Billing Judgment.

• Author: Rapoport, Nancy B.

INTRODUCTION

How many attorneys does it take to change a light bulb? Let's see. One to check the socket. Another to order the bulb. Three or four to do research on how to change a bulb. Another to write a memo about how to do it. And still another to proof-read the memo. One to twist in the bulb. Somebody to advise the bulb twister. Two more to serve as witnesses. Another to stand by if needed. And one or two to write a memo to file[ ] about the operation. Or, as some frustrated clients might complain, as many as the attorneys can persuade the client to pay for. (1) Why are the two of us obsessed about improving professionals' billing judgment--of lawyers in particular, but also of other estate-paid professionals--in bankruptcy cases? One of us serves as a fee examiner, and the other one of us has a company whose software analyzes time-entry data in several large bankruptcy cases. Both of us write in the areas of professional response bility and legal operations. That explains some of our interest in the topic. But there's another reason: We practiced law before changing careers, and we find the legal industry's economic model both fascinating and distressing. The economic model fascinates us because it gives legal professionals broad discre' tion to charge for tasks with sometimes dubious value. It's distressing because we know that uncompensated billed time is lost forever.

The legal industry's economic model, at least when it comes to BigLaw, (2) handsomely compensates extraordinarily talented, highly intelligent individuals to handle what, at times, are complex tasks. The twist? They handle those complex tasks at the same price that they charge for mundane and routine tasks. The legal industry uses an hourly rate metric as a rough proxy for "value," but that proxy is imprecise: It treats all of a professional's hours, and all tasks performed during each of those hours, as equally valuable. This, of course, is fallacious. Some hours provide enormous value and are well worth a senior attorney's four-digit hourly price tag, but others are actually worth just a fraction of a high-priced partner's hourly rate because the task undertaken or service delivered is inherently less valuable. (3)

Moreover, the legal industry's hourly billing model can compensate a legal professional despite that professional's inefficiency. (4) Clients often use inefficiency as ammunition to avoid paying a bill in full, creating a host of knock-on problems for attorneys. (5) Under a perfectly equitable system, an attorney with legitimate, but unrecoverable, time could travel to the past in a WABAC Machine (6) and rebill that time to some other matter. But WABAC machines don't exist, and nobody else will be paying for that "lost" time.

We hate that type of inefficiency and economic loss, too. (7) Most lawyers work far too hard, and many lawyers make far too many personal sacrifices, to forgo compensation because of bad decisions resulting from the legal industry's typical hourly-rate economic model. (8) Those bad decisions have serious negative implications, (9) demonstrating that professionals' billing judgment--either good or bad--lies at the heart of the economic results achieved by outside counsel.

Section I of this article discusses what we mean by "billing judgment" and why billing judgment is important. Section II addresses how billing judgment plays into the typical bankruptcy case. Section III discusses the interplay between billing judgment and "budgeting judgment." Section IV proposes an approach that can encourage both billing judgment and budgeting judgment. And Section V posits some logical next steps and challenges to overcome.

1. WHAT IS BILLING JUDGMENT, AND WHY IS IT IMPORTANT?

   Well start by explaining what we mean by "billing judgment" and how it affects the way that most lawyers do business. Billing judgment is a byproduct of the legal industry's economic model. In nearly all seller-buyer relationships, there is little variability in pricing. Typically, sellers set a certain price based on known, predictable factors like demand, cost of goods, and profit margin, and buyers pay that price to receive goods or services. The seller-buyer relationship in the legal industry, however, presents a less predictable character, mostly due to its "rate times hours" pricing model.

