Oregon State Bar Bulletin — AUGUST/SEPTEMBER 2007

We are delighted you have selected Austen Dental Services for all your dental needs. We look forward to providing you with high quality cost effective services. Our team of talented young dentists are highly motivated to give you outstanding services not only by virtue of their professional commitment to you, but also because the very best of them will be offered partnership in our great organization. To that end, we are sure you will be pleased to learn that we will charge for our services on an hourly basis. To demonstrate their dedication, we require our young dentists to record at least 2,000 billable hours per year, with bonuses if the dentist should achieve benchmarks of hourly dedication beyond 2,000.

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Hourly billing has been with the legal profession a very long time. The evolution from one line bills "for professional services" to billing on the basis of precise calculation of time began when clients, particularly those with in-house counsel, as well as insurance companies that hire lawyers to represent insureds, looked for greater accountability and precision in the way they were charged for lawyer services. What started as an innovation grudgingly accepted by law firms, soon became the gold standard, applied almost universally to this day, despite numerous objections and staunch advocates in favor of alternative billing methods.

From accepting hourly billing, it was not very long before the tracking of time became not only a basis for preparing invoices but also a welcomed, even celebrated, management tool. Raise the hourly rate $5 or $10 and the revenue went right to the bottom line. Get each lawyer to add one billable hour per month, per week or per day, and you achieved the same results. Review time accounting records and you could rank order not just associates, but all lawyers, in terms of their commitment to the enterprise. Lawyers went from being professionals evaluated on their excellence to being full time equivalent timekeepers ("FTEs") evaluated on the basis of numbers. Differences among lawyers’ billable hours became the source of much grinding of teeth. If only Caldwell & Moore could move the fifth quintile of timekeepers up to the fourth, the firm’s profits would soar. If every lawyer’s hours were above average, the possibilities were unlimited. And what started as an effort at simply drawing comparisons, slowly evolved into a method of punishing, at first, associates whose billable hours were below average, and then, partners whose low billable hours translated into their being perceived as "unproductive." That perception may even have provided reason enough to urge these slackers, who had grown up and become members of the firm in a different era, to look elsewhere for future employment.

The next step in the march of the billable hour was the adoption by firms of billable hour goals — just like those describing so many affirmative action initiatives. And not, heaven forefend, to be confused with billable hour quotas or requirements. Just a gentle nudge directed at all lawyers that the firm had expectations. But it was not long before these goals became much more than that. Firms told their lawyers, especially the associates, that the firms would provide bonuses to those lawyers whose billable hour production exceeded certain thresholds, perhaps $25,000 for 2,000 hours, another $10,000 for the next 200 and so on, bonuses cascading without limit. It is these billable hour requirements, with both their attendant bonuses and the unspoken but inevitable negative effects of failing to meet the firm’s expectations, that prompt this ethical rumination, addressing the question of whether what we are doing with billable hours violates principles of professional responsibility, if not the professional responsibility rules themselves.

Lawyers Are Good People
Let me start by observing that I firmly believe that most lawyers are honest in keeping track of their time and conscientious in undertaking tasks that are consistent with their clients’ best interests. I do not believe the profession is engaged in wholesale fraud. But it does not require a finding of rampant criminal conduct to conclude that billable hour goals raise important ethical issues. Nor are the professional responsibility implications of billable hour quotas and bonuses the only reasons why law firms should cease this practice and cease it now.

The Conflict — Compounded
Though hourly billing is universally employed, and has many characteristics that recommend it, hourly billing certainly has one huge ethical deficit. The client has a very real interest in limiting the client’s legal fees; the lawyers get rewarded, at least in the short run, for an increased number of hours. In short, hourly billing is a great incentive for the lawyer to undertake more tasks and to complete them more slowly, perhaps contrary to the interests of the client.

The imposition of specific goals, quotas or requirements for billable hours by law firms only heightens this conflict and, as the fictional disclosure in the preface to this article makes clear, they are hard to justify as serving any legitimate client interest. Simply ask yourself how you would feel if your dentist made that disclosure to you before you underwent a painful root canal. While the pain the young dentist might be inclined to prolong to add to her hour total may be more stinging than any a lawyer can inflict, any incentive to inflict pain on clients by delaying resolution of their matters or increasing their fees is something our profession should stamp out, not encourage.

