77 Judicature 191 (1993-1994)
Reforming the Lawyer-Client Relationship through Alternative Billing Methods

handle is hein.journals/judica77 and id is 205 raw text is: Reforming the lawyer-client
relationship through alternative
billing methods
Clients and law firms alike should consider alternatives to the
billable hour that would promote greater efficiency in legal work.
by Robert E. Litan and Steven C. Salop

]   E    he topic of legal fees once
was one of those subjects law-
yers didn't discuss in polite
company. Fees     were   dis-
cretely mentioned to clients. The attorney
who attempted to gather business by
offering lower rates was the exception
rather than the rule.
But for the past several decades, it
generally has been understood that
lawyers charge by the hour, at rates ac-
cording to their experience and exper-
tise. It was not always this way. Before
World War II, attorneys generally
charged on a contingency or fixed fee
basis, and few kept track of their time.'
Lawyers with continuing corporate
work often would bill their clients at
the end of the year for what they
thought their services were worth.
Only as law firms grew in size did attor-
neys turn to the hourly fee, a billing
arrangement that literally has trans-
formed the structure of the legal pro-
fession. Today, the marketing prac-
tices, budgets, and personnel practices
This article is adapted from a paper titled More
Value for the Legal Dollar: A New Look At Attor-
ney Client Fees and Relationships prepared for
the Section of Litigation program Value Billing
and Gaining a Competitive Advantage in the Le-
gal Marketplace presented at the 1992 American
Bar Association annual meeting. 1992 American
Bar Association Section of Litigation-All Rights
Reserved. Used with permission. Funding for the
paper was provided by the Aetna Life & Casualty
Company.
1. Well before that, legal fees in both England
and the United States were subject to statutory or

of law firms are all built around the
billable hour.2
In light of the disincentives hourly
fee arrangements can create for deliv-
ering legal services in a cost-effective
manner, this article provides some
analytical guidance to purchasers of
legal services, principally business cli-
ents, interested in obtaining more
value for the legal dollars they
spend, as well as to law firms eager to
gain business from such clients. The
analysis is meant to cover a wide range
of possible matters, including transac-
tional work, counseling and advice,
lobbying, and litigation.
It should be emphasized at the out-
set that the proper objective for clients
in all legal matters is not to minimize
legal expenditures. Like the firm or in-
dividual whose main objective is to
minimize taxes regardless of other con-
sequences, those who have the same at-
titude toward legal services almost cer-
tainly will be the poorer for it. Instead,
firms should maximize net value--gross
regulatory prohibitions against charging exces-
sive fees. The Field Code, adopted in 1848 by
New York, repealed the statutory regulations of at-
torneys' fees and legitimized contingency fees in
particular. For historical background, see Brick-
man, Contingent Fees Without Contingencies: Hamlet
Without The Prince Of Denmark?, 37 UCLA L. REV.
29-137 (1989) and Ross, The Ethics of Hourly Billing
By Attorneys, 44 RUTGERS L. REV. 1-100 (1991).
2. For a brief, excellent description of this pro-
cess, as well as a strong critique, see Hazard, Ethics,
National LawJournal, February 17, 1992, at 19.

value minus any legal costs-in activi-
ties requiring legal services.
Problems with hourly fees
The American Bar Association's Model
Rules of Professional Conduct provide
relatively little guidance to attorneys in
billing, cautioning only that the law-
yer's fee shall be reasonable (Rule
1.5 (a)). In determining whether a fee
is reasonable, the rules list eight gen-
eral factors, one of which is the time
and labor required to complete the
matter. The other factors-which in-
clude the novelty and difficulty of the
questions involved, the skill required
to perform the service, the fee custom-
arily charged in the locality for similar
services, the amount involved, the re-
sults obtained, and the attorney's expe-
rience, reputation, and ability-could
be used to determine the hourly fee or
the level of any other compensation
scheme, such as a fixed fee.
Nevertheless, hourly billing has
come to be the overwhelmingly domi-
nant fee arrangement for legal ser-
vices. For example, one recent survey
of almost 300 private attorneys found
that in more than 97 percent of the law
firms represented, hourly billing is the
principal type of billing. In addition,
more than 92 percent of the 80 corpo-
rate counsel who responded to the sur-
vey reported that either most or
all billing from outside counsel is

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