Law firms generally bill by charging an hourly rate for their “timekeeper” services. Billing rates can slide up or down based on the litigation matter or transaction – for example, the pre-packaged rates provided to an insurer for defense work – or by the seniority of the timekeeper – with partners potentially charging hundreds more an hour than associates. Even paralegals and some non-lawyer staff are charged at an hourly rate.
There are obviously a few other factors tied to the standard billable hour system: (1) How many hours are logged; (2) How many hours actually get billed to a client; (3) How many hours actually get paid by the client; and (4) How much in expense is paid by the client. At its core, however, it’s the annual ritual of increasing billable hourly rates that has caused law firm double-digit growth for so many years. Our economic troubles these past few years, however, have put a damper on that yearly ritual.
To that end, the press has generously covered any example of a law firm providing an alternative to the billable hour regime – with an eye towards claiming these sorts of arrangements are becoming more and more commonplace. For example, it is reported that over 10% of Reed Smith’s new engagements involve some form of alternative fee structure while Saul Ewing offers clients flat fees in some insurance, due diligence and employment matters as well as with will preparation and patent filings. According to a March and April 2009 Altman Weil survey of Managing Partners and Chairs at 687 law firms with 50 or more lawyers, 27.9% felt that “more non-hourly billing” was a permanent change in their firm’s strategy.
High profile lawyers such as Scott Turow have taken the “Kill the Billable” banner – even using his famous writing skills to pen an ABA Journal articleon the topic. As Mr. Turow puts it, his “greatest concern is not merely that dollars times hours is bad for the lives of lawyers – even though it demonstrably is – but that it’s worse for clients, bad for the attorney-client relationship, and bad for the image of our profession. Simply put, I have never been at ease with the ethical dilemmas that the dollars-times-hours regime poses, especially for litigators.”
Evan Chesler, head of Cravath, Swaine & Moore, has also very publicly called for the death of the billable hour. According to Chesler, “[t]he system rewards inefficiency, frustrates clients and has little economic logic.” Bill Lee, co-managing partner of Wilmer Cutler Pickering Hale and Dorr, offers his opinion in an article published by Corporate Counsel: “For in-house counsel facing tremendous budgetary pressures, the fixed fee addresses the problems caused by the hourly rate, such as unpredictability, high costs divorced from actual value and, most importantly, the maddening law firm definition of ‘productivity’ — defined as more lawyers and more hours per matter.”
According to a BTI Consulting survey of 1,700 corporate counsel there is a high correlation between how high a law firm scores on positive brand awareness and its revenues – not too surprising here to find law firms are not that different from other companies when it comes to branding. In fact, the survey revealed that a “10 percent incremental increase in positive differentiation translates into a 28.5 percent increase in revenue for a typical law firm.”
The survey reportedly uncovered that market differentiation was tied to a law firm’s innovation in technology, service and billing. There is nothing too startling in listing “technology and service” given that most non-law firm businesses are measured by the same yardsticks. What is more interesting is the fact that “billing” was considered by legal services buyers to be a marketing attribute that had a direct impact on differentiation and ultimately on a law firm’s revenues. BTI suggested that “[m[aking aggressive use of alternative billing arrangements (sharing risk, being accountable, etc.)” would assist in such differentiation. Despite the marketing potential of innovative billing structures, it remains to be seen whether the billable hour’s days are really numbered.