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January 03, 2008

The Billable Hour Bash-a-thon Continues Courtesy of Slate

This article was forwarded to me by a reader known as Blueb73.  Author Lisa Lerer of Slate Magazine writes a compelling piece called How to Kill the Law Firm Billable Hour in which she states the following:

The criticisms lobbed by academics, associates, and bloggers have had a negligible impact. Making such a significant change takes a more powerful force in law firm life: the client. And now, finally, the companies that pay millions in hourly rates are striking back, forcing their law firms to cut some tough, nonhourly fee deals. If anyone can tame the billable beast, it's the clients who feed it.

She further describes what she believes to be the future of law firm culture:

If this is the future of the legal world, then the business will eventually spilt into three fairly autonomous markets. The top end of the spectrum will remain largely unchanged. Companies will still pay hourly rates to hire white-shoe law firms for specialized, bet-your-company kinds of work. On the opposite end, however, clients will stop taking their rote legal work to law firms altogether. Companies already outsource relatively simple matters like document review to consulting services. And as technology improves, more programs will let companies handle their own contracts online.

In the murky middle between one-of-a-kind advice and dime-a-dozen contracts, the push for alternative arrangements will prevail. Cisco, for example, already pays a fixed fee to law firms for filing patents at the Patent and Trademark Office. The firm's total charge must decrease by at least 5 percent each year, as a firm becomes more efficient; if not, it is replaced with a smaller one willing to take the work.

Solos, take note.  Where will you fit into this structure and how will you capitalize on the opportunity presenting itself.

Links of Interest:

The Billable Hour "Cockroach" is Being Extinguished

The Cockroach of the Legal Profession - The Billable Hour

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Comments

Chuck Newton

I believe there is a lot of areas in which decapitation fees work. Real estate and other transactional work is a good example. But, make no mistake about it, these are decapitation fees and not merely fixed fees in which the the lawyer, and not the client, incurs all losses due to events mainly outside of his or her control, and even for the bad judgments and actions of the client. These fees are promoted in litigation by attorneys who simply do not wish to be accountable for their work product. In litigation I have most often found the attorneys accepting decapitation fees make less money.

PerGynt

What we are talking about is giving the customer more control over her money, not control over our companies. In the case of Cisco it is a case of the latter. I object to this kind of behavior the same way I object to "low ball" bidding for construction projects.

It's not good for the industry. Efficiency and reasonable pricing are certainly desirable, but companies that want to force me to reduce my price on a yearly basis aren't desirable customers because it disallows me the flexibility I may need to train new people or make decisions about the priorities of my own operation, not to mention the allowances for inflation and cost of living. It also suggests that my current price is not fair. What sense does that make? I want to be their lawyer, not their dog. Lastly, I have expenses that are best calculated in relation to time. Monthly, daily, hourly, etc. The expression of the cost of services as an hourly number is very appropriate. Now, I can see being new and inexperienced and not being willing to bill a client for learning how to do something, but I see nothing wrong with billing a fair price and providing a series of stopping points so that the client can make decisions about future expenditures. Is that not what we are talking about anyway? The "value billing" process seems manufactured and somehow removed from the actual value of the work, and therefore somehow less credible than a simple statement of minimum fees for simple procedures. Is value billing the equivalent of estimating the hours required and bidding the job accordingly? If so, why not just say so? I don't see how this would work in complex litigation, but tell me how I'm wrong. Please.

Am I wrong? I am seeing this from the perspective of a former construction professional, currently in law school.

Thanks.

P

Allison Shields

Susan –

Thanks for giving me the heads-up and the opportunity to chime in and comment on this post. While I agree that clients will be a big driving force in changing the legal profession and getting more lawyers away from hourly billing, I don’t necessarily agree with Lerer’s view of the future. And while I haven’t looked into Cisco’s system, the way Lerer describes it in her post, I’d have to agree with the commenter, “P,” that forcing a firm to cut their total charge by a specific percentage each year without regard to what work is performed and how it’s performed is too simplistic an approach that’s bad for both lawyers and clients.