   Several drivers generate uncertainty in today's law firm pricing model, particularly surrounding its "hours" component. First, disruptive third-party forces have triggered pricing uncertainty. Innovative technologies--like e-discovery, digital signatures, virtual data rooms, computer-assisted initial contract drafting, automated legal research, and data analytics platforms--have changed the time that it takes to analyze an issue or handle a task. (10) Alternative legal service providers ("ALSPs") have entered the market, focusing only on their own compartmentalized aspect of legal services, delivered in a high-volume, process-driven manner. ALSPs have left traditional lawyers scrambling to deliver services of identical quality in the same amount of time. (11) But when computers can do in nanoseconds what humans can only do in days or weeks, lawyers can't deliver the identical quality in that shortened time. (12) Second, even without the faster results of computer-assisted work, pricing uncertainty also stems from the inherently fluid nature of the law. New caselaw or statutes, unanticipated court rulings, indecisive clients, and uncooperative counterparties can transform easy and predictable tasks into one-of-a-kind endeavors. Finally, pricing uncertainty can result from a lawyer's lack of experience in pricing or from an overall lack of competence.

   The net result of pricing uncertainty is that charging and getting paid for legal services is not as simple as scanning a bar code on the side of a product or opening "the book" and pinpointing the cost to replace a broken car part. To the contrary, a lawyer's judgment comes into play both when the lawyer handles legal matters in an efficient manner and when the lawyer charges properly for those services. Indeed, in order to achieve the client's goals, a lawyer must make decisions about what legal work to do and who should handle each task involved in the overall matter. These decisions involve billing judgment. As with any exercise of judgment, lawyers can make either good or not-so-good decisions. Currently, there is no easy formula to assess good billing judgment.

   Defining exemplary "billing judgment" is complex. Insofar as law firms and corporate legal departments must evaluate billing judgment, common sense dictates that legal industry constituents should develop a framework for a meaningful, apples-to-apples "billing judgment" analysis. So we thought we'd get the ball rolling. If legal industry constituents don't develop and define the standards, outsiders such as chief financial officers, insurance companies, and financial institutions will. Outsiders also might apply arbitrary standards or develop their own metrics on an ad hoc basis. A universal framework to analyze billing judgment--the value of the services provided, relative to the cost of those services--should not elude the legal industry simply because creating a sensible framework is difficult.

   Currently, Model Rule of Professional Conduct 1.5 ("Rule 1.5") (13) offers an approximation of defining billing judgment--albeit obliquely--through the concept of "reasonable fees." (14) But even though the Rule 1.5(a) factors provide useful context, reasonable fees don't necessarily map directly to good billing judgment. In our minds, Rule 1.5 is just a start. Good billing judgment involves much more than delivering a client an affordable bill that meets minimum ethical guidelines and that a client will pay.

   The first step towards exercising good billing judgment is defining it. We propose our own formula for identifying good billing judgment. Lawyers demonstrate billing judgment when the legal services for which they bill: (A) advance a meaningful client goal while alleviating the client's burden; (B) are delivered with peak staffing and workflow efficiency; and (C) describe the work done in a clear invoice delivered in a timely manner.

   1. ADVANCING A MEANINGFUL CLIENT GOAL WHILE ALLEVIATING THE CLIENT'S BURDEN.

      Client strategies, tactics, and goals vary from matter to matter based not just on the law but also on non-legal, business exigencies. (15) Most lawyers recognize that their clients hire them to provide specialized expertise. The savviest lawyers embrace client goals that transcend a mere legal win-loss formula. (16) Lawyers must bring to bear not just legal strategies and tactics but billing judgment when advancing a client's goals. That billing judgment requires them to consider a mix of legal, economic, operational, reputational, political, and precedential factors. (17) When lawyers exercise excellent billing judgment, the cost of legal services should correlate to both legal and nonlegal goals. Clients can then evaluate the legal work not just on legal mastery but on overall problem-solving.

      After all, clients hire lawyers to do something that the clients can't do, or don't want to do, themselves. Clients who can pay for legal services will do so when the services' benefit outweighs their burden and cost. Most clients who can afford to pay for legal services understand that it costs money to solve problems, but clients don't want to overpay for bad billing judgment. Clients often say that the best lawyers know and understand the client's business. We add that the lawyers who understand their clients' businesses are most likely to have the foundational underpinnings of good billing judgment. A lawyer familiar with a client's business can practice preventative law, reducing the client's burden to troubleshoot risks. Moreover, when legal issues do materialize, the lawyer who already understands a client's business delivers...