Thursday, August 18, 2005

Hourly Billing II


Yesterday I referenced a joke about how a highly efficient lawyer can suffer from billing by the hour (with the rather obvious implication, I think, that inefficient lawyers can benefit from that system). The weblog I referenced, that of the Greatest American Lawyer (which, if you read the blog, is not intended as braggadocio) devotes quite a bit of attention to alternative billing systems which provide incentives to the lawyer both to be efficient and to achieve a good result.

There are some types of legal work where it is difficult to move away from hourly billing. And there are some consumer advocate types who seem to contend that hourly billing is usually best for the customer, objecting that a lawyer who switches to some form of "value billing" when, for example, using an automated document system which allows the lawyer to perform the work in a short amount of time, causes consumers to pay more. And it is true that an estate planning firm which has invested tens of thousands of dollars in an automated document system is more likely to charge a flat fee for a set of basic estate planning documents that reflects more than the attorney's time investment in creating those documents. Yet I believe that to be appropriate, first because the firm has to recoup the investment in creating, maintaining, and updating the system, and second because the "old way" is not necessarily either cheaper or better. I am aware of estate planning firms which go out of there way to improve and expand upon the product they provide to their clients though automation without increased cost. When you're billing on an hourly basis added value usually means added time, and thus added cost. In the longer term, as more firms automate and offer flat fee document packages, there should be market pressure to lower cost.

Moving away from an hourly model becomes more complicated in areas of law which don't lend themselves to automation or to the reuse of a lawyer's prior work. When you look at a big enough picture, perhaps that is less true - if you track enough cases of a particular type over a sufficient period of time, you can probably derive averages that would largely hold accurate for future work. And it may be reasonable to fashion a flat fee, even with significant variation, for some classes of cases. Many firms seem to apply a flat fee or modified flat fee for various forms of misdemeanor criminal defense.

To the extent that a higher fee is viewed as boosting a lawyer's devotion to achieving the best outcome, suggestions for a bonus mechanism to provide that incentive aren't universally possible. Few criminal defense lawyers would be interested in fee agreements which provide a bonus only in the event of acquittal. In cases where the outcome is likely to be mixed, or where there is a substantial probability of an adverse outcome, a lawyer is apt to view it as common sense that full compensation should not be tied to the outcome. At the same time, staying with a pure hourly system provides neither an assurance that the lawyer will achieve a better outcome, nor that the lawyer will strive for efficiency. (In the context of divorce litigation, it is not unusual to encounter lawyers with a reputation for aggravating conflict and bringing unnecessary motions, with the principal effect of driving up the legal fees.) Yet a flat fee system can provide a disincentive for the lawyer to invest time and energy into pretrial motions or investigation, which might otherwise improve the outcome.

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