ADDING INSULT TO INJURY IN THE LAND OF OZ

Just when I thought I’d heard about or had seen every Land of Oz-ian business practice employed by lawyers, I’m proven wrong again.  It seems, as one moves along the lawyers’ yellow-brick road toward Emerald City, lawyers now bill their clients for the time the lawyers spend billing the clients.  According to The Devil’s in the Billing Details, (subscription required) published on line by the National Law Journal, with respect to today’s detailed bills demanded by clients, “Although lawyers in private grumble and knowingly smile about the hassle, most acknowledge that clients are justified in demanding specifics -- consumers expect to know what they're paying for”; but that acknowledgment begrudgingly given also comes with a cost since, as the article continues - “One result: Lawyers end up billing for time spent on billing."   I’ve scratched my brain (not as hard to do these days since there is less hair and far less brain cells than there used to be), and I can’t come up with a single retailer, vendor, supplier, or service provider that sends me a bill for the time they spent preparing and sending me a bill.  Nor have I heard of any, other than law firms, that would.

I was so surprised by this lawyer business practice, I mentioned it to a lawyer-friend of mine.  Although he has modeled his business practices to mirror more closely those of his clients and other business - e.g., he does not pass along separately his overhead costs on top of his fees as he views overhead as his cost of doing business and believes to pass it along will reduce the net value he delivers his clients - he added he thinks many lawyers simply “don’t get it.”  To make his point, he told me a few “stories” about law firm business practices he’d heard recently that are foreign to other business industries and work more to destroy, rather than to deliver, value to law firm clients:

• A firm sent it’s client a bill for $18,000 just for copying internal file documents.

• A firm sent a client a bill for the time spent to review the standard jury instructions by a senior litigator (2.5 hours at a hefty hourly rate) in a case being handled by the firm in the firm’s home jurisdiction.

• A firm agreed to bill no more than a set, fixed fee to handle a matter; but then it was so pleased with the result it got, on it’s own and with no provision in the client agreement permitting it and no discussion with the client about it the firm billed the client not only for the agreed fixed fee but also for a “premium” the law firm felt it “richly” deserved.

I guess nothing should surprise me about legal industry business practices when it comes to billing, especially when you consider some of the other billing or reporting practices identified by a few outsiders who have studied the industry:

• William G. Ross of the Cumberland School of Law, who based on the results of his recently completed 2006 – 2007 survey of attorney billing practices, noted:

• Approximately two-thirds of the respondents to the 2006-07 survey stated they had specific knowledge of bill padding.

• 54.6 percent of the survey respondents admitted the prospect of billing additional time had at least sometimes influenced their decision to do work that they otherwise would not have performed.

• 34.7 percent of the respondents engaged in “double billing”, while only 51.8 of the respondents thought the practice was unethical.

• Harvard Business School Professor Clay Christensen and Scott Anthony, in an interesting 2004  study of eLawForum (a link to the study is in the margin under “Articles of Interest”), summarized:

• . . . But because corporations accept the sole-source market, law firms play a cat-and-mouse game with the billable hour and cost-plus pricing, hoarding productivity gains and saddling clients with both cost and outcome risks.

• With one hand, law firms give discounts on hourly rates to their largest clients. With the other hand, they take back what they have given by raising the base hourly rates to which the discounts are applied and increase the number of hours they bill to do the same work. Law firms are masters of the cat-and-mouse game of the billable hour. As long as they respect the procedures mandated by the law department, law firms can circumvent any attempts at cost reduction by controlling the two key variables—the base rate and the number of hours spent.

• Bill Henderson, a law professor at Indiana University-Bloomington who studies law firms, suspects - according to The Wall Street Journal’s Law Blog posting “Are Law Firms Gaming Their Equity Partners” on May 2, 2007- “many law-firm management committees may be minimizing the reported number of equity partners for the purpose of raising profits per partner in the Am Law 100. He feels that at some firms, the inner circles don’t share the actual (higher) number of equity partners with the rest of the firm’s partnership.”

If you put these stories together, you get an image of the Wizard of Oz standing behind the curtain concocting a detailed bill of professional services rendered and expenses incurred that likely describes the tasks done, the person(s) who did them, the time “spent” doing them, and a rate or rates for the work.  Apparently, these “detailed” bills also may include time “not spent,” tasks that weren’t necessary, discounts given with one hand and taken away with the other, time spent doing tasks not only for you but also for another client or clients (“cloned hours,” I guess), and reimbursement for some overhead costs.  And, just to add insult to injury, some firms apparently now expect clients to pay for the privilege of having this “detailed statement” prepared for and sent to them.  No wonder there is, as Mark Chandler - Cisco’s General Counsel - said at Northwestern School Law’s 34th Annual Securities Law Institute,

[A] fundamental misalignment at work here. Law firms cannot afford to own the business risks of their clients, have a lot of employees to pay and also have to allocate the limited resources of extraordinary star partners. On the other hand, we clients want access to information and counseling and want to pay for value received. Put most bluntly, the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour.  (Underlining added for emphasis).

Do firms like those I chose in my LawBall top 10 financial operating performance firms for 2006 from the 2007 AmLaw 200 in Beauty is in the Eye of the Beholder - like Wachtell, Lipton, Rosen & Katz; Wiley Rein; Sullivan & Cromwell; Cahill Gordon & Reindel; Irell & Manella; Cravath, Swaine & Moore; Simpson Thacher & Bartlett; Munger, Tolles & Olson; Gibson, Dunn & Crutcher; and, Quinn Emanuel Urquhrt Oliver & Hedges - engage in such business practices?  I honestly don’t know; but, I do believe those firms’ business models likely are built around creating the highest delivered value for their clients - and so probably are some others.  And, if more lions, tin men, and scarecrows join the likes of Mark Chandler, Mike Dillon - the general counsel of Sun Microsystems Inc. - and others on the client journey down the yellow brick road  and regularly insist on the highest delivered value from their law firms and say, “Pay no attention to that man behind the curtain,” then some of these silly legal industry business practices will have to cease.

Comments

[Disgusted Observer]

How could a lawyer not think that "double billing" is unethical? If it's ethical, then disclose to the client that it's being done and see if the client objects. What's your guess?

This is a problem with any services that bills on a "time and expenses" basis. It's not merely lawyers; I've also seen similar problems with accountants, consultants and software developers.

The clients are going to have to fix the problem by demanding a change in the billing model.