Originally published on March 8, 2010 in our free BigLaw newsletter.
Hailed by law firms and cursed by their clients, the billable hour remains the lifeblood of the legal profession. With primacy comes the risk of abuse. Risk? Actually, fact. Padding hours is a dirty little secret of the large firm world. How does it occur? Can it be stopped? Let's take a look.
Falsifying billable time occurs in several ways. On a micro level, attorneys can work slowly on assignments to rack up time or they can pad their time entries with extra hours. And on a macro level, while no law firms pad their attorneys' hours outright (or at least have been caught), most have fee arrangements and attorney compensation and advancement policies that don't exactly discourage their associates from overbilling. Addressing this problem requires more than just eliminating the billable hour fee arrangement.
Bill Padding Under the Traditional BigLaw Model
In the traditional model, the billable hour fee arrangement works in tandem with firm's compensation practices to create the perfect storm of perverse incentives to overbill. Take, for example, a typical law firm that pays its lawyers bonuses based on billable hours. The promise of bigger bonuses entices attorneys to inflate their hours, and the lure of higher revenue motives the firm to accept the bloated time records at face value and pass them onto clients unchecked.
Paying lockstep compensation doesn't thwart overbilling either since attorney evaluations, class advancement, raises, and job security remain tied to billables. Internal rankings for possible future partners also use this metric. Yet worst of all, neither the firm nor its attorneys have any incentive to tackle the hour-padding problem since the client is the only that pays for it — both literally and figuratively.
Merit Based Compensation Won't Solve the Problem
Though the traditional model still dominates, fixed-fee arrangements and merit-based compensation for attorneys have grown increasingly popular over the past few years. Unfortunately, these new models in their current incarnations have had little impact on the bill-padding phenomenon.
For example, firms that have migrated to merit-based compensation such as
Howrey and
Foley & Lardner continue to consider billable hours when determining associate compensation, which means that associates still have incentive to inflate their hours.
Fixed-fee arrangements provide the proper incentives for law firms to work efficiently and control client cost. But as long as attorney compensation and evaluations remain tied to billable hours, individual attorneys still have reason to embellish their diaries. As a result, flat fees simply shift the hour-padding burden from clients (who no longer receive bloated bills) to the firms themselves, which lose man-hours because of inefficient lawyers while paying them higher bonuses for their fabricated time.
The Solution to Bill Padding Has Its Own Perils
It's tough to imagine a world in which law firms don't use the billable hour either as a fee structure or a yardstick for evaluating and paying associates. But a legal world free of the billable hour is precisely what we need to eradicate the hour-padding problem and all of its moral and financial hazards.
If firms adopt both flat fees (or similar alternative fee arrangements) and true merit-based compensation systems that emphasize work product quality, client service, and other factors long used in the corporate world instead of relying on billable hours, attorneys will have virtually no incentive to overstate their time and firms will work efficiently on projects and send clients predictable invoices.
However, law firms that adopt such a system must resist directly pegging compensation to "efficiency," as emphasizing fast work may create the reverse incentive among attorneys — "underbilling" by cutting corners, which could result in loss of clients for reasons having nothing to do with sticker shock not to mention greater risk of malpractice claims and bad publicity.
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