The Billable Hour: Any End In Sight?
The Rules of Professional Conduct for attorneys require that fees charged by law firms be reasonable. A litany of factors may be taken into account in determining whether or not fees billed for performing legal services are reasonable.
These factors include: (1) the time and labor required, the novelty and difficulty of the questions involved and the skill required to perform the legal service properly; (2) the likelihood that acceptance of the employment will preclude other employment for the law firm; (3) the fee customarily charged in the locality for similar services; (4) the amount involved and the results obtained; (5) time limitations imposed by the client or circumstances; (6) the nature and length of the relationship with the client; (7) the experience, reputation and ability of the lawyer or lawyers performing the services; and (8) whether the fee is fixed or contingent. Out of this elaborate menu of considerations, the vast majority of law firms performing legal services for businesses charge based primarily on the time required to deliver the services (weighted for the difficulty of the question and the skill requirements for the performance of the services by establishing higher hourly rates for more sophisticated and experienced attorneys).
At a recent roundtable of Kansas City business lawyers hosted by Ingram's, there was a consensus that alternative methods for establishing fees are not likely to replace the billable hour in the near future. This was true even though participating attorneys recognized problems with billing based on hours alone, including difficulty justifying inexperienced lawyers performing services for clients, the possibility of overstaffing and unfair charges, and the inadequacies of tracking hours alone for reflecting other factors which may, and sometimes should, be taken into account in order to arrive at a fair charge for the law firm and client alike. Nonetheless, both lawyers and clients have become familiar with the billable hour and are com-fortable using it as a medium of exchange for determining the price of legal ser-vices. Establishing alternative methods for billing for legal services as the norm, or a readily acceptable alternative to billable hours, will require a major shift in outlook by both attorneys and their clients.
Still, several attractive options are available to law firms seeking to provide alternative methods of charging clients. One that was prominently mentioned during the Kansas City roundtable was a fixed fee for a specific service. This method lends itself well to securities, conventional finance transactions and similar practice areas where the amount of work is predictable, the level of expertise required for the work is known in advance and the time and effort required to complete a task is not subject to the tactics and responsiveness of opposing counsel.
The second alternative fee arrangement which was mentioned by several participants in the roundtable involves a reduced rate with a performance bonus. The reduced rate can be based on either the rate charged for billable hours or a fixed fee for the entire service required. In addition to the reduced amount charged for the transaction, attorneys using this method for billing expect a significant performance bonus in the event the desired result was achieved. This method of charging lends itself well to real estate development and some types of litigation where a successful outcome will greatly increase the benefits derived by a client from a law firm's efforts, while the outcome is not certain at the time the employment arrangements are made.
Some large firms have begun to enter agreements with corporate clients similar to an old-fashioned retainer, under which the law firm accepts a pre-determined stipend on a monthly or annual basis in order to provide services in a specific work area for the client in question. Agreements regarding retainer arrangements can include limitations on the amount or type of work performed, or the number of lawyers designated to work on the business of the client in question. Extraordinary circumstances can be addressed by adding additional charges based on hourly rates or a fixed fee for stated tasks.
While some Kansas City law firms presently provide representation for some clients based on each of the foregoing alternative fee arrangements, most clients and attorneys still believe that an hourly rate which is determined on a rational basis and administered in an ethical fashion, provides the fairest method for charging for legal services. Familiarity of general counsel and others purchasing legal services with the hourly rate as a basis for charging also makes negotiations of fee reductions or increases, in unusual circumstances, a process that is comfortable for both lawyers and clients.
Although much has been written about lawyers becoming less creative and more deliberate in response to the billing and compensation systems governed by the billable hour (not to mention jokes about the apparent age of lawyers arriving at the pearly gates based on the number of hours billed) it was apparent at the Ingram's roundtable that the vast majority of businesses retaining law firms and law firms providing services to businesses still believe it is the fairest and most transparent means for calculating charges. Alternative fee arrangements are, and will continue in the foreseeable future to be, the exception, not the rule.
Dick King is Chairman/CEO of King Hershey Law Firm. He may be reached at 816.842.3636 or by email at rking@kinghershey.com.