Billable Hours vs. Flat Fees


Today’s Wall Street Journal has an article on how companies are starting to insist on flat fees for legal services. In the economic recession, companies are starting to complain that lawyers billing by the hour (or the tenth of the hour) only creates incentives for those lawyers to work inefficiently and rack up higher fees.

And of course that’s true. But people forget that it was clients, not lawyers, who first insisted on billing by the hour.

Most lawyers perform transactional services. A lot of this work requires little original effort — the vast majority of corporate formations, contracts, wills, filings, etc. are practically boilerplate. There’s no new research to do, nobody needs to write anything from scratch. Just fill in the names and a few key variables, and the work is done.

Back in the day, lawyers charged flat fees for these services. You want a lease? That’ll be fifty bucks. And everyone paid the same amount, because fees were fixed by the bar associations.

But then clients objected, asking why they should pay fifty bucks for a document that took five minutes to prepare.

So clients started to insist on paying only for the work that their lawyers actually did. They didn’t want to pay for the value of a service, but rather for the time spent performing it.

Lawyers, for the most part, are not dummies. They readily adopted this new way of doing business. Their incentives changed, predictably. Away went the fixed-fee focus on getting the client a desired outcome, and in came the hourly-fee incentive to provide as many incremental services as one could get away with.

By the 1970s, the billable hour had pretty much supplanted the a la carte fees of yore. Now, that fifty-dollar contract had blossomed into several hours of research delegated to a junior lawyer, more hours of legal memoranda summarizing that research for partners who probably already knew it, more hours of drafting and revising, plus phone calls and travel time and meetings and so on.


Billing by the hour is not necessarily a bad thing. The client gets to see exactly what work is being done for him (if the bill is reasonably itemized). And although there is a real incentive to maximize billable hours, most attorneys we know are professional enough not to pad their bills with unnecessary or duplicative work. (Not saying it doesn’t happen, only that we haven’t had the pleasure of associating with such lawyers.)

Billing by the hour can actually be a bad thing if one happens to be the kind of lawyer who gets results. The lawyer who gets the job done, not just well, but soon. That lawyer has a happy client, but if he’s getting paid by the hour he’s not making a lot of money.

So there are plenty of lawyers who already charge flat fees, or minimum fees. These are very often criminal defense attorneys. The client doesn’t care so much about how many hours you spent researching the law of search and seizure, he just wants the evidence suppressed. He doesn’t care how hard you worked to negotiate a better deal, he just wants the deal.

When the client is concerned with the results, not how they were achieved, the billable hour makes little sense. The client should pay for the value of the service rendered.

That does not mean paying more for better results — that’s not ethical. What it means is, the lawyer can charge five grand to knock out a misdemeanor, even though it didn’t take five thousand dollars’ worth of time, because that’s what that outcome happens to be worth where he practices.


The big problem we have with this whole discussion is that the participants keep talking about the law as if it is a business. Firms are all about maximizing revenues and profits, we hear. Flat fees are going to cost the same, or more, because the firms will calculate what they would have billed anyway, and add in a fudge factor. And clients will suffer when firms focus their energies on the hourly work, perceiving time spent on flat-fee work as an opportunity cost. And without the billable hour, there is little justification for all the junior associates who generate so much hourly revenue (or their salaries).

But the law is NOT a business. The practice of law is NOT about making money. The practice of law is a profession.

There are only three professions: medicine, the clergy and the law. What sets the professions apart from businesses is that the point is not to make money. Profits are not the point. The only thing that matters is caring for the patient, tending the flock, and representing the client. The client’s interests are paramount. The lawyer owes his loyalty not to his firm, not to any shareholders, but to the client he represents.

The second a lawyer or law firm starts focusing on maximizing revenue, they stop being professionals. There is no reason why lawyers should not be compensated for their representation. And there is no reason why that compensation should not be handsome, when the representation is valuable. (We charge far more than the average lawyer, for example, but we like to think we’re worth it.) Nevertheless, making money must never be the point of doing the work.

So to those who bitch and moan about how switching to flat fees would hurt their bottom line, we can only say that they should stop thinking like shopkeepers and start acting like professionals.

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1 Response

  1. Nice post. I’d enjoy reading a follow up.

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