Almost 40% of partners believe bill padding remains a problem at law firms. Elizabeth Broomhall reports

The majority of law firm partners favour the traditional hourly rate model as a more accurate way of billing, despite a continued push from clients to use fixed fees and other alternative billing methods, according to Legal Week research.

The results of the latest Big Question survey show that while 63% of respondents find it 'quite easy' or 'very easy' to place an accurate value on work delivered when using hourly billing, 80% described such valuations as either 'quite hard' or 'very hard' when using fixed fees.

Indeed, when using fixed fees, just 12% of respondents said the final bill is 'about right', compared to almost half who said the same for hourly billing. More than 80% said fixed-fee deals undervalued the work carried out.

Eversheds corporate partner Richard Lewis described the shift to fixed fees as inevitable, but added that value can be maintained by ensuring good communication and implementing project management-style strategies.

"Hourly fees are still used as a basis point, but they are used less and less," he says. "The ability to quote a fixed fee depends on the amount of information you've got – the more you can get from the client at the beginning, the easier it will be. People have become more scientific at the outset. They are having longer conversations and working up much more methodically." 

Matthew Cottis, global co-head of banking at Hogan Lovells (pictured, top right), agrees: "Almost all borrowers prefer fixed-fee arrangements with their bank's lawyers these days. The problem with hourly rates is that the borrower has limited visibility about what is happening on the bank side and no certainty of final cost. It's good for them to know at the outset.

"But you do need some assumptions, such as that the deal won't take a lot longer. Typically, lawyers will put a cap on the time it takes to complete. 

"Also, if it goes slightly over you can't just assume that the borrower is going to be happy paying an increased fee. They need to be happy that it went over for a good reason, which wasn't the law firm's fault and actually meant it had to do materially more work."

In certain practices, such as litigation, hourly billing remains the standard. Clifford Chance global litigation head Jeremy Sandelson (pictured, top left) commented: "There has been less of a move towards fixed fees in litigation than on the transactional side, simply because it is harder to predict what is going to happen.

"I think most clients understand this. Providing you deliver value, many clients accept hourly billing. They recognise that it is extremely difficult to quote fixed fees in litigation."

When asked how realistic clients are about billing, 56% of respondents reported that they sometimes get pushback on bills, while 21% said clients regularly or always questioned their bills and 23% described such negotiations as rare. 

Meanwhile, the majority of respondents – 61% – described the practice of padding bills as either 'uncommon' or almost non-existent, with some attributing this to an increase in the use of fixed fees. 

"Padding is not really relevant with fixed fees," says Cottis. "The [client] doesn't really care how it works out for the law firm on an hourly basis." 

Lewis adds: "There is an assumption in this market that hourly rates are misused, but strong project management within law firms eliminates that." 

Nevertheless, more than 30% of respondents described the practice of padding as 'occasional', with a further 9% saying it is 'very common' or 'endemic'.

On the question of whether more junior resources are now used on transactions in an effort to cut bills, more than 50% said work was now regularly done by more junior staff than would have been the case before the downturn. 

One Hong Kong partner said this is happening more on capital markets deals in Asia: "I have heard that people are tailoring their teams' composition to include a large number of paralegals to do the work," he said. "They are less expensive than qualified lawyers. Especially firms which do a lot of IPO work – they do this in order to get the work."

In addition, 72% of respondents said law firms could reduce their bills by more efficient practices such as automating processes 

and reducing overheads, including 10% who said the cost of legal advice will be substantially smaller in future. 

According to Sandelson, bringing bills down is a priority: "We do try and give estimates for various stages of a case and are constantly trying to reduce the cost of litigation. Litigators generally are being asked to get better at giving estimates and we now involve internal costs experts much more than in the past."

Partners on law firm billing

• 80% believe it is 'quite hard' or 'very hard' to place an accurate value on work when using fixed fees
• 32% believe almost no one pads bills any more
• 51% say work is now done by more junior staff to cut costs for clients
• 72% believe the cost of legal advice will be cheaper in future