Distortions
Think about the distortions that are introduced by this system. The affected lawyers are always asking two questions: What are my hours? What goal can I achieve? As the year drags on the lawyer either falls behind the goal or realizes that yet a higher goal (and its resulting additional bonuses) is achievable. Either way the obsession with these statistics only grows. Assignments change, on the downside, from being opportunities for service to clients to way stations on the path to keeping one’s job and, on the upside, to "earning" bonuses. These new job opportunities are not evaluated on the basis of the lawyer’s interests or likely experiences (can I take a deposition? argue a motion? meet a client?) but on how many hours the matter will add to the associate’s annual hour harvest.

Think also about the likely effect of this system on the recording of time. In the brave new world of lawyer time accounting, hours are measured in tenths (a mere six minutes), an absurd construct that was designed to avoid overcharging of clients by the earlier use of quarter hour billing. In fact, however, it has placed virtually every lawyer in America in a position in which he or she is guilty of multiple mini-frauds every day. If one really kept track of every hour every work day in six minute increments, that is, in fact, all one would have time to do. Stop watch or chess clock at the ready, lawyers probably could keep track of their time in tenths, but unless one were fortunate enough to be in a long deposition, on trial or at a closing, "keeping track of time," not substantive work, would be the task entry on the lawyer’s billing sheets. And for the typical lawyer who waits until the end of the day to record time, accuracy to a tenth of an hour is an impossible assignment (was it 24 minutes or 30?).

Given this reality — that when most lawyers put down their time they are doing so based on estimates — the question arises whether it is likely that the presence of billable hour punishments and rewards has any distortive effect on how these estimates are made. Do we suppose that estimates high and estimates low are essentially equivalent, making the use of estimates mere harmless error that comes out in the wash? Or do we think that the special incentives built into the system by billable hour rewards might, just might, encourage lawyers to estimate and record on the high side the number of six minute increments dedicated to any given task?

This distortive effect is undoubtedly compounded as the associate contemplates the day of reckoning: the end of the fiscal year. Am I close to the minimum requirement? To getting the next available bonus? If so, can I find some more work? Stretch out what I have? Or "borrow" work that I know I’ll be doing next year? I’ll just record extra time doing document review now and then do it for free come January.

Or what if I am already over and can’t get close to the next higher goal? I’ll work hard now, but not enter my time into the system. Then when January comes my "banked" November and December time will give me a big head start in 2007. Nothing wrong with that, both fictitious lawyers easily rationalize, as they game a system whose absurdities are manifest.

All of which says nothing about the unspeakable possibilities. Short on hours? Need a few to achieve the minimum requirement? The next highest goal? Who can really say all the research for this memorandum only required three hours? I’ll just read a few more cases to make sure I’ve got it right. Or see if there are any law review articles on point. Or maybe I can draft a memorandum to the client. Write a few letters. Prepare a memo to the file documenting my work. I am just being careful, precise, conscientious, avoiding malpractice — all admirable goals worthy of nothing but high praise.

And then there is the most unspeakable effect of all. No one follows me around. No one really knows how much time I spent reviewing these documents in a lonely warehouse. Yet since I worked so efficiently isn’t it fair to record an extra hour or two? No, not an even hour. How about 1.3 hours? Or that last memorandum took 2.4 hours but was worth so much more. What an insight I had! It’s clearly worth, shall we say, 8.6? Or while I traveled for and billed Client A, I was working on Client B’s matters. Shouldn’t they both pay for my six hour flight to L.A.? Twelve added billable hours credited to my account.

Yes, we hate to admit it, but even among the legal profession there are those who would work extra slowly or record phantom hours, hours not dedicated to the client’s matters, but hours nonetheless "earned," hours the lawyer is entitled to record to reflect the efficiency or excellence of the work that was performed, rationalizations that permit the surreptitious rewriting of a billable hours retainer agreement to include new qualitative terms that always result in an uptick in the bill, but that no one gets around to confirming with the client.

