Shift from Billing on Hourly Rates towards Value Generated Billing - Essay Example

Legal Professional Conduct: Shift from Billing on Hourly Rates towards Value Generated Billing by the Lawyer for Clients Student’s Name: Name of Institution: Instructor’s Name: Course Code: Date of Submission: Introduction Time costing as a business management tool in law firms was introduced in Australia in 1970s. However, in 1994, the deregulation of fees in New South Wales saw the abolition of scale costs, and time billing became the main model used1. However, in his speech in February 2004, the Chief Justice of NSW, Justice Spigelman questioned the credibility and efficacy of time billing, arguing that it produced perverse results, i.e. there was lack of incentives for legal practitioners or lawyers to work productively and efficiently. These two key factors, he argued, were distorted. NSW’s Legal Professional Act 2004 has been used as the framework for regulating the billing of legal services2. All the while, there has been a debate among legal profession stakeholders on Time billing. Today, more clients in NSW are increasingly calling for a shift from time billing (hourly rates) to value generated billing. Criticizing the Billable Hour According to NYSBA3, the billable hours that individual attorneys worked had been increasing for years. However, in 2008, there was a 12 percent drop in the number of billable hours, i.e. to 1,784 hours. This, NYSBA4 further reports, was as a result of increased pressure by clients demanding for the reduction of service fees. Apparently, this drop ran across the whole market, i.e. in both big and small firms, as well as among both partners and associates. NSW’s Legal Profession Act 2004 has been the key tool for regulating the billing of legal services, e.g. accurate recording of time, prompt time recording and sufficiency of bill detail (i.e. enough information on which a client can soundly evaluate the value of work, i.e. work done against fee charged), billable hours, etc. Unfortunately, this has not been sufficient to most clients. For this reason, the clients in the New South Wales have increasingly demanded partial or full success fees. As a result, focus has shifted from hourly billing to value-generated billing5. Critics of billing by the hour have argued that the approach, by placing emphasis on time as the measure of value rather than client satisfaction or outcome, encourages inefficiency characterized6 by inferior lawyering and abusive practices of billing, and also provides incentives for the unhealthy work values for timekeepers789. Dal Pont notes that the phrases ‘access to lawyers’ and ‘access to legal services’ are more commonly used than ‘access to justice’10. He fears that the emphasis on ‘lawyers’ and ‘legal services’ gives them more prominence from the rather bigger and more important question of ‘justice’, which, he argues, is the chief function of legal system. There are several ways by which ‘lawyers’ and ‘legal services’ factors can impede such access, but the main problem relates to ‘cost’11. The key concern here is that hourly-billing makes access to justice too expensive for some members of society, and especially those who may need it most. These, among other grounds for criticism of the hourly-billing, have prompted increasing calls for alternative methods of charging fee by both clients and commentators in the NSW. Value-based approach, also referred to as ‘task-based’ charging. In other words, lawyers charge fees based on the task (value of task) performed. However, this approach still faces a number of dilemmas. For instance, the proposition to bring in this approach is ‘to favor client interest’. But now the question is, what does ‘client interest’ really entail? Is it monetary or result-wise? In other words, Del Pont (2006) posits, it is difficult to calculate the value for money12. This question hinges on the possibility that clients may be influenced to choose lawyers on the basis of price, and that lawyers would need to show just how cheap their services can be. Also associated with this question what this emphasis on cost could do to the quality of legal services. Ethical Implications to Legal Practitioners The emphasis on time has always opened way for certain practices that have not always been welcomed by clients. Although these practices have not been considered as unethical, value-generated billing is likely to lead to both the redefinition of ethics for legal practitioners and the issues that fall under these new definitions. There are several example, but here are only a few of them. According to Ullrick13, double-billing on recycled work has hardly been viewed as unethical since emphasis is on the amount of time that a lawyer spends on a case. However, double billing is only one factor of ethics that paints the legal profession and the current hourly-billing in a bad light. Another issue that value-generated billing is likely to raise has to do with the disclosure of bills1415. The time-billing does not fully account on how time is spent. This has given lawyers room to exercise unethical ‘time –spending’ habits so as to maximize their profits. The value-generated approach, as has been seen in other jurisdictions, insists on legal practitioners to disclose fully the basis for billing. There are also problematic billing practices. For example, a lawyer may use an old relevant research in a new case. The question is whether the legal practitioner deserves to charge the same amount when actually he/she has not spent the same time16. Value-generated approach helps to deal with such billing problems. Implications on How Lawyers Do Business and the Shaping of Future Legal Services Marketplace So far, the legal services are priced by those who sell the services, e.g. lawyers. Although