A walking shadow (#2 of 5)

Graeme Johnston / 17 February 2023

‘You have your principles, but then there is also the commercial reality’

Head of a specialist litigation function at a law firm, quoted by the Solicitors Regulation Authority – 14 February 2023

This is the second post in a series of five about time recording in legal services. The first post discussed its history. The next three will be more interpretive. But this one seeks to capture where we now are, with a focus on England & Wales (E&W) and the United States.

This raises two main challenges:

• Even in those two places (a bit over half the global legal services market by $), legal services cover a lot of different kinds of legal issues, in different places, for very different people and contexts.
• Data is patchy and often tells you much less than claimed by those promoting it (examples below)

I’ve looked at a huge amount of material on this topic and have followed it for many years now, but don’t want to produce something that’s either unreadably long or short-but-vague. 

Instead, I’ve decided to try to get to the point succinctly by using three snapshots, each with limited external links. I’ve chosen them because I believe them to be representative of important dimensions.

1. Pricing for large businesses

Back in 2007, Daniel J. DiLucchio, of the leading American legal industry consulting/analysis firm Altman Weil, wrote that alternatives to time-based billing (AFAs – ‘alternative fee arrangements’) had been discussed for decades but that there had been little progress. 

A decade and a half later, what’s changed?

• Most enterprises in the US and UK use some kind of AFA, sometimes. But so far as I can tell from various sources and conversations – and really good data is lacking – most legal costs are still fundamentally time-based.
• Sometimes ‘AFA’ is used for things where the departure from time-based billing is almost trivial: I recall, for instance, when working with a corporate, that they were most frustrated with a firm which proposed to apply the term to a proposal which involved not delivering some bills until the next financial year. A proposal which didn’t in fact help, for various reasons.
• More commonly, ‘AFA’ is used for divergences from basic time-based billing that are non-trivial but still fairly minor variants, such as
  • time-based billing with volume discounts simple or otherwise (e.g. ‘caps and collars’) – a famously naive approach from corporate buyers has been to negotiate down the hourly rate yet find themselves hit with numbers of hours which they fear may be inflated,
  • time-based billing with fee caps,
  • time-based billing with ‘blended’ hourly rates (i.e. same rate irrespective of the seniority of the lawyer).
• There have also been some efforts to vary pricing according to specific factors other than value/risk (implicit in the sourcing decision made), time spent and outcome that the client values. An example is responsiveness – in effect, a service level agreement. That can obviously be taken so so far, though.
• The term AFA is also used for arrangements for complex matters that are more distant from time-based billing:
  • ‘retainers’ / fixed monthly fees
  • fixed fees agreed in a bespoke way for a particular phase
  • or even for a particular (usually small or moderate-sized) matter.
• There are two limitations with a lot of thing:
  • First, so far as I can tell only a minority of spend on genuinely complex matters is handled this way, as the transactional (again, time-related) costs of negotiating such fees are just too high.
  • Second, such fees as are agreed are sometimes undermined by an insistence on ‘shadow billing’ i.e. delivery of information about what the work would have cost if billed on an hourly rate basis. This is supposedly with a view to testing whether the fixed fee represents ‘value for money’ but in reality (and rather obviously) incentivising the provider to ‘dump time’ on the file in order to give the illusion of value. Thereby making the client’s buying agent (e.g. an in-house lawyer) ‘look smart’ while delivering revenues to the vendor. From what I’ve seen helping corporates look at their pricing, some law firms have become quite proficient at this.

All that said:

• There has been some real progress in the years since 2007 in using non-time-based fees for work which is not complex in the sense of unknowable, and which can be priced by a volume based measure, often document or transaction based. To be fair, that never went away in some areas – for portfolios of certain types of rather predictable litigation claims and highly document-driven work (e.g. for financial services institutions). But there does appear to have been some ‘reclaiming’ of such work from the world of time-recording in recent years, encouraged by the focus by process outsourcers (aka managed legal services providers) and some law firms on a much more ‘industrial’ process and tools.
• But I also think it’s fair to say that the structure of pricing for a lot of legal work hasn’t changed in the ‘disruptive’ way which was being predicted by many around ten years ago. The challenge and complexity have proved greater than expected.
• There are some ongoing efforts to challenge the somewhat use of ‘alternative’ as a phrase for fee arrangements and organisations which depart from time-based billing. I think that’s a good thing, as the word tends to validate the time-based approach.

2. Pricing for consumers and small businesses

In November 2020, the UK Competition & Markets Authority (CMA) and Legal Services Board (LSB) published their latest E&W pricing research.

The link is here if you would like to read it, but the gist is that there is huge variance, quite a lot of fixed pricing these days and also greater transparency following regulatory requirements for prices for consumer and certain types of small business work to be published on websites.

Still quite early days since the regulatory requirements were introduced but also an encouraging story, in my view, of what can be achieved by smart regulation in circumstances of (in my view) a free market which had hitherto failed to deliver.

There are also some interesting experiments about to go live in E&W, in October 2023, to extend the scope of ‘fixed recoverable costs’ for what ought to be relatively small-scale litigation in E&W. This is in the expectation that fixing what can be recovered from the losing party will lead parties to moderate the time and money more generally that they spend on litigious bye-ways. We’ll see how things play out, but again some worthwhile experiments in evolving ‘push’ into ‘shove.’

3. Billable hour targets

If you’re reading this article and involved in the US or UK legal sector, you’re probably well aware of the long hours often worked by lawyers.

I’m not going to belabour that, but a couple of observations are:

• So far as I can figure out, ‘billable hour’ targets are very common in UK and US law firms, and even where there are none there are often understood to be expectations. Firms which do not have such targets tend, so far as I can tell, either to be small, largely ‘virtual’ (so no major fixed costs to cover) or doing work which is largely not charged on a ‘per hour’ basis (so that any targets can more sensibly be set in purely financial terms instead)
• Such targets vary quite significantly in UK law firms and there is an increasing effort to make flexibility of working time (e.g. only certain days a week) a reality in the UK. This dimension of competition has become real.
• I don’t know enough about the US market to know if it’s slower than the UK on that, but my general impression is that it may be. Certainly the US firms in London are famous for their much longer working days. See this November 2022 piece by Legal Cheek and note the nationality of most (though not all) of the firms with really long hours cultures.

Three more things worth knowing and thinking about:

• In October 2021, the New York State Bar Association’s Attorney Well-being Taskforce (which has no regulatory authority) suggested capping lawyer billable hours at 1,800 per year. 
• In the UK, working time over 48 hours per week on average is illegal unless certain exceptions apply, the only one potentially relevant to most lawyers being (in the UK government’s official summary) “where working time is not measured and you’re in control, for example you’re a managing executive with control over your decisions.”
• In February 2022, the Solicitors Regulation Authority (SRA) stated that it recognised that legal work ‘can sometimes be pressurised and stressful, involving long hours [and] heavy workloads’ but that it was likely to take enforcement action against ‘the imposition of wholly unreasonable working hours or targets’ – without, however, giving any numerical guidance.

And two final things to reflect on:

• There is competition in other parts of the UK labour market but laws on working hours in industrial jobs have existed since the nineteenth century and there is no serious suggestion that they be repealed. Is legal work different?
• There’s lots of talk about gender diversity in legal work and how the balance changes radically between law students (mostly female) to partners at firms with high billable hours (mostly male). What gives?