Billable Hour: Going, going ... Still here

11/01/2010
Published November 2010

In a recent article, I asked whether the billable hour method of billing clients is dead or on life support? It turns out that there is a third option: Hybernation.

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

When looking further into the responses of the large companies surveyed, most of whom exceeded $1 billion in revenue and more than 5,000 employees, we find 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 take a $300 fee to a $250 fee, or numbers similar to this. 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 in the original sense of our discussion. Value billing means 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 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. This large sum for the plaintiff also meant that the fee for the law firm would sustain its operation for quite some time to come. The plaintiff lawyer suggested to the defense counsel (Fox) that he would have better luck in his next case. Fox, smiled, and said he was just fine; that the law firm had the good fortune to receive a $90 million case and settled for only $35 million. He, on the other hand, had a client who knew it was worth $90 million and had a reserve for $50 million. Fox would receive a bonus (stock options, etc.) for anything he could produce less than the $50 million. In this case, $35 million, and a very large lawyer’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 objective(s) of the client and then determine the strategy to reach those objectives. This includes the fee and the method of determining the fee. These are alternatives ... and they’re not based on the time expended on the matters. These 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 law firms, they are imbued with the hourly rate. For law firms, they have been built on the hourly rate and the ease of increasing fees by a small percentage increase here and a small percentage increase there. For the smaller or individual client, they, too, understand the idea of hourly rates. Will the hourly rate ever disappear? Only when lawyers begin to understand the cost of their doing business and can create a “laundry list” of unbundled services for established prices, each of which is determined in a way that will produce a reasonable profit for the law firm and a fair price for the client for the value delivered. Will we reach that point in the near future? Possibly. More effort is being placed on teaching lawyers cost accounting for professional service firms; more law 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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