Management Assistance Program
A Brief History of Legal Billing
By Jim Calloway
How lawyers handle their billing has long been a topic of discussion in our field. Traditionally, it was a simple process. Record your time. Prepare invoices by listing all these billing entries multiplied by the lawyers’ hourly billing rates and adding expenses clients should pay. Send out the billing on the same day every month. Get paid. But it was often not simple and smooth – and it still isn’t today. Recording a lawyer’s time by the six-minute increments is not the way legal billing has always been done.
Most readers know of the challenges found between recording time and final billing. A new associate demonstrates their expertise by doing too much research and writing a lengthy, detailed memo, generating billing that needs to be written down. The partner did a lot of work on a project but generated few billing records because things were so busy. One partner is out of state and failed to turn in a week’s worth of billing before leaving. And the pre-bills can get stuck in the review process because both emergencies and procrastination can happen.
BILLING HAS NOT ALWAYS BEEN RATE TIMES THE HOURS
As someone who has coauthored two books for the American Bar Association on alternative billing practices, I appreciate that most lawyers believe the hourly rate is how attorneys have always billed. That is certainly true throughout the lifetimes of most lawyers practicing today, but in earlier American history, lawyers didn’t track their time by the tenth of an hour. Retaining a lawyer was similar to buying from a merchant – there was a fee quoted and paid when the lawyer was retained. I’m sure lawyers had some standardized fees, like 50 cents for drafting a deed. More complex legal work was quoted at a custom price. On those larger matters, I am also certain lawyers sometimes had challenges collecting the balance of the fees owed them. In those bygone days, the wealthy and large businesses and financial institutions had capable, good lawyers. But most lawyers were independent, and the lawyer who represented the bank in the morning might be advising a poor widow in the afternoon. Most lawyers were in general practice at some level, and their clientele and billing practices reflected that reality.
But then somewhere it began. Some business client asked a lawyer why a certain matter that had been handled before had doubled or tripled in price this time. The lawyer responded this matter was more complex and therefore took more time to complete. Then came the question that would prove fateful for the legal profession: “If you are billing me for the time you expended, why aren’t you showing me the time you expended on the billing?” Upon reflection, that sounded fair to the lawyer. After all, it was a repeat client who always paid their bills requesting this change in the firm’s practices. Although changes in the legal system often take a fair amount of time to catch on, as larger law firms, banks and insurance companies learned of this method, it became the standard practice. It was objective. Hours times the lawyer’s hourly rate equals the bill.
Retainers, an advance of a fee yet to be earned, became a lot less common for long-term, established clients. Business clients no doubt appreciated both holding onto their cash longer and more information being provided via the law firm billing. Lawyers no doubt appreciated that when a matter became unexpectedly complex and time consuming, it was reflected in the billing without having to go renegotiate the fee with the client. Clients were not consulted about completing every step in every assignment. If a client was unhappy with the amount of a legal bill, it was better to have that conversation over an entire month’s billing rather than when each item was billed.
There has been criticism of hourly billing throughout its existence. But what is certain is many firms recognized the business potential of hourly billing. Assuming hypothetically, a bounty of clients was waiting and available to hire and pay the lawyer, then one thing was clear – the more hours you worked, the more money you made. We, lawyers, understand this is not always true. But it is often true. Lawyers appreciate their ethical obligation not to bill a client for any time not necessarily expended representing the client. A proper, ethical approach is important because there is an inherent tension in the system – lawyers get more revenue from more billing, and the client pays less when less time is billed.
By the last few decades of the 20th century, the logical progression of most legal billing being hourly was realized. Many lawyers went from working a few nights and weekends when emergencies or overflow of legal work demanded it to routinely working several nights and weekends each month to increase their income. New associates were hired for desirable jobs in law firms and given hourly billing targets they were expected to meet to advance in their careers.
RE-EXAMINING THE BILLABLE HOUR
The billable hour then came to be identified as the root of many of the profession’s challenges, from the increasing cost of legal fees to lawyers experiencing personal problems due to their workaholic lifestyle. There was both truth and hyperbole in these criticisms.
Lawyer and novelist Scott Turow wrote a cover story for the August 2007 ABA Journal in proclaiming “The Billable Hour Must Die.” An opinion piece by Evan Chesler in the Forbes magazine, Jan. 12, 2009, edition, was titled “Kill the Billable Hour.” This was particularly noteworthy because Mr. Chesler was then presiding partner at Cravath, Swaine & Moore, one of the most elite of the mega law firms. He compared legal fees to his kitchen remodeling job, where the contractor measured and did other research before giving him a flat fee bid and said lawyers should bill like Joe the contractor does. He wrote: “Clients have long hated the billable hour, and I understand why. The hours seem to pile up to fill the available space. The clients feel they have no control, that there is no correlation between cost and quality.”
Oklahoma City attorney Mark Robertson and I wrote our books on alternative billing methods and served as panelists at ABA meetings and other state bar programs on the subject. But the billable hour had by then become deeply rooted in law firms, particularly large law firms. Associates were often ranked by their billables in reviews because it was a clear, objective measure. This was true even though some other subjective traits and accomplishments might be more meaningful.
Partner compensation was also often tied to billable hours. Every partner in the firm understood how the partnership compensation formula affected them, even if they took little interest in other aspects of firm management. This made any changes or reforms problematic. If a new compensation formula was proposed, every lawyer quietly figured out the impact of the new formula on them and then based their aye or nay vote predominantly on that. Once established, modifications to law firm compensation systems are among the most challenging to enact and the most likely to result in a lawyer or group of lawyers leaving the firm.
