Thanks for the comment. Your thoughts are interesting, but mostly don’t apply to this post, as it specifically is about the case of a non-expert, non-lawyer hiring a law firm (for example, an individual or small business owner). I thought that was clear from the mention of “you” and “non-expert”, but went ahead and tried to clarify that point a bit more in the post. When large corporations hire law firms, the situation is, as you point out, quite a bit different.

I believe that hourly billing when individuals are hiring lawyers is quite a lot more common than you imply. If you can provide evidence to the contrary though, that would be helpful to see. Certainly, small businesses are often charged by the hour when they would like to have a legal question answered, and they generally are not experts in the law or what might be reasonably deemed “sophisticated clients”.

Most regular people that need lawyers hire lawyers on flat fees. It’s usually at the consumer level that unscrupolous lawyers will rip off clients, particularly in Wills and Estates.

But Lawyers that charge by the billable hour usually only serve very sophisticated clients, i.e. corporations and other high net worth entities. These mega clients typically have their own legal departments – staffed by former “Biglaw” associates. If a top law school student doesn’t end up becoming a partner (or aspire to it) @ big law, they often end up working decent hours (and much less pay) as corporate counsel.

The legal department at your typical fortune 500 firm farms out its transactions and lawsuits to many different Big Law firms depending on the matter. Very few corporations are captive to one firm, and very few big law firm are captive to one corporation.

And believe me, at this level of the game, there are plenty of attorney/accountants, former partners, former senior associates who can review the quality of the work as well as go line by line on any invoice sent. There’s more than enough oversight.

When you look @ the size of the matters that law firms typically handle (transactions in the tens/hundreds of millions, lawsuits in the hundred millions/billions), the legal fees often don’t amount to more than 1-2% of what is at stake.

Furthermore, the community of fortune 500 companies and big firm lawyers that can handle their work is very small. At any particular Vault 100 firm, there are probably a handful of rain maker partners that bring in the business. With a community that small, attorneys/firms that pad the bill will be quickly outed.

What’s actually more prevalent is Fortune 500 companies nickle and dime-ing their legal counsel to the point of stretched capacity. Corporate legal departments will specify vendors that the firm must use, limit which attorneys can work on which matters, so on and so forth. At the same time they do that, the business people at the corporations will insist on being overly aggressive (which means more people on the case to do more running around in crisis mode).

Is there some slack in law firm billing of major clients? Probably.

But if you expand your vision and look at the ecosystem, you’ll find that the situation is not defined by waste, fraud, and abuse.

Secondly, as with most bills/invoices we all want/need a specification. Same goes for lawyers. I currently work at a law firm and everything (from 6 minutes and more) must be accounted for.

Third, the goal is to get the most out of a case for your client, not to get as many billable hours as you can. I know a lot of firms judge their associates on billable hours but every employee in every job is is judged on his job-performance

The example of one firm winning a summary judgment dismissal doesn’t show that reputation and client appreciation can make a firm behave in a way that’s optimal for the client. Didn’t that client pay the firm to win the dismissal? Was it the firm that won the dismissal, or the facts of the case? I’d bet money that they overpaid for their win compared to the imaginary ideal world where the lawyers did the best work they could do and charged the client less than expected. The reality is that if a team of 10 lawyers working around the clock at $500/hr per lawyer can write a winning brief in 3 weeks, it’s very likely that 3 lawyers working 8 hr days at $250 hrs can write a brief just as good, particularly when 7 of that first group of 10 have about 5 months experience each and are duplicating effort and engaging in shady billing practices as mentioned in the post. Where is it written that law firms must charge to the client when some foolish associate makes profitless busywork for 3 other associates, and they bill $10,000 for something unnecessary. It’s not. Firms write off hours all the time. However, at least as often they choose not to write off needless costs, and then engage in conspicuous needless spending, i.e., everything about summer associate internships. $50/person lunches … $100/person dinners and open bars. Flying hither and thither and staying in fancy hotels.

I think the big enabler here is these rich clients’ ability to pay. Big, publicly traded companies have budgets that dwarf firms’ ability to charge fees. Even in these “hard times” corporations are still able to conjure money up in ways that individuals and small organizations just cannot. No matter what way you cut it, with regard to for-profit clients, firms are purely self-interested organisms. They’re not working for charity or for the joy of lawyering. Even the glory of the win is just a manifestation of financial self-interest. Law firms are never friends, they are tools. That said, probably these rich fat cat clients are finding creative ways to pay the bills, maybe even finding some sort of tax shelter to protect themselves from the costs of litigation. I’m sure they expect to be be billed ridiculous amounts, and for the most part don’t really care. Google is not going to go under because of its legal bills. Google understands that only Google has Google’s incentives.

Hi Ames,
Thanks for the comment! I totally agree that reputation helps reduce the conflicting incentives to an extent (hopefully that was clear in my article). I would also point out that this article is about what happens when a non-expert hires law firms. My guess is that your firm generally works directly with experts: either the legal council of large corporations, or other representatives of large corporations that have tons of experience with working with law firms. These experts are in a much better position to evaluate the quality of work produced than a non-expert would be, which helps incentives be a bit more aligned.

The story you give is a nice example of a case where (1) there are bigger incentives than the financial ones (in this case, looking great for your client and looking good in the newspaper) and (2) where quality is easily measurable (it sounds like in this case it was obvious to everyone that your firm had done something unusually good). I would say that a more typical case is one in which quality is not nearly as easily measurable (e.g. the production of a contract that will only be tested if someone sues years later) and where reputation related incentives are not nearly as large compared to profit incentives as they were in that case (rarely is there an opportunity to save a client so much money, and do so in such a public way).

You make a good point about miscommunication, and clients not understanding how valuable different aspects of work really are. That may be an important contributing factor. But none the less, when a company as a whole, and its individual agents, have a monetary motive to do X, I think it is a fair assumption that we will see a lot of X being done. So financial incentives should be a significant factor as well.