Stop the clock?

By Doug Childers, Virginia Business Magazine – 8/27/2009

L. Steven Emmert doesn’t like thinking about time, at least when it comes to his clients. A partner with the law firm Sykes, Bourdon, Ahern & Levy in Virginia Beach, Emmert believes the billable hour — the standard billing system for many lawyers — is inherently unfair. “Billing by the hour removes all the risk from the lawyer and places it on the client,” he says. “If the client loses, he still has to pay the lawyer, no matter what. I don’t want to be in a cozy position while the client is biting his nails.”

Instead of an hourly rate, Emmert relies primarily on contingency fees. With this arrangement, the lawyer receives a percentage of a winning judgment. Emmert turns to flat fees for cases in criminal and domestic relations, for which contingency fees are considered unethical. He also uses a blended fee — a reduced flat fee plus a percentage — “where it makes sense to the client and for me.”

Emmert, who specializes in appellate law, isn’t alone in his concern about billable hours. Two of the largest law firms operating in Virginia — Williams Mullen and Reed Smith — already offer clients alternative billing options. In fact, with the nation facing its worst economic downturn since the Great Depression, more lawyers are wondering, “Is it time to stop watching the clock?”

The answer might not be a resounding “yes.” Finding a new, universal plan to replace billable hours might be impossible, according to some experts. “I don’t think there’s any single thing that would replace it,” says Guy Tower, executive director of the Virginia Bar Association. “The industry is struggling to find more thoughtful, alternative ways of billing.”

A complicated process
Assigning a monetary value to a lawyer’s contribution is part of a complicated process. “An optimal compensation system would have pay based on the quality of the service provided, but this is very difficult to measure,” says Paul G. Mahoney, dean of the University of Virginia School of Law. “You can’t measure it simply by whether the client won the case or successfully completed the transaction because the lawyer’s services are just one of many inputs that determine success or failure.”

Without a simple substitute, the shift toward alternative billing plans might evolve slowly. “I think the billable hour is going to be with us for the foreseeable future, even though you’re seeing more digression from strict billable hours,” says Gant Redmon, managing partner at Redmon, Peyton & Braswell, an Alexandria firm with 15 lawyers.

While the billable hour may not be perfect, it has worked pretty well, says Tower, in the four decades since it replaced fixed-fee schedules published by many bar associations. “It gives a certain predictability to the process of delivery of legal services that is particularly popular for businesses,” notes Tower.

The model allows firms to charge various rates based on their staff’s expertise. “In larger firms, there’s an array of hourly rates from paralegals to the most senior partner, so it’s a way of mixing and matching expense and talents to come up with a reasonable rate,” explains Tower. A paralegal might charge $35 to $75 per hour, for example, while attorneys at the same firm might charge $175 to $375 per hour.

A starting point for fees
The key, say supporters of the billable hour, is to consider it a good starting point. “The billable hour is important, but in the final analysis, the value we add determines the fee,” says Redmon. “If you put in billable hours and they don’t add value, you can’t bill for it.” In those cases, he offers the client a courtesy credit or writedown. “By the same token, if you’re efficient and you can perform a given task in less time, I also take that into consideration during billing.”

Still, the billable hour inevitably raises questions, especially for clients watching the lawyer’s meter:
• Could a lawyer with a lower hourly rate have performed the same work for less
• Did the lawyer overestimate the number of hours spent on the case?
• Did paying by the hour drag out a case unnecessarily?

“The billable hour has a built-in disincentive to early resolution,” says Harris D. Butler III, a partner in Butler, Williams & Skilling, a Richmond firm with six lawyers. “There’s a lot to be said for result-driven fees.”

Butler’s firm has seen increased interest among clients in paying contingency fees. “A blended system is ideal,” he says. For plaintiff work, Butler’s primary field, a blended system could be based on contingency fees, hourly fees and the result of the case. For instance, if there is no anticipated recovery — such as in defending a claim or handling a complex matter — a blended fee may incorporate elements of hourly fees and fixed fees. “A fee could be adjusted upward or downward for a particularly good or bad result,” says Butler. “It means some lawyers will have to be willing to take more risk.”

Working in some areas of law (such as domestic relations) or handling complex transactions and litigation, lawyers likely will retain the billable hour. If there is a movement away billable hours, many lawyers expect change to come first in smaller firms. “The smaller the firm, the more likely another kind of billing would be offered because there’s more flexibility,” says Redmon. “The more lawyers you have, the more rigid the system needs to be to keep control of it.”

Variety of arrangements
Still, some big firms have signed on. Richmond-based Williams Mullen, Virginia’s third largest firm, now offers a variety of fee arrangements. “Those arrangements include fixed fees, blended rates, contingency fees, result-oriented fees and agreed reductions if matters fail to close,” says Julious P. Smith Jr., the firm’s chairman and CEO. “Flexible fee arrangements respond to our clients’ requests for more predictability and help in managing legal budgets.”

Another large law firm with a Virginia presence, Reed Smith, also is expanding alternative billing arrangements. The Pittsburgh-based firm employs nearly 1,700 lawyers on three continents, including 63 at three offices in Virginia. Historically it used billable hours, but it has become more flexible in the past year in response to clients’ demands. “On the transactional side, since the beginning of the year, approximately 25 percent of all new matters are under alternative billing arrangements,” says John Iino, vice chair of the firm’s business and finance department. “On the litigation side, it’s pretty significant as well.”

The firm, for example, charges several businesses annual fees to handle their litigation work. “Because we’ve been proactive, we’re getting work we wouldn’t have gotten,” says Iino.

Still, he doesn’t see the trend toward alternative billing killing off the billable hour. “For some clients, the billable hour makes the most sense. So conceivably a firm might have half of their matters under billable hour and half under alternative billing and build a business model to do both.”