there are negotiations held between attorney and clients, which gave clients room to decide the costs to pay, it is essentially the service providers who set the terms. In this market where the service providers ‘own’ the market, hourly billing has prevailed. This, as already seen, has meant that clients have limited capacity to restrain the costs of such legal services17. This called-for shift in the legal services market therefore means that some power is taken from the attorney and given to the client, i.e. the legal services market would become a buyer’s (client’s) market18. Clients would then have more power to demand and define ‘value’19. Such ‘definition’ depends on a lot of factors, including production cost, e.g. reasonable profit, outcomes delivered, the cost of comparable services. When clients adopt the value-generated approach to select and pay for legal services, then a number of implications are likely to be witnessed on the people who deliver the legal services and the way they will handle their business. For example, the value-generated billing facilitates and enhances cooperation and collaboration between clients and the lawyers (or law firms). These implications will manifest in a number ways. First, this approach significantly cuts the number of outside firms that clients use20. Second, the criteria for selecting outside firms will be based on their demonstrated efficiency. The result is that several law firms that earn huge profits currently may not enjoy the same profits once this trend is adopted: “at least not for some kinds of work”. In their place, smaller firms that have high expertise, limited leverage needs, relatively low overhead, and proven efficiency may take over21. Third, this trend is also likely to change the internal model of law firms. NYSBA22 argues that although clients do understand that it takes years for law graduates to gain experience, they would not be willing to pay the price of ‘training’ (of graduates). To prove this, NYSBA further notes that clients in countries where value-generated billing has been adopted are increasingly refusing to pay for junior associates to handle their cases. This therefore means that firms may conclude it is more effective and profitable to take in fewer associates, view their training as cost of investment, and make their attorneys stay longer. And those projects that require larger teams of supporting lawyers would increasingly consist of contract lawyers, or be contracted to groups that handle outsourcing of legal processes2324. In the US, noted NYSBA25, changes in how associates are hired, assimilated and finally promoted have been accompanied by the tendencies of firms to merge with either other firms or practice groups. As a result, firms have seen key partners depart, or old firms dissolve or reorganize. The practice environment has thus been seen to develop in flux, and characterized by regular changing of firms and their constituents. These elements have then seen the emergence of multinational law firms with thousands of lawyers26. The ability and capacity of these trends to be seen in NSW as well cannot be dismissed. Besides, it is only practical for this paper to anticipate implications of value-generated billing by looking at the implications it has caused in the places that have already adopted it. Conclusion This paper has provided the basic critical understanding on hourly and value-generated billing in the New South Wales. This paper has also shown that while there is need to review billing methods in the legal profession, the answer is not simple. Value-generated, just like hourly-billing, still carries much dilemma. Nevertheless, it is a sufficient framework upon which to begin considering alternative billing methods. Bibliography Benjamin, R., ‘Challenging the billable hour’, Law Society Journal, 41/1 (2004), 2-5. Dal Pont, G. ‘Lawyers’ charging and access to justice’, 24th AIJA Annual Conference, Adelaide 15-17 September, [web page] (2006) http://www.aija.org.au/ac06/Dal%20Pont.pdf, accessed 5 June, 2012. Dal-Pont, G., ‘Cost agreements and VCAT-the challenge of ST YVES’ Austlii [web page] (2009) http://www.austlii.edu.au/au/journals/MonashULawRw/2008/11.pdf (accessed 5 June, 2012) Legal Fees Review Panel (LFRP), Discussion paper: lawyer’s costs and time Billing [web page] (2004) http://www.lawlink.nsw.gov.au/lawlink/olsc/ll_olsc.nsf/vwFiles/Legal%20Fees%20Review%20Panel%20-Discussion%20Paper%20%20Nov%20%2004.doc/$file/Legal%20Fees%20Review%20Panel%20-Discussion%20Paper%20%20Nov%20%2004.doc (accessed 4 June, 2012) Legal Fees Review Panel (LFRP), Report: legal costs in New South Wales, [Web page] (2005) http://www.lpclrd.lawlink.nsw.gov.au/agdbasev7wr/lpclrd/documents/pdf/final_costs_paper_and_recommendations_summary.pdf (accessed 5 June, 2012) Munneke, G., Seize the future: forecasting and influencing the future of the legal profession (American Bar Association, 2000). New York State Bar Association (NYSBA), ‘Report of the Task Force on the future of the legal profession’, NYSBA ORG [web page] (2011) http://www.nysba.org/AM/Template.cfm?Section=Task_Force_on_the_Future_of_the_Legal_Profession_Home&Template=/CM/ContentDisplay.cfm&ContentID=48108 (accessed 4 June, 2012). Shelley, D., The future of the legal profession, (Paper Presented at SA Legal Convention July, 2002). Spigelman, J., Opening of Law Term Dinner Speech, (Australia, 2004) Ullrick, B., ‘The Alternative Billing Diner: Serving Up a New Billing Scheme for the Technological Age’, Journal of Technology Law & Policy, 5/1 (2000), 14-15. Westgarth, S. & Balachandran, R., Review of billing practices- the way Forward, Law Society [web page] (2011) https://www.lawsociety.com.au/idc/groups/public/documents/internetcontent/522591.pdf (accessed 5 June, 2012) Read More