Legal News

Has the Clock Struck 12 on the Billable Hour?

By Ashby Jones

People who follow the world of law firms know, among so much else, two things: 1) that billing-by-the-hour has long been the way law firms get paid and 2) companies have over the years had only limited success in getting firms to agree to do it any other way.

That’s changing. In a big way. Companies are starting to ditch the hourly structure — which critics complain offers law firms an incentive to rack up bigger bills — in favor of flat-fee contracts and other types of arrangements. Click here for the WSJ story out today, from Nathan Koppel and me.

The practice of asking for flat-fee arrangements has, until now, largely been the province of some forward-thinking general counsel, like Cisco’s Mark Chandler. But now, some other heavyweights are getting involved, in a big way.

Exhibit A: pharmaceutical giant Pfizer Inc. Back in March, the company, at the leadership of new general counsel Amy Schulman (pictured), decided to pilot a new program, in which it would choose 16 law firms and pay each of them a flat fee to handle a set amount of work. Some of the participating firms include Skadden, DLA Piper (Schulman’s former firm), Boies Schiller, Shook Hardy and Ropes & Gray. The company says that it expects to reduce its domestic law-firm spending by 15% to 20%, largely through flat-fee arrangements. Schulman told the firms that in exchange for their participation in the plan, the firms would be unlikely to make their “historical profit margins” on Pfizer work.

Money spent on alternative billing arrangements has totaled $13.1 billion this year, versus $8.6 billion in the like period of 2008, according to BTI Consulting Group Inc., which surveyed 370 lawyers who work at Fortune 1000 companies.

Pfizer could have demanded a discount from firms’ hourly rates, Schulman said, but she hopes for a shift to a system that encourages firms to work more collaboratively with Pfizer and with other law firms that service Pfizer. The flat-fee program “should be something fundamentally different that will last beyond whatever people think they have to tolerate because of the economy,” she says. Embedded in the online version of the story is a video of Schulman talking about the program.

Of course, for certain types of work, the billable hour will likely stick around for a while. High-stakes litigation, for example, might be tough to put on a flat fee. A “client can’t expect to have the absolute best team of [trial] lawyers from a firm, and have the lawyers give up all the other work they could be doing on a regular-fee basis, to work 18 hours a day for months of time on a flat-fee engagement,” said Barry Ostrager, a Simpson Thacher litigator.

In the midst of the shift, firms are adjusting the way they work. Orrick Herrington & Sutcliffe, for instance, has tripled the revenue it generates from alternative billing arrangements in the past year, but maintained profitability through efficiencies, said David Fries, chief client-service officer. Software sends an email to lawyers when they hit certain levels of a fixed-fee budget, as a reminder to work efficiently. Financial analysts file biweekly reports analyzing how lawyers’ time is being spent. “You find that someone may have spent 200 hours on something” that isn’t crucial, Fries said.

Full post as published by Law Blog - WSJ.com on August 24, 2009 (boomark / email).