Law firms’ love affair with the billable hour is fading

Corporate clients have grumbled about the billable hour for years. It has been blamed for high rates of burnout in the legal profession.

Critics say charging by the hour is inefficient and opaque, yet it remains the mainstay of how most law firms charge clients for their work. Lawyers log their time in six-minute increments and are expected to bill 1,700 to 2,500 hours a year, or up to 7.5 hours a day. The system piles pressure on lawyers to hit demanding targets.

Law firms often cannot say exactly how much a piece of legal work will cost and this uncertainty means corporate clients often get a nasty shock when the final bill comes in.

Jim Diamond, a UK legal cost analyst and author of a 2016 report on law firm billing for the Centre for Policy Studies think-tank, says clients are often reluctant to challenge law firms even if they are paying hundreds of pounds per hour for a junior lawyer.

“The billable hour is still the basis of it all. I am seeing time-dumping on a scale I have not seen before,” he says. “If you are paying £1,000 an hour for a top tax expert that is one thing but what about paying £350 or £400 an hour for a 25-year-old with little experience?”

What about paying £350 or £400 an hour for a 25-year-old with little experience?

Some big organisations in the UK and Europe have taken a stand by asking law firms for capped or fixed fees, or by refusing to pay for some types of work. Deutsche Bank sent shockwaves through the industry in 2017 when it said it would no longer pay for work by trainee lawyers.

Others have not followed suit, however. “There is still a nervousness among clients about damaging the relationship with their law firms,” says Mr Diamond.

Trial judges in the English courts have also raised concerns about costs. Last year High Court judge George Leggatt said a £1.47m legal bill submitted for a lawsuit involving Dana Gas was “unsustainable” and noted six fee-earners had their time charged at hourly rates of more than £700, with a top rate of £946. Trainees were charged out at £282 an hour.

Yet law firms, especially in the US, appear wedded to the billable hour. This is partly because of uncertainty in long-running lawsuits or M&A deals where billing is complex and can vary between industry, types of work and risk.

Technology is helping to change this. Some legal start-ups are crunching data based on previous cases, which predicts how long tasks will take and is the first step towards being able to price future assignments in a different way.

San Francisco tech start-up Ping, founded by Ryan Alshak who trained as a corporate litigator, takes this a step further. The tech learns the way each lawyer works and can track a lawyer’s activities minute by minute to create detailed time sheets of their weekly working hours automatically — rather than the lawyer filling in their own time sheets, often retrospectively.

“In order to get off the billable hour, you have to first understand it,” Mr Alshak says. “There are inefficiencies in the way the system works once you start to understand how lawyers work and how they use that time.”

“If you have a non-disclosure agreement, for example, it looks at what the NDA is, who is doing it, what experience they have, what is their billing rate and you have got an idea what it looks like . . . a law firm can tell clients this task will cost X.” He says the use of data to crunch the timekeeping is a key shift, particularly as lawyers tend to submit their own timekeeping in an unstructured way that is difficult to analyse.

Towards fixed fees

Other legal start-ups are using tech and data in different ways to connect lawyers with businesses and offer more price transparency.

New York-based start-up Priori Legal, founded by lawyers Basha Rubin and Mirra Levitt who met at Yale Law School, helps clients select boutique law firms that are best suited to a task at lower prices than they have paid before. Priori connects work with external lawyers or boutique law firms who submit bids.

We will let lawyers know where their bids sit . . . often they reduce their bids and reduce prices

Lawyers on the platform are vetted and must give detailed information about previous experience such as court cases or contract types It uses an algorithm to match requests with the best law firm or individual and tells lawyers where they sit in the bidding process.

“The billable hour is dying a slow death and we see increased interest in ways to move away from it,” says Ms Rubin. The data allows the tech to match more suitable lawyers with cases, and give clients more agency in the process. She cites a client that was helped to hire a specific lawyer who had negotiated a particular agreement with a specific counterparty.

Ms Levitt adds: “We will let lawyers know where their bids sit . . .  They then have the opportunity to review it but they don’t have to, although often they reduce their bids and reduce prices.”

This use of technology and granular data is the first step in allowing law firms to be able to quote prices with certainty — a move away from the billable hour and towards fixed fees or capped prices. For overworked lawyers and their clients this may come as a welcome relief, for both sides.

The case studies below showcase combining the use of data and technology in business operations. They were compiled by RSG Consulting.

Case studies: automation slashes the cost of using outside counsel

WINNER
Accenture
Professional services firm Accenture has been remodelling its legal department since 2013. For contracting, it created two workflows: “complex”, to be dealt with by senior lawyers, and “transaction”, to be handled by junior lawyers working offshore and using automation. By 2018, it had cut the cost of outside counsel by 70 per cent. It has also cut the cost of drafting and processing contracts.

Applied Materials and Wolters Kluwer’s ELM Solutions
Electronics maker Applied Materials replaced its manual review of invoices with an AI-enabled product from Wolters Kluwer ELM Solutions. It picks up non-compliant entries and returns them for review, with 90 per cent accuracy. As well as saving 10 per cent on invoice review processes and increasing guideline compliance by up to five times, it flags areas for improvement.

Columbia Sportswear and Thomson Reuters Legal Tracker
Columbia Sportswear uses Thomson Reuters’ Legal Tracker software to manage its work with outside counsel, including document management, ebilling and reporting. Columbia has made significant savings and has a better insight into its relationship with panel firms and has been able to establish flat fee arrangements for certain matters.

D2 Legal Technology
D2 Legal Technology developed a platform for 15 financial institutions to give legal opinions on the enforceability of close-out netting and collateral in master trading agreements, which reduce the capital needed to comply with banking rules. The opinions must account for regulatory updates and are specific to institution and trading agreement. By consolidating the advice from law firms, the platform cuts legal advice costs by 40 per cent, it says.

Fitbit, Elevate, Ironclad, Onna and SimpleLegal
Fitbit, the health tech company, works with various providers to increase efficiency and manage legal spending. It teamed up with law company Elevate to improve its contract management process and in 2018 used Ironclad software to automate half its contract workflow. Outside counsel spending is managed using software from SimpleLegal. Data integration platform Onna provides a central point for all the information.

Persuit
Persuit is an easy-to-use procurement platform that cuts the costs of buying outside lawyers. It compares firms’ proposals and ranks them on metrics such as price and quality of service. Its real-time live auction capability reduces the gap between quotes. Average savings for most users is around 20 per cent of doing legal procurement without the tool.

Gilead Sciences and Mitratech
When biopharma company Gilead’s legal operations team overhauled its legal tech, it moved to Mitratech’s software tools to manage ebilling, workflows and collecting data. It halved time spent opening new matters and saved 3 per cent on external counsel costs. The tools allow legal information to be integrated across the business.

Hearst and Priori Legal
Priori Legal supplies temporary attorneys that are sourced, assessed and paid for on the company’s tech platform. Working for media company Hearst, Priori helped it make savings of 60 per cent on legal spending and cut time spent on administrative tasks by 80 per cent.

L’Oréal Australia and New Zealand and Plexus Legal
The legal teams at L’Oréal in Australia and New Zealand have worked with Plexus, a virtual law and tech company, to increase efficiency and cut the cost of outside counsel. Using Plexus’s tool, L’Oréal can manage its own low-risk but high-volume legal contracts such as non-disclosure agreements, using 14 legal tech applications.

Univar and Elevate
In 2018, global chemical distributor Univar reconfigured its law department workflows using Elevate, the law company. Everyday litigation matters are handled on a fixed-fee basis by ElevateNext, a new model law firm, which has significantly cut the number of cases handled.