But lawyers and law firms have to keep in mind that the needs of clients are ultimately what control their business; the key is to choose your clients carefully. If a particular client is requesting that the firm perform work at a fee that is economically not viable for the firm, the firm has two choices – target other clients or find a way to make the work economically viable for the firm. As P notes, a client that wants to force a firm to reduce fees on a yearly basis may not be a desirable client for a particular firm (or lawyer). But remember that clients aren’t the ones responsible for ensuring that lawyers and law firms can train people, prioritize their business needs and ensure that the firm is covering inflation, etc. Those are business decisions that need to be made by the law firm. One of those decisions, as mentioned above, is the clients you choose to work with. Another one is how you structure your fees.

Many lawyers like P claim that they have ‘expenses that are best calculated in relation to time.’ Layers today are accustomed to making calculations in terms of time, but that doesn’t necessarily mean that’s the best method of making those calculations. What expenses are actually best calculated in terms of time? Even if the lawyer thinks that the best method of calculating their expenses is time, that doesn’t necessarily mean that’s the best way of calculating fees. The ‘cost of services’ is something a law firm needs to take into account when pricing their services, but it isn’t the only factor – the value of those services to the client is the real measure of the appropriateness of the fee.

The issue of ‘value billing’ is getting a lot of attention lately, but the definition of ‘value billing’ isn’t fixed, which causes some confusion among professionals. Value billing doesn’t mean that the client has total control over what the lawyer charges. But no matter how you structure your fees, the client must value the work performed enough to pay the fee charged.

P’s comment says, “I see nothing wrong with billing a fair price and providing a series of stopping points so that the client can make decisions about future expenditures.” That’s really the answer to P’s later question about how value billing would work in a complex litigation context. The big question is how you determine what a ‘fair price’ is. And complex litigation or not, time isn’t the sole factor that determines whether a fee is appropriate or fair.

There isn’t only one way to value bill, because every law firm is different, every client is different, every case is different, and different practice areas require different legal skills, etc. Sometimes it’s appropriate to provide a ‘flat fee’ up front for ‘simple procedures’ (as P calls them) or for predictable work. Other times, what P suggests about a series of stopping points is appropriate. By quoting a fixed fee for specific work outlined in an agreement, advising the clients of variables that would change that fee, and providing ‘stopping points’ at which the client determines whether to move forward and what additional services might be required or appropriate based on the client’s desired outcome and values (as well as the fee), alternative, value-based billing can even work in a litigation context.

Lawyers need to start thinking about the value that they provide to their clients in terms of the services that they provide, rather than the time it takes to provide those services. A lawyer’s most valuable assets are the lawyer’s intellectual capital - skill, knowledge, expertise, ability to argue, to see the issues, to creatively represent their clients’ position- and their ability to provide their client with the kind of experience the client is looking for in their legal representation. Time is NOT the lawyer’s most valuable asset. Lawyers do themselves and their clients a disservice by continuing to assert that time (a limited asset, the same amount of which is available to everyone) is what the lawyer is ‘selling’ to a client. Value billing is NOT billing based on estimated hours – it is billing based on the value provided by the lawyer to the client. Time is (or may be) a factor that the lawyer considers when calculating the lawyer’s cost to provide the service, but it shouldn’t be the sole basis for the lawyer’s fee.

The bottom line is that more and more clients are getting frustrated with hourly billing and are calling for alternatives. Lawyers that can learn to structure their fees in a different way will be more attractive to those clients – assuming that those are the clients the lawyer wants to work with. And experience has shown that that lawyers who are no longer tied to the billable hour find the law firm culture, legal work, enjoyment of the practice, employee and client relationships and profits all improve.

Allison C. Shields, Esq.
Legal Ease Consulting, Inc.
www.LawyerMeltdown.com

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