Bad Policy
Even if billable hours were scrupulously and honestly kept for only those tasks efficiently performed and essential to serving the best interests of the client, it still would be the wrong way to award bonuses to associates for a number of different reasons.

The purpose of having a billable hour requirement is to make sure every highly paid associate is dedicated to hard work. Caldwell & Moore doesn’t want to continue to employ those who don’t "earn" their $125,000 per annum first year salary. And it is undoubtedly true that some associates may not actively seek out work, may leave early or arrive late, are never available when the legitimate demands of the practice require extraordinary efforts, even all-nighters and seven-days-per-week commitment. Nor do I suggest for a moment that law firms may not design a program to ferret them out and either reform their conduct or terminate their employment.

But, because it fails to distinguish among very different situations, establishing a billable hour requirement is a ham-handed way of accomplishing this goal. While it is true Caldwell & Moore should want to reward hard work, lack of hours may not be the associate’s fault. The ready, willing and able associate may be assigned to a department that does not generate the outsized tasks (interminable depositions or endless closings) that generate the high hours. Or by virtue of the assignment luck of the draw, the associate may not have been given the "opportunity" to spend hundreds of billable hours staring at a computer screen reviewing documents for attorney-client and attorney work product privilege. Or an associate may need to be on a reduced schedule to care for a child or an elderly parent or simply to maintain some balance in his or her life. Being put in this position by necessity or choice, it would be totally fair to conclude that the affected associate is not eligible for a billable hour bonus, but when that is the only basis on which associate bonuses are awarded, the firm has missed a chance to reward real talent for other meritorious accomplishments.

Put simply, looking at a chart of associate annual hours does provide a method of awarding bonuses with apparent precision, but its simplicity of application belies the fact that not all similar billable hour statistics reflect similar situations — or anything close to it. For that reason, it is critical that the firm embarked on such a billable hour reward and punishment enterprise must go behind the stark numbers on the computer printout to understand why the numbers are what they are, whether they reflect sloth or some failure on the part of the firm to provide sufficient work, allocate work fairly, or otherwise give the affected associate appropriate opportunities. A failure to take this nuanced approach, while surely reducing administrative time, breeds resentment among the associate corps, directed at both their "fortunate" colleagues pocketing the extra bonuses and the partners who use such a mechanical measure for allocating rewards.

The use of billable hour bonuses also only focuses on one narrow dimension of an associate’s total performance. Think for a moment about the questionnaire we know Caldwell & Moore uses to evaluate associates. It certainly asks questions about the associate’s ability to research and write, to be responsive, to deal with clients, to follow instructions, to accept increasing responsibility, to take the initiative and to succeed at myriad other activities. Yet when it comes to bonuses, Caldwell & Moore only rewards associates on the basis of billable hours. Where is the bonus for the brilliant brief, the riveting oral argument, the call the associate got directly from the client with new business for the firm, the imaginative idea that saved the client thousands of dollars? To make judgments like these certainly takes more familiarity with what associates are doing and how they are doing it than to look at the billable hour chart, but surely Caldwell & Moore owes its associates the awarding of bonuses (if any there shall be) on qualitative factors at least as much (I would say far more) as it does on raw billable hour totals. Far more important, Caldwell & Moore owes its clients the knowledge that when the client’s law firm rewards its professionals for work done on behalf of the firm’s clients, it values excellence, imagination, cost-savings, efficiencies and speed at least as much (again, I would say far more) as it values the accumulation of hour upon hour of professional services. In fact, should not clients be assured that if Caldwell & Moore rewards the achievement of billable hour thresholds, those rewards will only be granted if the hours are not just calculated but also evaluated for their necessity and competence?

