The Billable Hour: Going, Going ... Still Here

Published on: 
01/10/2011
Published on 1/10/11

In a previous column, I posed the question: Is the billable hour dead or merely on life support? It could be that there is a third answer: hibernation.

A recent survey reported that almost 73 percent of 2009 outside counsel fees were based on arrangements other than the standard hourly rate, up from 66 percent the previous year. It's clear that law firms are scrambling with deals to retain clients, but is it also an inescapable conclusion that firms are moving away from the standard hourly rate?

A more detailed look at the responses from the large companies surveyed, most of whom exceeded $1 billion in revenue and more than 5,000 employees, reveals that the "alternatives" they described were basically discounted fees.

When the customer pushes hard enough, the supplier/vendor/law firm will react, and in most cases the reaction was to discount the fee by a percentage. The net effect is to reduce a fee from $300 to $250, or the like.

There are many ways to disguise the discount: a flat percentage, a blended rate, a volume discount, a fixed fee, etc. But these are not really "value" billings, where the customer/client has more involvement in setting the fee and the arrangement is more of a partnership than a traditional customer-vendor relationship.

In the contingency area, one example was highlighted in a recent episode of the ABC drama "The Good Wife," with Michael J. Fox as the protagonist defense attorney. In the end, the plaintiff law firm was celebrating a "victory" of a settlement for $35 million. The large sum for the plaintiff also meant that the fee for the law firm would sustain its operations for some time to come.

The plaintiff's lawyer suggested to Fox that he would have better luck in his next case. Fox smiled and said he was just fine. After all, the firm had the good fortune to receive a $90 million case and settle it for $35 million. He said he had a client who knew it was worth $90 million and had a $50 million reserve, with Fox to receive a bonus for anything he could produce under the $50 million target. That made for a very large attorney's fee (a reverse contingency).

In transactional work and more traditional litigation work, alternatives are created when both client and lawyer work together to analyze the facts, learn the objectives of the client, and then determine the strategy to reach those objectives. That includes the fee and the method of determining it.

Those are alternatives, and they're not based on time expended on the matters. Those approaches are still few and far between, notwithstanding the great amount of air expended in conversation about it.

Will the billable hour ever disappear? I suspect not. For the larger corporation whose general counsel are more senior lawyers and often come from large firms, they are imbued with the hourly rate. Law firm have been built on the hourly rate and the ease of increasing fees by a small percentage here and a small percentage there.

The smaller or individual client also understands the idea of hourly rates. The hourly rate will disappear only when attorneys begin to understand the cost of their doing business and can create a laundry list of unbundled services for established prices, each determined in a way that will produce a reasonable profit for the law firm and a fair price for the client.

More effort is being placed on teaching lawyers cost accounting for professional service firms, more firms are engaging professionals in other fields to help them understand the needed processes, and more lawyers are learning project management techniques.

When these skills come together, we may see a de-emphasis on the billable hour and the delivery of legal services based on the value received by the client. Until then, we'll continue to talk about value billing.

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