as it relates to... [Read More]

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