People become lawyers for all kinds of reasons: family legacy, seeking justice, an interest in the ins and outs of how the law works. Very rarely, however, do people become lawyers to fill out timesheets in six-minute increments.
Various voices in the legal community have been speaking out against the billable hour model for quite a while, but with the advent of AI tools for lawyers, it’s possible the billable hour will not be the dominant fee arrangement for much longer. That’s why, this fall, we’ll be covering alternative fee arrangements here on the Answering Legal blog.
We’ll be digging into as many different billing models as we can in order to make sure you have the information you need to choose which one might be best for your firm. But before we get to the alternatives, we have to talk about the biggest fee arrangement: the billable hour model.
Of course, most, if not all attorneys are familiar with the billable hour. It’s the most common fee arrangement in the legal world; according to Clio’s 2022 Legal Trends report, 97 percent of firms bill by the hour! But why is it the most common fee arrangement? And are there better options out there? We’ll explore these topics below as we cover a bit of the history of the billable hour, its pros and cons, and its effectiveness.
Why Is The Billable Hour So Widespread?
The billable hour model has been under considerable critique throughout the 21st century. Feelings on its effectiveness vary, mostly, based on the lawyer’s position within the legal world. BigLaw refugees, for example, having survived huge hour quotas and long working days, probably are not the biggest fans of the fee arrangement. Their bosses, however, and many other attorneys who find success under the model, are more likely to have the opposite opinion.
The biggest claim of proponents of the billable hour model is that charging by the hour promotes productivity. If only the work you do for the client matters, then you’re more incentivized to actually do that work, rather than some of the other things you might have on your plate. As such, the average attorney bills 1900 hours a year, which comes out to about 30 hours a week.
However, as every attorney knows, 30 billable hours a week is very different from working 30 hours a week. So how did we get here? It can feel like the billable hour has always been the norm for lawyers, but that is obviously not the case. Below, we’ll discuss the history of the billable hour, and how it got to be the most common fee arrangement in the legal world.
History Of The Billable Hour
The billable hour is a fairly recent phenomenon, only really becoming the main fee arrangement in the late 1970s. Before then, attorneys used flat-rate billing to determine their payment. But that all changed when a Boston firm started tracking their time in six-minute increments. In 1940, the ABA published a pamphlet in four parts called Law Office Organization by attorney Reginald Heber Smith, managing partner at legacy firm Hale and Dorr.
According to Wilmer Hale’s website (as the firm once known as Hale and Dorr is called now), Smith’s stated purpose was not to drive up profitability, but to track productivity, to ensure that clients weren’t being ignored in favor of socializing and networking time. This pamphlet and its promotion were part of a long-term campaign by the ABA to promote the billable hour as a method of pumping up lawyer earnings, which hadn’t increased at the same rate as other professionals through the 40s and 50s.
A campaign that, by and large, was very successful; it’s difficult to measure lawyer salaries, since the Bureau of Labor Statistics measures the small business earnings of law firm owners differently than other lawyers. But without a doubt, rates for lawyers across the country rose.
This national campaign, combined with the end of the bar ban on lawyer advertising, resulted in the billable hour model’s dominance across the country by the late 70s, and the beginning of the hypercompetitive era of the legal profession. Today’s competitive legal world can be attributed to many factors—technology, the Supreme Court ruling that lawyer marketing was a kind of commercial speech, the increase in higher education matriculation after the 1960s—but all of those factors come back to the ascendancy of the billable hour.
Without the billable hour, the law would not have been as lucrative a career, and there would be fewer graduating JDs. With fewer lawyers, the legal profession would be much less competitive and much more homogenous; if only the children of lawyers can afford to become lawyers, then the legal world becomes less diverse, something that doesn’t help either clients or lawyers.
What Makes The Billable Hour So Successful?
By the present day, of course, a decent amount of the billable hour model’s staying power is inertia. By now, most law firms across the country are very familiar with the process of logging time and billing by the hour. There are whole sectors of the legal technology industry dedicated to making that part of the job easier.
Changing systems now would be a lot of work and quite a bit of risk, and attorneys, naturally risk-averse, are already overworked as it is. Law firms would have to restructure, from the smallest solo firm to the biggest multinational firm. And, as the old saying goes: if it ain’t broke, why fix it?
And, at the end of the day, there’s a very simple reason the billable hour model is still around: its promise is that if you work more, you will make more money. It’s a simple deal: the more hours you bill, the more you make.
Of course, this isn’t exactly true—you’ll run out of billable tasks for a legal matter eventually, and there are ethical concerns with wasting client time and money on billable but unimportant tasks—but it is truer for lawyers than it is for a lot of other professionals. Where most other professionals work for a salary or under strict overtime restrictions, the law is one of the few places where you can work more if you want more money.
What Problems Does The Billable Hour Bring?
Of course, there are plenty that would argue that the billable hour model is, contrary to the old saying, broken, and that it does need fixing. As the business climate in the legal world has gotten more and more competitive, there have been many voices criticizing the billable hour.
Those criticisms are not limited to the topics we’re about to discuss below. Associates and junior attorneys in big practices probably have a lot more to say about billable hour requirements. However, below we’ll be discussing the problems affecting lawyers at small law firms, law firm owners, and solos.
Administratively, the billable hour model creates a lot of extra work. In other fee arrangements, you don’t need to manage a timesheet. And though there are plenty of technological solutions to this problem, the fact that a need has been filled by an industry points to the fact that a problem exists in the first place. Most attorneys, after all, were not stellar mathematicians.
In the grand scheme of things, this may seem like a minor issue. But bookkeeping takes time, and though every fee arrangement will involve some form of bookkeeping, none will have granular requirements like keeping track of your time in six-minute increments.
