Ask most attorneys who Reginald Heber Smith was, and less than 1 percent will respond correctly.
And yet, it is Professor Smith — by all accounts a well intentioned and highly intelligent law professor from Harvard — who gets the credit for inventing a concept so central to the practice of law for over 50 years that most attorneys simply assume it has always been there.
The billable hour.
And it’s Smith whom Richmond business owners must curse when they get an hourly bill from their lawyers.
If you’ve ever paid legal fees charged by the hour, you may remember that gnawing feeling that the fee you paid bore little or no relationship to the value you received. If you asked about the fee, maybe your lawyer told you, “That’s the way it’s always been,” “All we have to sell is our time” or “You’re lucky, I didn’t charge all my time.” Of course, the first two are demonstrably false, and as to the third, well, you should be so lucky.
As an entrepreneur, I engaged (and fired) law firms large and small, so I’ve been on both sides of this issue. Today, my clients, especially entrepreneurs, tell me what I already know — billable hour pricing doesn’t work for them. They may forego the services they really need, and they resent the seemingly arbitrary fees they are quoted or charged. This has to end, but how? What’s next? How will the bulk of the legal profession survive if lawyers don’t charge for their time?
The answer is simple but profound. We must price legal services based on their value to the client and then find ways to provide those services profitably at that price. Technology can help, but, fundamentally, most lawyers must change the way they think. They must understand that by pricing according to value, they will prosper. Many attorneys in Richmond already know this and run their practices accordingly. Some of the largest firms here and across the nation are already moving in this direction, often urged on by their largest clients. But the vast majority of firms and lawyers are still “on the clock.”
Law is big business here in Richmond. Our firms command respect nationwide and provide thousands of jobs not only for lawyers, but also for support staff and countless local businesses that provide supporting services. As net exporters of legal services, Richmond lawyers must lead, not follow, if we are to maintain our competitive position.
Clearly we don’t want to topple the entire industry, but let’s pause for a second to see how we arrived at this system.
It turns out that the billable hour has only dominated the legal profession for about 50 years. Professor Smith ran a free legal clinic at Harvard. He reasoned it would be a good thing to know how efficiently his lawyers used their time. What could be simpler than a timesheet! So he instructed his lawyers to write down everything they did in fractions of an hour. Those who accomplished more in less time were obviously more efficient, and to be rewarded. In this approach, Smith drew upon Frederick Winslow Taylor’s theories of “scientific management” and “time and motion” studies. Apparently Smith was a great admirer of Taylor.
Decades later, anti-trust concerns forced lawyers all over the country to abandon the rigid fee structures set and enforced by the local bar associations. Smith, by then the managing partner of Hale and Dorr, dusted off his invention from the free-clinic days — the time sheet! To adapt it to commercial practice, all that was necessary was to add a standard hourly rate for each attorney, multiply their hours by their rate and voila! Profit!
Professor Smith’s well-intentioned system soon produced one of those “unintended consequences” that are so easy to see in hindsight but so hard to predict at the outset. In fact, the billable hour itself has spawned the unbridled growth of mega-firms built on a pyramid system, leveraging ever larger numbers of associates to generate more billable hours, and (it is hoped) higher partner profits. A tool to measure efficiency has morphed into a process that too often penalizes it! The only way to grow a firm based on billable hours is to bill more hours, and the only way to bill more hours is to add more people. The more people you add, the more your expenses grow, increasing pressure on profits, leading to more leverage, more hours — and the cycle continues.
But all pyramids ultimately crumble (except perhaps a few tourist attractions in Egypt and South America). Clients reject bills that charge them for what is, in their view, training of new attorneys. Associates reject unrealistic quotas of hours to bill, and even partners may ultimately reject the system when it comes between them and their clients, poisoning the relationship and marginalizing their standing. Old ways die hard, though, and still today, nearly all law firm management systems track the billable hours of each attorney for each day, month and year, down to the tenth of an hour.
Within the past 12 months, articles from the Wall Street Journal to BusinessWeek, and the ABA Journal have all run feature stories trumpeting the end of this deeply flawed and worn out “business model.”
But ask any lawyer today what their services are worth, and they’ll probably quote you in dollars per hour. Exceptions prove the rule, such as plaintiffs’ lawyers who collect a percentage of the winnings and at the other extreme, pro bono lawyers who do wonderful things for free. In some areas of practice, flat fees set in advance have long been the norm. Estate planning comes to mind. But the larger the law firm, the more likely it is that the billable hour is the measuring stick by which all activities are valued, managed and priced.
Increasingly our own firm and others often depart from the billable hour when an alternative approach better suits the client’s requirements and permits the firm’s attorneys price their work to the mutual benefit of client and lawyer.
This is good thing.