Microsoft wants to end the tyranny of lawyers billing by the hour

Image: Reuters/Jim Young
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If you’re a lawyer, or if you’re ever spent more than 10 minutes talking to one, you know all about the misery of hourly billing.

Under a typical agreement, attorneys bill clients for all the time spent on their case. Writing letters, looking up precedents, deposing witnesses, making phone calls—the meter is always running, and clients can expect to see it all in the bill at the end.

But hourly billing is actually a misnomer. Because many tasks take less time than that, firms often require attorneys to bill in six-minute increments. Lawyers hate the system, because they have to account for every six-minute block of their time. Clients hate it, too, because every task, no matter how short, is rounded up to six minutes, inflating the cost. (At a $1000-per-hour firm, sending a 30-second text can cost a client $100.) And though firms can profit from it, the system invites extra squabbles with clients over billing, which can quickly sour relationships.

Now, one of the biggest US corporations wants to shake up how it pays its legal bills. Microsoft, which spends hundreds of millions of dollars on litigation annually, plans to eliminate hourly billing for most of its legals needs. The software giant plans to have 90% of its legal needs handled on a retainer basis or other alternatives to hourly billing, within two years, the New York Times reported (paywall). That could portend a major shift for law firms, which currently bill about 16% of their revenue through alternatives to billable hours, like flat rates per project.

The hope at Microsoft is that the new billing methods will encourage more collaboration between the company and its outside legal advisors. “We want to create a situation that encourages our lawyers to be able to pick up the phone—without going through bureaucracy or worry about how to pay for it—and talk to the law firm about whatever is needed,” David Howard, Microsoft’s deputy general counsel, told the Times.

Fourteen firms that work for Microsoft—including K&L Gates, named in part after former partner William Gates, father of Microsoft’s co-founder—have agreed to the change.

Now if only plumbers and auto mechanics would try something similar.