Many law firms did vote to change their compensation formula to reflect hours billed and collected rather than just hours billed. Otherwise, the lawyers with the most clients failing to pay their bills were unfairly rewarded at the expense of partners with superb collection rates. This change had the collateral consequence of making contacting delinquent clients part of a year-end routine for lawyers. If their clients’ payment didn’t arrive until later into the new year, it wouldn’t benefit that partner for another year. It is good for law firms to have lawyers focusing on accounts receivable at year’s end. Research studies have demonstrated that once a bill is over 90 days past due, the odds of it ever being paid drop dramatically. One could make the case this should be done quarterly.
A lawyer’s hourly rate became more than just a metric of billing. It became a symbol of status. If your rate was X and another lawyer’s rate was 2X, it meant that lawyer was twice as good as you or at least thought they were.
BILLING POLICIES IMPACT ATTORNEY BEHAVIOR
The law firm is a business. It would be odd if the revenue procedures didn’t have a large impact on all aspects of business operations. The brief history above outlines how law firm billing policies directly influence and impact the lawyers in the law firm. Whether it is intentionally working more hours each week, a year-end push to personally collect delinquent bills or an associate’s advancement in a law firm being tied to hours billed, compensation is a strong motivation. Some law firms enacted financial penalties for lawyers not submitting their timesheets and expense records timely.
A law firm that wanted attorneys to be more involved in the community or a major client’s favorite charity could decide a limited amount of time donated that would be treated as if it were billed in their performance reviews.
It is not always true, but if a law firm manager sees periodic problems with attorney behavior, particularly if different lawyers hired for the same position have similar challenges, it may be wise to determine if law firm policies are contributing to the problems.
So that’s a brief look at legal billing and its history from the viewpoint of those producing the billing. Now, let’s look at the consumer side – the ones receiving and hopefully paying the bills.
WHAT CLIENTS LIKE TO SEE IN LEGAL BILLING
Business clients, as noted, were a primary force in shaping how legal billing operates today. Alternative billing methods have been used more often with consumer clients historically. We all understand there are other legal billing methods besides hourly. Contingency fees on personal injury claims have been called the poor person’s keys to the courthouse door. Fixed or flat fees for various types of consumer matters have long existed. Criminal defense is often done under a flat fee, with additional fees required if a jury trial occurs.
What individual consumer clients really want is affordable cost and certainty. The challenge of hourly billing for an individual paying fees from their personal budget is often the lack of predictability.
That’s why I have advocated for fixed fees when possible in consumer legal work. It’s a huge marketing advantage if clients are shopping among lawyers, and you can quote a fixed fee while other attorneys in your area are proposing retainer and hourly billing.
But today, there’s another aspect to this discussion – automation. At our Opening Your Law Practice program that will be held virtually Oct. 19, I will stress the importance of exploring and incorporating automation in a law practice for future success. Automating some back-office processes that are not billed does not affect billing. Automated document assembly will impact billing. And, yet, if some are drafting and finalizing certain routine documents in minutes while others spend hours preparing them, there’s a business management question that goes beyond the billing implications. Attorney time is a finite thing, and it should be utilized appropriately. What do consumer clients most care about in legal billing? For most, it is the last line of the bill – the grand total. And just like our personal utility bills we pay, the lower, the better.
A FEW QUICK BILLING TIPS
If you bill by the hour, enter your time in digital format instead of writing by hand. A practice management software solution is best because it is the same tool used to prepare the invoices, but there are free-standing programs like Bill4Time and TimeSolv. One of the biggest delays in preparing billing is staff trying to decipher a hurriedly written time entry and then the lawyer proofing each entry to make sure it was interpreted correctly. If you bill by the hour, try to record all the time expended on client matters contemporaneously. Studies show that lawyers who record their time when expended capture more time than those who attempt to recreate billing later. But don’t hesitate to write down some items with a no charge when warranted. Disclosing the write-downs sends a positive message to clients.
It would be extremely challenging, maybe impossible, to turn on the proverbial dime and switch from hourly to flat-fee billing on all matters. The first target should be matters for which 1) there is a steady consumer demand with 2) significant aspects standardized and 3) aspects where there is room for process improvement by automation, streamlining or delegating a greater share of the work to staff. Once established, you will want to consider marketing your flat fee service more aggressively.
Be familiar with limited-scope representation as that rule may possibly play into designing new processes. Flat fee work may require a rather detailed fee agreement, both for disclosure to clients and protection of the attorney. Make sure important details are covered early in the agreement. If someone wants you to do more work than was covered in the flat fee agreement, explain this is a change order and the amount of the additional fees for that work.
Michael Kun is a partner at the firm of Hogan Lovells. He was recently quoted in a Law.com Trendspotter piece:
Because we lawyers usually bill by the hour, the perception can develop that the more hours you work, the more valuable you are. I think it’s important to remember that although we bill by the hour, we don’t sell hours. We’re selling thought leadership and problem solving. We shouldn’t confuse the way we sell our product with the product we’re selling.
Getting paid for helping solve others’ most serious problems is what the business of law is all about, isn’t it?
Mr. Calloway is OBA Management Assistance Program director. Need a quick answer to a tech problem or help solving a management dilemma? Contact him at 405-416-7008, 800-522-8060, firstname.lastname@example.org or find more tips at www.okbar.org/map. It’s a free member benefit.
Originally published in the Oklahoma Bar Journal — October, 2021 — Vol. 92, No. 8