I was recently in a meeting with several members of a legal department at a Fortune 500 company discussing RFPs for legal services.  During the meeting I was surprised by a comment.

“That’s great that the firms would be incented to offer discounts, but won’t they all just stuff the time sheet with more hours to make up the difference.”

I want to be clear here.  This lawyer was not talking about attorneys working on tasks that had arguable utility – an issue often cited as being linked to the incentive hourly billing creates for lawyers to be inefficient.  No, she was an experienced lawyer who had grown so cynical of law firms that she presumed not some but all outside lawyers would lie about the actual hours they worked.  And worse, she seemed resigned to this outcome.

My initial response was two fold.  “I’m not sure you should presume all lawyers stuff their time sheets.  And if someone is inclined to lie about how many hours they work, wouldn’t they do this when they are charging you at their standard rate too?”

The answer satisfied her before I moved onto ways a well run RFP combats this type of practice.

Do lawyers pad their hours?

I was left to wonder just how prevalent bill padding was in the legal services industry.  It turns out there isn’t much conclusive data – presumably because those who engage in the activity aren’t going to readily report it.  Some articles speak to a rise in fraudulent billing cases over the last 25 or so years.  But that doesn’t speak to overall prevalence and it may not necessarily mean the practice of overbilling has become more common.

Then there’s a 2006-2007 survey from overbilling expert William G. Ross  (http://www.williamgeorgeross.com/surveys.html) that noted about two-thirds of lawyers were aware of an instance of overbilling.  This at least suggests the practice is more common than most would want to acknowledge.  It certainly is alarming.  But it is still hard to draw firm conclusions as to the prevalence of the issue.  For instance, when I started to practice law 20 years ago I knew a lawyer who was caught trying to bill 26 hours in one day by his firm. That makes me one of the 2/3rds of lawyers aware of an overbilling incident.  But that single incident as well as a handful of other suspicions I’ve had over a 20 year career don’t mean much in the context of the hundreds and hundreds of lawyers with whom I’ve worked where I’ve had no evidence or reason to suspect fraudulent billing.

That same survey by Mr. Ross also delves into the extent to which hourly billing practices causes lawyers to seek out and perform work that has questionable utility (i.e. lawyers performing work they otherwise might not have performed).  Around 55% of the respondents to the survey reported they’d engaged in this type of behavior – a number that I personally would have expected to be a bit higher given the incentive billable hour requirements create for lawyers to find things to do.  And about 53% of respondents believed if legal engagements were not tied to hourly billing, then the number of hours worked by outside counsel would decrease by some percentage – another nod to the reality of “make work”.

How to Avoid Bill Padding

Ultimately, the point is that a well-run RFP process helps set you up to avoid bill padding and unwanted “make work” after you award your engagement in a number of ways:

• Pro Forma Budgeting.  Well run RFP processes typically require respondents to build a detailed pro forma budget for the proposed engagement.  This budget serves as a guidepost for work on the engagement by the selected law firm.  In turn the law firm will feel accountable to try and meet the budget.  And having the budget facilitates conversations about why any significant discrepancies between the budget and actual hours worked occurred.
• A Competitive Process.  The very fact an RFP is a competitive process also helps.  Cost in legal engagements is tied to time – regardless of the fee method used.  It follows that budgets built in a competitive process will be prone to suggest work can be performed efficiently.  In fact, the larger risk is that firms will understate estimated hours in their budget.  Obviously you are able to review proposals to determine if they appear unrealistic.
• Pressure Testing How Fixed Fee Engagements Are Priced.  Law firms that offer fixed fee arrangements often build risk pricing into their proposal to absorb the possibility the engagement will take more time than expected.  This isn’t necessarily an unreasonable position for the law firm to take given the potential for a fixed fee engagement to become unprofitable.  But a competitive RFP process can help mitigate how much risk premium law firms build into their pricing simply because other firms are making proposals to win your work.

About the author – Dave Sampsell is a 20-year lawyer with extensive experience managing large, complex legal engagements throughout the world and overall corporate legal budgets.  He presently serves as General Counsel of a NASDAQ listed company and is a Founder and Principal of BanyanRFP.  BanyanRFP saves companies time and money through an easy-to-use, private and secure online application that processes legal services RFPs.  For more information, visit www.BanyanRFP.com