Think for a moment, moreover, about what a billable hour reward and punishment system says about where the law firm’s real values are. The hiring literature, the firm website, the summer associate presentations all may talk about a balanced life. Many firms have enshrined the work-life balance in their mission statement. But the true firm commitment to that concept is found, not in what the firm says, but in what it does. And what it does when it engraves its devotion to high billable hours in a billable hour reward and punishment system is to tell associates that the rhetoric of work-life balance is just so many eloquent but meaningless words. The real message — the one that counts — is that Caldwell & Moore is a sweat shop and the more you sweat the more you will be rewarded with bonuses now and with the fruits of the bonus-striving of associates later if you bill enough hours to become a partner.

Does it Count?
No. The answer to the question is no. Does (fill in the blank non-billable activity) count as billable hours for purposes of bonuses? That is the question out of every naïve associate’s mouth. The sophisticated already know — whatever the activity, no matter how important to the health of the firm or the good of the poor — it doesn’t really count. Hiring, pro bono, bar association work, writing an article, attending a CLE. Oh, sure, some firms pay lip service to permitting these hours dedicated to these frill endeavors to "count." But remember we are talking about billable hour goals. And that is because ever higher billable hours are what Caldwell & Moore is trying to achieve. So every time it agrees to "count" something that is not a billable hour as if it were, Caldwell & Moore might end up saying a given associate has met the minimum goal or even earned a bonus. But the firm does so with its collective fingers crossed, with more than a little reluctance, with a grudging admission that to do otherwise in public would be unseemly. Yet any associate who thinks these non-billable hours really count in the same way real billable, likely-to-yield-$200-or-more-dollars-per-hour hours count was born yesterday. If it were otherwise, the firm would never have instituted such a unitary bonus system in the first place.

The Solution
In fact, all of these activities must count. In the long run, Caldwell & Moore will only succeed if its lawyers dedicate themselves with real quality time to hiring and retaining the very best talent, training the firm’s lawyers to perform at the highest professional level, mentoring associates to become partners, developing a real diversity program that recruits, retains and promotes women and minorities. Moreover, the profession of law will only survive if lawyers — including Caldwell & Moore lawyers — dedicate themselves to pro bono, bar association work, continuing legal education and the greater civic good of the community.

But, instead of making these "non-productive" hours count in a billable hour bonus system, the entire rewards and punishments for billable hours method should be jettisoned in favor of a system of rewards and punishments that rewards excellence, innovation, imagination, savings for the client, pro bono dedication, bar association commitment, hiring, mentoring and training, diversity, and all of the other characteristics that yield a rich fulfilling professional life.

Consider the following mythical memo:

TO: All Associates
FROM: Management Committee, Caldwell & Moore
RE:
Compensation

The Managing Partners of Caldwell & Moore have spent the last year studying the way in which we compensate and provide bonuses to our associates. As a result, we are announcing, effective as of the beginning of the firm’s next fiscal year, a new basis on which our associates will be rewarded for outstanding achievement.

Salaries
Effective July 1, 2007, our starting salary will be $135,000 for all full-time associates. Base salaries for associates in years two through six will increase by $10,000 and in years seven and eight by $15,000 each year.

Elimination of Billable Hour Bonuses
At the same time, we are eliminating any bonus system based solely on billable hours. We recognize that such a system is not only inconsistent with our commitment to our clients, but also both an unfair way of compensating associates and inconsistent with our desire to encourage some of the non-billable activities our firm and our profession must value.

This does not mean we do not expect hard work from our associates. Caldwell & Moore is a business in a competitive marketplace. We pay competitive salaries and expect every associate to be committed to earning such generous compensation. Indeed, bonuses will be awarded to those associates who make an extraordinary commitment in terms of time. It is simply that these bonuses in the future will not be tied automatically to the achievement of any given number of billable hours and will only be granted in light of a number of other factors described more fully below.

The Bonus System
Bonuses can be earned by all but first-year associates. Bonuses will be rewarded at the sole discretion of the firm in amounts that will be significant, but without regard to any formula.

Professional Services
With respect to work for clients, associates may earn bonuses not only for the number of hours dedicated, but also for the quality of the work and imaginative ideas that advance the interests of our clients. To consider the latter, we will be asking partners to make an evaluation of each associate’s hours in terms of efficiency, diligence and necessity, and to nominate for bonuses those associates whose initiatives saved clients money or whose ideas enhanced clients’ likelihood of achieving their goals.

