Tuesday, April 9, 2013

"I'm shocked, shocked to find that [churning] is going on in here!" (Apologies to Captain Renault.)

A law firm with 4 trillion lawyers in 876 countries was recently embarrassed by emails that made its lawyers look like cynical thieves when it came to overbilling clients. OK, I exaggerate. Only 4,200 lawyers in 30 countries. 

Hourly billing was instantly hauled out to be mauled by the critics of and within the legal profession (or legal industry, as it should truthfully be called). A retired Kirkland & Ellis partner wrote an op-ed piece for The New York Times in which he blamed the hourly billing system for spawning the "big law-firm business model." 

A more nuanced and far more devastating portrait of the modern big law firm was painted by a retired Arnold & Porter partner, Abe Krash, in a 2008 article in Washington Lawyer, published by the D.C. Bar, "The Changing Legal Profession." In it Mr. Krash did not take the hourly billing system to task for deadening the spirit of law practice. Rather, he focused on the economic system itself and, in particular, the quest for ever larger revenues and partner compensation.

I have practiced law in a variety of settings: big international firm, big national firm, local firm, solo. Trust me. The problem is not billing by the hour. Criticizing lawyers for billing by the hour is looking through the wrong end of the telescope. Search high and low for a truly viable  base billing system other than the hourly system, and you will come up empty. That's because lawyers have nothing but their time and brains to sell. On the long haul, the hours it takes to accomplish a task provide the base, objective measure of the value delivered to the client. Adjustments can and should be made to that calculation. Wasteful work should be written off. Upward adjustments can be provided for exceptional work (if disclosed). But starting without the simple multiplicand - hours spent times a billing rate - is like trying to hit smoke, except in those rare hypothetical instances where the brilliant tax lawyer legitimately charges a million dollars for spending five minutes saving someone hundreds of millions in taxes.

The problem is not that lawyers bill by the hour. It is that, at the big law firms, the expected norm for equity partners is to make gobs of money, far more money than their grandfather lawyers did. To produce the profits that can fund gargantuan compensation to partners, particularly with the large overhead that law firms have to pay for every day, "revenue producers" (lawyers and paralegals) have to produce gargantuan fees. To produce those fees, they must generate extra-large numbers of hours. To generate extra-large numbers of hours, they have to work matters to death. Even if billings were based on tasks, lawyers would bargain for per-task billing that imputed a large number of hours, at large graduated billing rates, for each task. The young lawyer is told she must bill 2200 billable hours per year, or over seven hours a day, six days a week, 50 weeks a year. No wonder the lawyers get giddy and cynical about the hours they have to put in to reach their minimum billing requirements. 

Corporate clients pay these fees because it's not their money and because they're scared to use less expensive or smaller firms lest they be criticized if they lose. Not that the same result would not have occurred had they used the large law firm. 

Until clients fully use their bargaining power and do not insist on using the largest law firms whether or not the case requires a standing army, nothing will change.