Survey Considers Downside of Time-Based Billing

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A recent survey completed by William G. Ross, professor at the Cumberland School of Law at Samford University, is ruffling some feathers. Ross has a special interest in billing ethics, and has done two previous surveys of this sort.

In the current survey, 5,000 randomly sampled attorneys were asked about their billing practices. Only 251 responses were received, and that number of responses seems a bit thin to provide reliable results. However, I think that the results are interesting nonetheless and bear discussing.

The focus of the survey was time-based billing, and whether or not such billing leads to inefficiencies, fraudulent billing, or other negative consequences.

Survey Results
Ross notes that this survey’s results were very similar to the results of previous surveys. He opines that “a distressingly high percentage of attorneys believe that time-based billing results in bill padding and provides incentives for attorneys to perform unnecessary work.”

I think such an opinion comes as no surprise to professionals across a variety of disciplines, including the practice of law, public accountancy, and business consulting. The practice of billing by the hour can ensure that a professional is compensated for all the time spent on a matter, however, it quite clearly can provide an opportunity for dishonesty.

The survey done by Ross found that two-thirds of survey respondents said they had specific knowledge of bill padding. Almost 55 percent of respondents indicated that billing additional time sometimes influenced the work they did. This was up from just over 40 percent in the 1995-96 survey. Bill padding in this situation involves invoicing clients for work not performed, invoicing clients for unnecessary work, or inflating the amount of time spent working on a matter.

The incidence of double billing has also increased, according to the two most recent surveys. Double billing refers to the practice of traveling on behalf of one client, while doing work for a second client during that airplane ride, and billing both for the same block of time.

In the older survey, 23 percent of participants admitted to engaging in double billing. In the most recent survey, that number increased to almost 35 percent. In addition, fewer attorneys in the current survey said they felt that double billing is unethical. Ross notes that the American Bar Association “condemns” the practice of double billing, yet in the most recent survey, only 52 percent of attorneys say that the practice is unethical.

The Problem with Hourly Billing

The most obvious problem with billing clients for work on an hourly basis is the pressure to increase one’s billable hours. I don’t know of a law firm that does not have some sort of billable hours requirement for associates. This type of system is counterintuitive to providing efficient services to clients, and everyone knows it.

When I worked at accounting firms with hourly billings, I experienced the same thing. There was no incentive to be efficient in one’s work and finish a project quickly. In fact, it was at times frowned upon. Billable hours are a measuring stick, and a project that didn’t take as long as management thought, might not be considered high quality. Alternatively, working quickly means that the client is billed less, and management doesn’t always appreciate that. It’s no secret that some management teams value number of hours much more heavily than efficient, quality work.

Hourly billing rates do not usually take into account the type of work being performed. Most attorneys seem to have one rate no matter what work is being done. More specialized work, such as a complex acquisition project, might be billed at the same rate as the review of a deposition in a straightforward case. Is that really fair to the client?

Clients often end up paying for the training of newer associates on legal issues and procedures. A big project may have multiple associates participating, each with an hourly rate. As they all sit around and discuss the case, the client may or not be getting value from those multiple hourly rates being incurred at once.

I’ve heard clients say that one of the best ways to determine the honesty of a bill is to challenge it and see how fast a discount is received. How often are hourly bills accurate? Who really thinks that requiring professionals to log their time in six-minute increments is reasonable? At the end of the day, hourly billing is cumbersome at best and unfair to the client at worst.

Alternatives to Hourly Billing
When I started my company more than seven years ago, I began billing clients on a “flat fee” basis. This means that the client and I determine the scope of a project, and I determine the fee for that project. In larger cases, I break the project down into phases, and typically quote the fee for each phase as we go. This allows me to adjust the fees as the project progresses, in order to make sure that I’m being fairly compensated for my time, knowledge, and expertise.

Flat fees have worked out well for both my company and my clients. We all know the cost of the services going in, and we avoid the “black hole” of fees, where they go on into infinity. It makes it easier administratively, because I don’t have to log my time, enter it into the computer, generate a bill, and make sure that bill captured all billable time.

I also find that clients appreciate paying for value. I can put an exact dollar figure on my expert witness services, and the client can easily determine if the services are worth that fee. Certain cases that require a different level of expertise may have higher or lower fees than other. Fees are also adjusted based upon geographic location, whether the expert report needs to be completed on an accelerated schedule, and other relevant variables. Some clients still prefer an hourly fee, and in certain cases I still use this billing method. But all-in-all, I’d rather quote a fee for a project and let the client decide if the value is worth it.

Attorneys do use alternatives to hourly billing in plenty of situations. Contingency fees are a great example, and there are a number of attorneys offering flat fees for some standard services. Cisco is one of the leading companies in paying lawyers largely under fixed fee arrangements. The company estimates that 70 percent to 75 percent of its outside legal work is done this way. Other large companies are following suit, but phasing in fixed fees by starting with smaller matters.

Some smaller law firms have been using alternative billing arrangements for years, and it seems that more firms are picking up on the practice, particularly regional firms. Some firms are using flat fees as a way to appear more competitive to prospective new clients.

Yet it seems law firms in general are leery about using flat fees on many matters, such as large mergers, anti-trust cases, or complex litigation. One of the hurdles that attorneys must get over is looking at everything in terms of hours of effort. A flat fee need not be based upon an attorney’s hours, although that may play a part in the development of the fee. For flat fees to be effective and practical, they need to be based upon the value to the client.

Padding of invoices is simply a nice term for a fraudulent billing practice. If law firms and lawyers agree to hourly billing rates with their clients, they owe the client an honest bill with honest hours reported. If there are reasons why hourly billing is impractical or undesirable, then the solution is not committing fraud. The solution is agreeing to a fee structure that properly compensates attorneys for their work.

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