Alternative fees (Part 2): An idea whose time has come?

In the most recent issue of Forbes, Evan Chesler, the Chairman of Cravath, published an article with the provocative title Kill the Billable Hour arguing that: “For reasonable periods of time during the life of a lawsuit, say three months at a time, [lawyers should] identify the client's objectives, measure, calculate, build in a contingency and come back with a price. Once the price has been agreed upon, the billable hour should be irrelevant.” 

This central idea is familiar to advocates of alternative fees.  But when the Chairman of one of the most prestigious law firms in the world says it, that is news.

The blogosphere and the media have been buzzing about alternative fees for several months now, ever since the 25,000 member Association of Corporate Counsel announced its “Value Challenge”, “to reconnect value and costs for legal services.”

As a Washington Post article put it:

“New efforts to jettison hourly billing are being driven by in-house corporate lawyers, who say they have grown frustrated seeing fees to outside firms soar even as they slash their own costs. They said they want more certainty in their legal budgets and worry that outside firms are spending unnecessary amounts of time on their matters.”

When The American Lawyer published its latest survey of 112 law firm leaders in December, 69% agreed with the statement:  “due to the advent of new technology and increased commoditization of legal services, many, if not most, Am Law 200 firms will have to change their business and billing practices.”

When I started working on this series in December, I knew alternative fees were a hot issue.  But I did not know how hot.  Partly as a result of some nice comments in Pat Lamb’s blog and Jay Shepherd’s blog, my Part 1 post set some new personal records.

The day my post appeared, I also got a long thought provoking email from Ron Baker, founder of the VeraSage Institute which is “dedicated to burying the billable hour and timesheets across all Professional Knowledge Firms.”  Ron had read the complete draft of the full series in “The LegalBizDev Guide to Alternative Fees” (which can be downloaded from the free resources section of our web page.), and while he agreed with some things in my piece, he also had some fundamental concerns: 

“What I am most concerned with in your report is you still have an over reliance on measuring and tracking hours, which is Karl Marx's labor theory of value. There is simply zero correlation between hours and value. No customer cares about hours, efforts and activities, but rather output, results and value. Suggesting firms use blended rates, or capped fees based on hours, is to keep them mired in the mentality they sell time. But again, no customer buys time, they buy value.  For some posts on our philosophy on pricing and no timesheets, along with many additional resources, you can check out our post. 

I replied, in part:  “At this moment, you and I definitely disagree about some very fundamental issues.  But I have not yet had a chance to review the sources you cite, and would like to believe that I am open to changing my mind.”

Based on my research so far, and recent exchanges with other experts, I have decided to expand the scope of this series.  I said last week that there would be a total of five parts.  I was wrong.  There will be more.

But while many people agree that alternative fees are a hot issue, there is less agreement about exactly which types of billing are alternative and which are not.  As ACC General Counsel Susan Hackett put it in an interview with Corporate Counsel  “I don't know what alternative billing will look like. Perhaps you'll see more contract people, more people providing legal products and services that are currently being done by lawyers but probably don¹t need to be. I think you'll see a lot more focus on technology and how it can move those processes forward. And I hope you'll see a much more vibrant law firm market, one that will have corporate practice spread across a much broader swath of firms than you currently see.”

Whatever the change looks like, few seem to think that it will come quickly.  When Evan Chesler was interviewed in the Wall Street Journal blog they asked him to identify “the highest hurdle to achieving a billable-hour-free world.”  Chesler replied:  “One is inertia. People tend to continue doing what they‘ve always been doing. Change requires the application of force. Another is the difficulty of defining what constitutes success. Because in large, complex cases, that’s not a question with a simple answer. It’s easy to think of it in terms of a jury foreman standing up and announcing who won. But the world is more complicated that that.”

When Aric Press interviewed Chesler for AmLaw Daily, he asked how much progress Cravath has made in getting away form the billable hour.  “Chesler says that he’s been raising this issue with clients and in private talks for the last few years. Thus far, he says that he has ‘just a few situations, in the single digits’ with clients who have abandoned the billable hour.”

Ron Baker, who has devoted years of his life to this issue, believes the acceptance of value based pricing “could take decades if not centuries, since it involves the diffusion of a theory. I was naive enough to think the ABA Report in 2002 would have an impact, but alas, it fell flat. I'm starting to think physicist Max Planck was right: progress happens funeral by funeral.”
 
I am not sure how long this series will last, but I can promise it will not take centuries.  Until it is complete, readers who want to read ahead for the full picture can download a draft of The LegalBizDev Guide to Alternative Fees from the free resources section of our web page.  It currently includes the original version of the first five posts.  I will update that Guide when the series is complete, or maybe even sooner.   

Comments

[A Solo]

I suggest two additional factors for your consideration on this issue (that may be more important to solo lawyers, but impact big firms as well).

First, it seems impossible for me to entirely abandon time spent as part of my value calculation. The simple fact is that I want to be compensated at a reasonable level for the work I have done; I do not want to devote 2500 hours of my life to something for which I receive 50k. Another way to look at it is that value has two sides -- there must be value for both the lawyer and the client. At the end of the day, and at the lesser end of the spectrum, the value of something to me is in part calculated by the amount of time that I spend upon it instead of other things.

Second, it seems to me that clients, particularly smaller clients with less legal acumen, are not in a very good position to judge the value of a legal matter. Often, they cannot answer the basic questions of what they want out of a matter or what the reasonable value of success is to them. The end result is that that fixed fees are looked at with skepticism. It seems as though the clients think they are being taken in by the fixed fee and that a hourly rate would actually be cheaper for them. This is particularly true when I present a budget for the life of a case to the client, but the lawyer down the street says "I just need 5k now, and we will make short work of this case." Clients do not seem to want to focus on the bigger picture and issues and instead want to focus only on the immediate (putting off larger issues for later consideration). I have not found a way to deal with this other than to keep track of hours to show that a fixed fee was a "deal" which obviously defeats the purpose of the whole scheme.
I would very much like your thoughts on these

[Jim Hassett]

On the first issue, I don’t want to be evasive, but the relation between hours and value is quite controversial. I am still working on the post that summarizes what various experts say about this, and what I think. It will appear in a few weeks.

On the second, I think the client is always right. If they want to pay by the hour, that is their choice. As for judging value, I think it's their money so they get to decide how to define success. It is true that in some cases clients need to be educated by legal experts about what they need. I wish I had a simple answer about how to accomplish this, but I don't think anyone does.

[Thomas L. Bowden, Sr.]

Charging for legal services by the hour is like selling gold by the foot. And you can quote me on that.

[lieben]

Interessante Informationen.