Firm Activities
It is just as important for the firm to hire, retain and promote a talented, diverse associate corps. To that end, bonuses will be rewarded for recruiting, training and mentoring hours and initiatives in the same way as work on client matters. Similarly, service on the associates committee, if undertaken in a dedicated and effective way, may result in an award of a bonus to the associates involved.

Pro Bono
In the past, the firm "counted" so many hours of pro bono. Beyond that level, the associate had to seek a waiver for the hours to count. We know this misled some associates into believing that pro bono really did not count, discouraging them from undertaking pro bono engagements. It is Caldwell & Moore’s policy to encourage and support pro bono endeavors. The firm would like to achieve 100 percent participation by all of its lawyers at a level of 50 hours per year within the next three years. Meanwhile, the firm recognizes that pro bono engagements do not come in 50-hour assignment blocks. Henceforth, once an associate undertakes an approved pro bono matter for the firm, it will be treated like any other firm matter. Associates will be expected to dedicate all necessary time and effort to the matter. And associates can expect that in the evaluation of their commitment and hard work, the firm will count all of their pro bono hours — so long as they meet the same criteria of necessity and competence as all other hours — toward the awarding of any bonuses. Our pro bono clients are not second-class citizens, and we do not want any associate to feel that our compensation system is inconsistent with that principle.

Bar Association and Other Civic Endeavors
Our lawyers’ obligations do not end with commitment to clients — both paying and pro bono — and to the firm. Caldwell & Moore is a leader of the profession. We expect our lawyers to get involved in the organized bar by serving in leadership positions, writing articles and books, presenting at continuing legal education seminars. Similarly, our lawyers should serve as leaders of the larger community. School boards, houses of worship, charitable and arts organizations and similar endeavors all will benefit from the leadership of Caldwell & Moore lawyers. You can expect to be evaluated on your participation in these activities and for bonuses for outstanding accomplishments in this area to be awarded in the same way as for other achievements.

Work-Life Balance
While Caldwell & Moore expects extra effort from all of its lawyers, we recognize that the number of hours a lawyer is able to devote to all of the activities listed above varies widely because of the necessity of fulfilling even more important personal obligations, such as child-rearing or other family obligations. We also recognize that some of you have made lifestyle choices that are inconsistent with 2,000 or more hours per year of professional time. Though those circumstances or choices may mean that you will not earn bonuses for your number of hours, Caldwell & Moore wants to emphasize that you will still be eligible for bonuses for the quality of your work, your imagination and skill, and for the other firm activities should your qualitative performance warrant it.

Business Generation
Though it is rare for associates to bring in significant business, any business generated by an associate will be evaluated in terms of the revenues generated and the quality of the work for possible bonus awards. Far more important, associates will be evaluated in terms of the foundation they are laying during their associate years for business generation thereafter. Is the associate dealing well with clients, making a name for herself in her field, writing articles, appearing in CLE’s, taking leadership in young lawyer divisions of the various bar associations, joining civic and charitable organizations, developing a marketable specialty? Professional life is a long journey, but the first seven years of the trip set the course for all that follows. The associate who does this in an outstanding way can expect to be considered for bonuses based on how he or she starts his or her professional journey.

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Having read the memorandum, the reader undoubtedly thinks I’ve been smoking a controlled substance. Admittedly, it is way too easy to craft such a memo when you do not have to consult eight other managing partners, a firm executive and chief financial officer or 135 partners. But it does seem to me that, though my offering does not reflect the perfect antidote to billable hour punishments and rewards, nor the perfect solution to so many other ills in the modern law firm, it could open a dialogue not only on how this memorandum to associates should read, but also how the modern American law firm must change to raise the bar to the level of professional commitment, professional responsibility and professional rewards the profession must offer, not just to associates, but to all lawyers.

Anticipating the Critics
This diatribe has already drawn considerable dissent. Perhaps it will draw more. I certainly welcome the dialogue. But permit me to answer in advance a few of my critics.

