Legal costs in complex work: action and reaction

Graeme Johnston / 5 September 2023

This article discusses

  • the development of ways to bill for complex, unpredictable work – in particular, hourly billing
  • some of the ‘billing countermeasures’ (a personal usage, inspired by ECM) which have developed in response to concerns about the over-reach of hourly billing
  • some emerging possibilities and a couple of possible futures – with emphasis on your ability to choose

The story so far

Once upon a time, it appears that legal work was charged largely on fixed fees, value-based fees or fees based on days rather than hours or minutes spent.

A potted history of how this changed during the 20th century:

  • Early 20th century: legal time-recording in its modern form invented in the United States, for the purpose of identifying what lawyers are working on. Inspired by the industrial Taylorism phenomenon
  • 1930s – 1960s: increasing use of time recording as a billing method, heavily promoted by the American Bar Association
  • 1970s – 1990s: time-based billing becomes a dominant method in the US and is increasingly adopted elsewhere, including the UK; computerised systems increasingly used to capture time
  • also 1970s – 1990s: growth of in-house lawyers, partly as a response to rising external legal fees

These developments in the closing decades of the century have a complex relationship – demand by in-house lawyers to see time-recording data as a benchmark to negotiate-down non-time-based bills appears to have been one factor promoting the adoption of more time-based billing, generally reckoned to have had cost-inflationary consequences. 

In any event, it is clear that demands grew during the closing decades of the century for time records to be accompanied not just by a high-level narrative of the work done on the matter overall, but by

  • A written narrative against each time entry of minutes or hours
  • Various types of work code, to be used to describe the work done, in various ways – some corporate clients imposed these and in the 1980s and 1990s there was some early standardisation in the United States
  • Law firm financial systems developed to capture these requirements
  • On the corporate side, early ebilling systems developed to process such data

In the background, the volume of documents used in legal work was starting to explode in the late 20th century, together with the complexities arising from the growth in regulation and globalisation. This led to some early attempts to reduce the time required by use of

  • rule-based systems for following steps in a highly defined process and assembling correspondence, agreements and other documents
  • more fixed fees for such work
  • software and a more (though, as yet, often not highly) defined process for reviewing large volumes of documentation – at that time, particularly in litigation 

These approaches were, however, largely constrained to certain types of work. Time-based billing tended to prevail for anything novel or complex.

In the 2000s, as well as continuation of the trends already mentioned, notable developments that I’m aware of included

  • Increased law firm efforts to impose internal discipline to submit timesheets, send out invoices and collect more quickly so as to improve both cashflow and realisation (delay typically correlates with lower recovery)
  • Business clients seeking more % discounts from hourly rates; a trend leading law firms to increase hourly rates in expectation of greater discounts
  • Major business clients putting more resources into law firm panels and periodic reviews of these, with a view to controlling rates and overall costs (among other things)
  • For data-intensive work (e.g. document review in disputes/investigations, due diligence, some kinds of contract negotiation, ‘repapering’ etc) use of software and more highly-defined processes (often outsourced, offshored or both). These were initially known as legal process outsourcers – LPOs – taking inspiration from business process outsourcers – BPOs, but broader concepts developed of ‘new law’ – later, alternative legal service providers – ALSPs, and subsets of these such as managed legal services (or, if you prefer, legal managed services) for ‘business as usual’ / operations (as opposed to project) work
  • The growth and complication of ‘outside counsel billing guidelines’ – rules on what can and cannot be billed
  • More specialist pricing functions in some law firms – starting to go beyond simply rate-setting, responding to some of the client demands for new pricing methods

In the 2010s, with some pricing pressure resulting from the 2008-09 financial crisis, we saw more of the above, but also

  • Use of machine-learning for review of documents and other content
  • Large law firms establishing their own defined-process operations, often in ‘nearshore’ locations
  • Increasing exploration of ‘alternative fee arrangements’ as an attempt to reduce time-based billings while accommodating uncertainty – some of these became quite complicated in their efforts to ‘share risk’
  • In practice many were just variations on time-based billings
  • There was still in some quarters a wish to benchmark even fixed fees against time records (“shadow billing”) in ways that, in practice, tended to incentivise the spending of time
  • The early growth of legal project management specialists – in various forms – in some law firms
  • Growth of corporate legal operations – in practice, often involving process improvement and automation techniques and, in some cases, outsourcing elements of ‘business as usual’ legal work (e.g. contract management)

On the time-recording side specifically, some notable development in the late 2010s into the 2020s include

  • ‘Passive’ time-recording: software which captures what you’ve been doing based on the emails and documents you’ve been working on – the pitch to law firms of such software is usually ‘capture more billable time, more easily’
  • Use of natural language processing to summarise the type of work being done as described in narratives – for use in ebilling systems (to facilitate assessment of value and compliance with guidelines) or for law firm internal analytics

Bear in mind that all these things have been going on, and interacting, at the same time. They expand, retreat and mutate.

I think it’s fair to say that many people are dissatisfied with the situation. There is a sense of zero-sum games in the various efforts undertaken, at significant expense, to capture and constrain billable time.

So where do we go from here?  Two possible futures to consider —

Future 1: the same, just more so 

There are certainly ways in which the latest technology can sustain and optimise the path of recent decades.

I’ve had several conversations with people at law firms expressing interest in using large language models to

  • summarise text and thereby improve passive time-recording
  • expand upon a simple prompt, to generate narratives which meet client expectations and guidelines.

This American legal publication had a story about an aspect of this at the end of August 2023.

It doesn’t take much imagination to foresee the future discussion and experiments about how such text can be generated, summarised, misused, detected and audited.

I’m sure there’s value there: saving time and distraction in the generation of text while also making it quicker to review and analyse such text.

But there are several limitations:

i) a new generation of zero-sum games also beckons – AI-generated narratives competing with AI detectors – good times;

ii) none of this encourages addressing the ongoing, serious lack in most legal work of proper reflection upon process improvement and the imaginative finding of better ways through;

iii) pressure may foreseeably arise to bill ever more hours – now that you have less time-keeping admin, what’s stopping you?

Taking this a stage further, down a distinctly dystopian, industrial surveillance track, is the idea of neurotech enabling billing for units of attention, a possibility discussed interestingly in the legal context by, for example, Dr Allan McCay. Whether or not the tech works as anticipated, I find it hard to imagine lawyers accepting it, but the more important point for present purposes is that, despite the futuristic sound, it would, if it happened, by a rather conservative approach to what constitutes value that should be paid for. 

Future 2: investing in process

Another future involves investing more in designing better processes and journeys, and in applying better project management, using suitable technology and (as a result) developing better pricing and experiences – for clients, firms and legal teams alike.

This could involve finding ways to offer lower, predictable pricing which nevertheless is more profitable for the law firm and less burdensome for the individual human being (to whom many of the inefficiencies of the current system are externalised).

Which future will it be?

Elements of both, I expect. Big questions include:

  • In which combinations and proportions in the market overall and in particular niches? My guess is that there will be more diversity of models, not less. 
  • How will existing and potential clients, competitors and team members react to those really focused on future 1 as opposed to investing in future 2? 
  • Accepting that others will differ, which future do you personally want to live in? My guess is that different organisations will offer increasingly different mixes – a real competitive dimension for both clients and teams.

If you want to explore future 2, it will take some time and effort. There’s much more to it than tech, but a 14 day free trial of our software, Juralio, is an easy way to see part of what’s possible. You can sign up for that here.

Picture credit: Bing Create upon a prompt by me seeking a cyberpunk invoice-reviewing machine.



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