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Breaking the billable hour myths

Breaking the billable hour myths

CLOCKING OFF?: Is the death of the billable hour drawing nigh? Clients hate billable hours, ri

CLOCKING OFF?: Is the death of the billable hour drawing nigh?
Clients hate billable hours, right? Not necessarily, claims a new report from the Institute of Knowledge Development (IKD), which says they would just like a few more options.

The billable hour is a factor of the legal profession that is said to be hated by clients, promoting inefficiencies and inspiring out-of-control billing fees. It is a point of parody for lawyers in TV shows, raises the suspicions of clients and has presented lawyers as being more worried about their timesheets than their clients' needs.

But, despite the billable hour's perceived unpopularity, are in-house lawyers and their external law firms really ready to get rid of the billable hour?

A recent report, based on round table discussions with both in-house counsel and law firm participants, found that it's too soon to announce the death of the billable hour just yet. Instead, the research by Dr Ben Tabalujan, director of the Institute of Knowledge Development (IKD), and Andrew Godwin, a senior lecturer at the University of Melbourne's law school, found that the billable hour is simply in the process of being challenged, with in-house lawyers harnessing their increase in powers spun off from the GFC to negotiate, and sustain, alternative fee arrangements.

But despite such a challenge and law firms now desperately searching for work in order to build their practices back up to pre-GFC levels, the billable hour it seems, remains resilient as a prominent billing method.

Both Tabalujan and Godwin say their research was carried out in response to media criticism of time-billing, as well as the general slowdown in work at law firms which is believed to have given in-house lawyers more control in the billing negotiation process.

Godwin says the study wanted to find out if the commonly aired predictions that hourly billing methods are fast disappearing are correct.

"Our conclusion on that would be 'No'. Time-billing is very much here to stay," he says. "But [billing methods] are likely to be modified to take account of the fact that there is what we would describe as an irreversible trend towards alternative billing methods (ABMs)."

The report was critical of the billable hour. It found that the key arguments for eliminating hourly billing were: that it does not create an incentive for efficiency; it can result in work being pushed down to more junior lawyers who offer questionable quality; it lacks transparency; and it places a natural limit on just how much revenue a law firm can generate in a given day.

But the report also found some benefits in the billable hour - notably that some clients see billable hours as actually encouraging firms to remain professional and ethical (given that they may not be motivated by other forms of incentives) and that hourly billing is an obvious billing type for certain matters where fee estimates are difficult.

Meanwhile, Godwin says the research also indicated that while the GFC has highlighted the importance of debate over ABMs, such debate has been under way for some years now.

"That's [the debate] now coincided with increased pressures on in-house legal departments to manage their legal spend more effectively. I think there's been particular concerns in the area of litigation and that is reflected in the comments in the recent access to Justice report released by the Attorney-General."

He adds that in-house lawyers are in a much stronger position now to negotiate fees - a position the in-house participants on the round tables say they are looking to maintain into the future.

"They are trying to imbed the right practices, if you like, and encourage law firms to be more flexible in considering alterative billing methods," says Godwin.

The most popular ABMs, found the report, include retainer arrangements - where law firms charge fixed fees for the delivery of a variety of legal services over a period of time - secondments, and event-based billing - where a maximum number of hours a law firm will grant a matter is agreed on upfront.

But Godwin did question whether timebilling had been given a bad rap simply because of certain areas of law which may have taken advantage of it:

"In my view, time-billing has been somewhat of a scapegoat, and has been blamed for the increase in legal costs when, in fact, this is a trend that has emerged as a result of a much greater involvement in litigation [by organisations] and an increase in costs generally."

And despite common perceptions, the report finds that not all in-house lawyers are keen on ABMs. The report found inhouse lawyers question the success of such fees because of difficulties in negotiating such arrangements and the possibility that some ABMs could actually promote counterproductive incentives - such as unethical "win at all costs" arrangements.

While IKD would not attribute quotes supplied by participants on their round tables to Lawyers Weekly, one comment, supplied by a partner, was particularly telling: "I think alternative billing methods are coming. There wouldn't be a day [which] goes past where I don't get one ... being talked about ... [So] we keep putting more and more on the smorgasbord - but everyone keeps taking the chicken [hourly billing] because it's safe."

General counsel participants on the round table came from organisations including Nestle, the Commonwealth Bank, Caltex, Goldman Sachs JBWere, Woolworths, Telstra, Qantas, ASIC, Siemens, the National Australia Bank and the Victorian Department of Transport.

- Angela Priestley

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