The billable hour: How sick is it?

The failure of the billable hour to die is back in the news. 

In a recent AmLaw Daily post entitled The Billable Hour Endures, former Kirkland & Ellis partner Steven Harper argued that, “Regularly over the past 20 years, optimists have declared [the billable hour’s] imminent demise…yet it survives because it has powerful defenders, including the U.S. Supreme Court's conservative five-man majority.” 

Harper listed several reasons that the billable hour remains strong, but it was the Supreme Court reference that got the blogosphere buzzing.  He described an April 2010 US Supreme Court ruling that addresses how, “attorneys fees [are awarded] under the federal statute permitting winning plaintiffs to recover from the losers.”  The court’s “lodestar method” is based upon multiplying hours worked by the hourly fee.  The implication is that, “lawyers maximizing their chances for court approval of their fees will adhere to hourly billing. Innovators experiment at their peril because, depending on the type of matter, they risk not getting paid.”

Whenever a post appears that argues in favor of the billable hour, lawyers and consultants rush from all sides to add their support.  This is the message that lawyers want to hear: “The way you’ve worked for your entire career is the best way to meet client needs.  You don’t have to change a thing.  Just keep billing hourly, and when the economy improves you’ll make as much as ever.  Maybe more.” 

In every profession, sellers love the billable hour, because it puts all the risk on the buyer side.  Believe me, if I could sell all of my company’s services on an hourly basis, I would switch over in a heartbeat.  But I’m stuck with fixed price work, because I sell to lawyers, and they hate buying services by the hour.  They know better. 

Which brings us back to the ACC Value Challenge and the widely heralded revolution in what legal clients want.  Will lawyers take the risk of non-hourly billing if clients continue to demand it?  Oh wait, the revolution in client demand is also being questioned.

Last Thursday, Paul Lippe sent Legal OnRamp members an update email came with the subject line, “How Many GCs Does it Take to Change a Paradigm?”  It highlighted a post by Patrick McKenna entitled The Demand Side of The Market is Not Demanding, arguing there is “a lot of smoke, but...where’s the fire?”

Patrick cited a number of experts about client preferences for billing by the hour, including an excellent article by Alex Novarese in Legal Week, which argued that clients “are not only generally failing to enforce change, they are, if anything, more conservative than the law firms, which is saying something.”  Patrick’s conclusion?  “In the end things will change...but on the client side, it may yet be a long, protracted process.”

The day after Patrick’s post appeared, a colleague emailed me a link.  He knew that Patrick and I had co-chaired a panel in Chicago a few weeks ago on “Overcoming Lawyers’ Resistance to Change,” and he was surprised that Patrick had a substantially different view of alternative fees than I do.  I wrote back to say that actually I agree with most of what Patrick wrote.  Clients are moving very slowly. 

My LegalBizDev Survey of Alternative Fees quoted a number of law firm leaders to this effect, such as the partner who said, “At least half the time, maybe more, when the client says alternative fee, what they are really saying is, ‘Give me a larger discount than you gave me before’” (p. 32).

In that survey, I also asked chairmen, senior partners, COOs and CFOs from 37 of the largest law firms in the US to estimate the percent of AmLaw 100 revenue from alternative fees then and five years in the future.  Every single participant said it was going up. 

When senior decision makers at 37 of the largest law firms in the world unanimously agree on a trend, something very important is going on. 

Only headline writers are predicting the death of the billable hour.   But there can be no doubt that, as Bruce MacEwen of Adam Smith Esq. elegantly put it in the foreword to my survey, “The billable hour’s market share has peaked.”

It is very difficult to predict exactly how quickly the market share of hourly billing will decline, or whether a tipping point is in sight.  In my survey, although all agreed on the direction of change, decision makers strongly disagreed about its speed.  Predictions of the five-year growth rate ranged from 20% to 900%. 

Lawyers are not known for embracing change, and going from an hourly business model to a non-hourly one is extremely difficult not just for law firms, but also for in-house lawyers.  That’s why the Association of Corporate Counsel is beginning to offer presentations for law departments on project management.  (One example: on September 30, I will be on an ACC panel at McDermott Will’s Boston office entitled The Value Challenge in Action: Doing Deals Efficiently and Effectively Using Legal Project Management.)

But while the difficulty of change makes for slow progress, do not be fooled into thinking that change will not occur.  All of the momentum is away from hourly billing. 

If you doubt this, consider what you would do if you were the general counsel for a large corporation, and you were being pressured to control costs.  Suppose you had to choose between two law firms that you thought would provide comparable service, one with hourly billing and the other with a firm fixed price.  Which would you choose? 

I know that the assumption of comparable service is a big one.  In another recent study of GCs, the most significant obstacle to increasing the use of alternative fees was “concerns about quality” (56.7%).  But bear with me for a moment and assume that lawyers are smart enough to solve that problem over time, and that they will gradually be able to consistently deliver comparable quality at a fixed price.  Which would you choose: hourly or fixed?

Now suppose that you chose the fixed price option a few times, and you did indeed get the same kind of service that you got under hourly arrangements.  Why would you ever go back?

Comments

[Patrick J. McKenna]

Jim:

Your Blog post, as always, makes some excellent points. I was intrigued to read the email comments from your colleague and learn that he "was surprised that Patrick had a substantially different view of alternative fees than I do." I don't believe that we have different views at all. We both subscribe to the belief that AFA's will happen and those lawyers / firms that get out in front of the inevitability of this development will have an advantage. That belief is evidenced by a series of eight articles I co-authored with Jeff Carr, Pat Lamb and Ed Reeser over a year ago (available on my website). My blog post was simply intended to make the point that I'm bloody disappointed that not more clients are yet truly "walking their talk!"

[Legal Dodo]

Although the billable hour does not seem to be dead as yet, its days are definitely numbered. Clients are increasingly demanding reduced legal costs, forcing the law firms to innovate. One solution to the high legal fees problem is legal outsourcing.

With the advent of legal process outsourcing, legal work is now being done at a fraction of the cost in countries like India, without compromising in quality. Companies like SDD Global Solutions are helping buyers of legal services in the U.S. reduce costs dramatically by providing cost effective legal solutions.