Billable And Non-Billable Time
Then, there’s the problem of non-billable time. As we’ll discuss later in this blog, only one-third of the hours an attorney works in a typical eight-hour day are considered billable time. That means that, yes, you’re being paid for the work you do, but you’re going unpaid for a lot of other work.
Not to mention that if technological changes make legal work easier, as may be the case with AI tools, productivity will go up, but profit will go way down. If you want to read more about how AI might affect the billable hour, we have a blog covering that topic and more here.
The billable hour is unique among professionals because lawyers make more money the longer a matter goes on. A criminal defense attorney who gets a favorable plea deal for their client, for example, would get paid less than if they had decided to go to trial, regardless of which is better for the client. You can imagine how clients feel about that; we’ll discuss that at the end of this section.
In addition, creating a situation where time is literally money is an easy recipe for wellness issues. Whatever you believe the right balance to be between your work life and your personal life, it certainly isn’t helped by the belief, however true or unconscious, that time not spent working is time not billed, and therefore money lost.
In addition, if you’re only billing one-third of the hours you work, and you need to bill 30 hours a week to meet your goals, your schedule becomes 90 hours a week, more than double a standard 9-5 job. It’s no wonder that the legal world is suffering from a mental health challenge.
Finally, and most importantly, there’s the client factor. The plain fact of it is that clients don’t like the billable hour model. When clients walk into a law office, they have no idea how much they will have spent at the end of the legal matter, which makes legal costs unique amongst the expenditures consumers have to make.
For example, when you walk into an auto shop with a car that doesn’t run, you’re putting a lot of trust in the mechanic. Their job is to diagnose the problem and fix it, and charge you a fair price for both. While a trustworthy mechanic may add fees for problems they find mid-repair, they’re usually able to give you a good estimate of what their work will cost you, parts, labor, and all.
Not so in the legal world. If you’re billing by the hour, you can take a guess, but unless you’ve handled dozens of cases just like the one a client is bringing you, a guess is all it will ever be. And even then, there’s all kinds of unforeseen or hidden circumstances a matter could involve that would make you seem like a liar if you said you could resolve it in three weeks and it ends up taking six months.
Not to mention that the hourly rate makes every interaction with one’s attorney transactional, rather than communicative, which can make it harder for an attorney to do their job. If a client has a piece of information important to the legal matter, it’s in their best interest to share it. But if, say, that piece of information can be shared in a three-minute phone conversation, the client may hold onto it until they have two pieces of information, so as to use as much of the six-minute block of time as possible. Of course, without that information, the attorney might have a much harder time solving their legal issue. But not everyone makes the most rational decisions when it comes to spending money.
How Well Does The Billable Hour Model Work?
Every attorney is probably familiar with the billable hour model, but the numbers behind it might be more of a mystery. Thankfully, to analyze the effectiveness of the billable hour, we can turn to the best source of quantitative information on how much lawyers make: Clio’s Legal Trends Report.
In their 2022 Legal Trends Report, Clio found that the average hourly rate for lawyers was $313 an hour.
The rate, of course, varies significantly by state; lawyers in D.C. make a lot more than lawyers in Alabama by the hour, for example. But the hourly rate only tells a fraction of the story.
The utilization, realization, and collection rates Clio shares at the end of each of its Legal Trends Reports is much more important. These statistics point out that only one-third of the hours worked each day by lawyers are considered billable time, 84 percent of the billable time worked each day is actually billed, and 89 percent of billed time is actually collected upon.
So not only are lawyers only eligible to be paid for one-third of the hours they work, one-sixth of those hours aren’t even billed! And then 11 percent of the billed time isn’t collected! If you do the math, the average attorney who works 90 hours a week only gets paid for about 22 of those hours.
Your perspective on these statistics says a lot about how you might feel about the billable hour. If you look at these statistics and see an outrage, you might be thinking about how other fee arrangements would pay an attorney for more of their time. Meanwhile, if you see the inefficiency demonstrated above and think of it as an opportunity for improvement, you might not need to look elsewhere, provided you’re willing to put in the investment to get paid for more of your time.
Exploring Alternative Fee Arrangements
In future blog posts this month, we’ll be discussing alternative ways to bill clients for the work you do for them. We’ll be discussing legal subscription services, flat-rate and fixed-fee billing, and other kinds of alternative fee arrangements.
What we will not be doing, however, is picking the best fee structure. That’s because the best billing arrangement does not exist. Rather, the only fee structure that is the best is what works best for your firm. There are plenty of firms out there that might benefit from embracing an alternative fee arrangement. And there are plenty of others that work well under the system as it is right now.
At some huge law firms, there might not be a better way to measure an associate’s productivity than having them track their billable time. But, on the other hand, many of our readers are solo and small law firm owners, who may stand to gain the most from a switch, and find that change easiest to make.Hopefully, throughout this series, you’ll be able to learn enough about the other fee arrangements that you can come to a conclusion about what works best for your firm.
Make The Most Of Every Hour With Answering Legal
The billable hour model has its strengths and weaknesses, but its biggest draw is the promise that if you work the hours and bill them, you’ll be able to make more money. One of the problems with this way of thinking is that you need a constant influx of new clients to bill for this to work; eventually you’ll run out of work to do for the clients you already have.
Of course, to get clients, you need to spend time generating and capturing leads, and for lawyers, time is money. If you’re investing in getting more clients for your firm, look no further than Answering Legal.
Our receptionists are experts at making sure prospective clients stick with your firm. Lead capturing can make or break a marketing campaign; with our receptionists answering every call, you’ll make the most of every opportunity your lead generation brings you. Click here if you’d like to read more about how our receptionists conduct custom legal intakes for each of the law firms we answer for.
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