The Inherent Client Conflict of Interest Caused by Hours-Based Billing

Originally published for Thomson Reuters Legal Executive Institute on March 10, 2015

For some time I have been troubled by the potential conflict of interest that hours-based billing causes between the lawyer and the client. The more I focus on it, the more profound the problem appears.

Let me start by saying that I have deep confidence in the dedication to ethical conduct of the members of our profession. My concern here is not with their fundamental professionalism. Instead, it is a concern that, notwithstanding that professionalism, the hours-based billing model can put them at odds with their clients in ways they do not intend, and in ways they may not recognize. It is a structural issue, not a moral issue.

I first noticed the issue years ago when a lawyer friend of mine quipped, after meeting with a client about a new lawsuit, that he had to feign empathy for how upset the client was, given his own personal glee with the prospect of the revenue the new case would generate. Knowing my friend, I knew he wouldn’t deliberately do something contrary to the client’s interest, but it was, nonetheless, a disturbing exchange. What was bad for the client, was good for the lawyer.

More significant to my outlook was Richard Susskind’s 2008 book, The End of Lawyers?, in which he identified “the curse of hourly billing.”

So long as the focal point of law firms’ profitability is premised on the number of hours spent advising clients, their motivation will always tend to be to spend more rather than less time on the work, where the clients will prefer precisely the contrary… . At worst, hourly billing can tempt lawyers to dishonesty. At best, it is an institutional disincentive to efficiency.

It is not just that what is bad for the client is good for the lawyer. The model incentivizes the lawyer to make it worse for the client.

The incentive to log more billable hours has become pervasive in the hours-based billing model. Lawyers have minimum billable hour requirements; compensation turns on billable hours; so do department and office performance assessments. Most internal measurement systems are aimed at rewarding high billable hours and sanctioning low or even modest billable hours.

A recent article, entitled What’s Wrong With Law Firms? by Georgetown Law Professor Jonathan Molot suggests that the conflict is now about the model itself. Knowing that clients want a different model with different incentives, law firms adhere to the billable hour model “because any departure… might risk reducing current revenues and current profitability.”

Similarly, as I wrote last week, it is clear that the billable hour model is impeding law firm adoption of new technology and process design options that would make firms more efficient. Converting to a method that delivers client service with fewer billable hours might be better for the client, but since it will reduce revenue, law firms are slower to change.

So, where does this analysis take us?

At the minimum, clients and law firms need to recognize that there is a structural problem at work. It warrants serious consideration and appropriate action.

Clients need to be more assertive about the issue. Fees aren’t too high merely because the lawyers don’t stay on budget or because their hourly rates are too high. Fees are too high because law firms hold on to 20th Century business and service models. Clients should demand that their firms perform and price their services differently.

And law firms need to take responsibility for what they are permitting to occur. A material gap has developed between the costs incurred and fees charged and what those costs and fees could be. At some point the fundamental fidelity firms owe their clients and their ethical responsibility not to charge an unreasonable fee require them to revamp their business and service models.

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