It has been asserted that my concern about the recording of billable hours is slanderous, that I am accusing the profession of wholesale fraud. That is certainly not my intent. But we also cannot blind ourselves to four things. First, there have been far too many documented cases of billable hour abuse. From the case of the celebrated Chicago law firm partner billing more than 6,022 hours in one year,1 to Lisa Lerman’s catalogue of overbilling, expense padding and other criminal conduct by 16 high profile lawyers at prestigious American Lawyer 200 law firms,2 to think our profession is pristine is to ignore the facts. Second, I am much more focused on the subtle effects that billable hour quotas and rewards create then I am on out-and-out fraud. To suggest that these effects are not likely is to assume lawyers are not human beings, when we know all too well that they are. Third, even if lawyers were perfect, it is impossible to think that we are carrying the right message to our firm colleagues — when we employ billable hour requirements and provide billable hour bonuses — about the importance we place on non-billable activities. Fourth, and most important, we are a profession that owes all these duties to our clients; they are our raison d’être, and how must they feel if they know this is the basis on which lawyers working on their matters are rewarded? Consider again the mythical three-hour root canal procedure to capture the point.

It has also been argued that associates really want to be rewarded this way, they like the certainty of knowing that if they put in exactly 2,103 hours they will achieve the 2,000-hour bonus and the 2,100-hour extra bonus. This argument proves my point. While there is so much associates hate about our billable hour culture, of course they do like certainty. Everyone likes certainty. And knowing that I’ve got a lock on an extra $15,000 so long as I spend New Year’s Eve in front of a CRT reviewing documents for privilege-guaranteeing compensation that will pay for far more than my midnight champagne makes me feel warm and fuzzy all over. But the certainty that arises from no more than the writing down of a pre-stipulated number of hours is not a desired result. Rather an associate should know that his or her lawyers’ hours will be evaluated for quantity for sure, but also for quality, for innovation, for benefit to the client, and that the associate’s non-billable hours will be evaluated too, and then — no certainty here — the associate may get a bonus if this overall review yields the conclusion that the associate is entitled to a bonus. Is it subjective? To be sure. But we are lawyers, producing legal work, running law firms, preserving a threatened profession, and there is no way a lawyer’s contribution to those goals should be evaluated in other than a qualitative, albeit subjective, way. Leave it to the production line employees installing windshields and rearview mirrors to get compensated by purely objective criteria.

Last, I have been confronted by those who say that far too many firms operate this way to change things now. Indeed, I have been accused of systematically seeking to change virtually the whole big firm business model.

To this I plead guilty. My experience with the Raise the Bar Project has convinced me of two things. First, our problems are profound and deeply troubling. Any enterprise that loses 78 percent of its new hires in the first three years is in a state of crisis. Second, we must change the way we do business other than incrementally if we are going to turn the ship of state around. Half-measures will not work. Maybe this idea will not work either. But in our search for solutions we will have to develop ideas that change in some dramatic way the manner in which we do business, that overcome the litany of problems — too long to repeat here — that started the Section of Litigation to declare: enough of decrying the current state of affairs, let us find solutions, the goal of the project and this article.

Endnotes

1. "Chapman & Cutler Axes 17 Firm Staff," Chicago Daily Law Bulletin, March 22, 1995.

2. Lisa G. Lerman, Blue-Chip Bilking: Regulation of Billing and Expense Fraud by Lawyers, 12 Geo. J. Ethics 205 (1999); see Bill Padding Happens, Legal Times, Oct. 18, 2004.

ABOUT THE AUTHOR
Lawrence J. Fox is a partner with Drinker Biddle & Reath LLP, Philadelphia, Pa.

This article grew out of the author’s work as co-chair of the ABA Section of Litigation’s Raise the Bar Project launched by Section Chair Brad Brian in 2004. The project is designed to seek solutions to many of the problems that currently plague the legal profession, particularly in the large firm arena. This article is a work in progress, which the author hopes to include in a book the Section of Litigation will publish addressing many Raise the Bar issues.

This article originally appeared in The Professional Lawyer (Vol. 17, No. 3) and is reprinted with permission.

© 2007 Lawrence J. Fox


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