Law Students

Changes in BigLaw?

By Casebook Sherpa

There are two moments that really stand out for me this recruiting season.

The first happened during a screener at a big firm. The conversation turned, as it usually does, to the economy. The partner with whom I was interviewing says, “Well, if this economy leads to the death of the billable hour I’ll give it a big, wet kiss.” Our mutual realization that this statement begged far too many questions, we quickly moved on to her journey to complex class action litigation.

The second happened about a week ago. Late Saturday night. Auburn was well on its way to easy win over Mississippi State when a friend calls. He’s an attorney and owns his own small firm. While I wasn’t totally sure how much of the Old Grandad he had imbibed in watching his beloved Tigers trounce the Bulldogs, he did make one thing abundantly clear: “Find something that doesn’t involve billable hours. My flat fee clients let me a real lawyer.”

Given the nature of the firms I’m considering (large and small), I think the billable hour is, in fact, in my future. I’m fine with that and am talking with firms that do work I’d enjoy without regard for how they bill.

But the partner’s point about the economy killing the billable hour makes the coverage (also here and here) of O’Melveny & Myers’ new Strategic Plan well worth the read.

The five-year plan begins with a statement of ?The Vision.? It?s not exactly visionary: O?Melveny & Myers wants ?the most desirable engagements,? and it wants to be ?primary outside counsel? to a large and growing list of clients.? It intends to do this by ? surprise surprise ? providing ?the highest quality legal service.?

Then the memo gets more interesting. It expresses management?s plan to ?adopt[] a single rate card by FY2012, with volume and ?investment? discounts and appropriate alternative fee arrangements.? It announces OMM?s intention of ?becoming the leader in providing high-end legal services on a fixed fee basis, reducing costs to clients and achieving superior economic performance through practice management oriented toward cost effective client service.?

Emphasis added. OMM appears to be committed to making alternative fee arrangements a growing part of its revenue model and is making appropriate staffing changes to accomodate that. One commenter on the Above the Law link above speculates: “It sounds like O’Melveny wants to make itself more like Munger or Wachtell – smaller, with top-quality lawyers. So lawyers already at OMM can look forward to (a) better colleagues and (b) more prestige.”

Add this news to the decision by Mayer Brown and Reed Smith to champion flat fees:

Mayer Brown is looking to move away from traditional hourly billing models, with plans to bring in fixed or capped fees for transactional work.

Mayer Brown’s senior management is in the process of reviewing how the firm bills clients and is considering proposals to overhaul fee structures for core transactional practices including corporate, banking and real estate.

[. . .]

Separately, Reed Smith has also been looking at changing fee structures within its transactional practices. The firm has a committee made up of partners from across the firm reviewing proposals and is looking at an increasing use of fixed or capped fees for clients within its financial industry group (FIG), corporate and real estate practices, for transactional work.

And don’t forget this one:

With the recession crimping legal budgets, some big companies are fighting back against law firms’ longstanding practice of billing them by the hour.

The companies are ditching the hourly structure — which critics complain offers law firms an incentive to rack up bigger bills — in favor of flat-fee contracts. One survey found an increase of more than 50% this year in corporate spending on alternatives to the traditional hourly-fee model.

Pfizer earlier this year reached a deal with law firms, doing away with billable hours and switching to a flat fee. The pharmaceutical company’s general counsel, Amy Schulman, talks about what was behind the arrangement.

The shift could further squeeze earnings at top law firms. The past 18 months have been brutal for some big law firms as work that hinges on vibrant credit markets, such as deal making, has flat-lined.

This piece captures the key component – clients. If the billable hour structure produces an unreasonable strain on clients’ budgets, then it needs to be clients that act as the impetus to change the economics of the legal services market, because lord knows the increasing supply of attorneys has hardly led to a decrease in rates because of an excess of legal services available.

So, is this the beginning of the end of the billable hour? Or this just a temporary correction caused by a severe economic downturn?

I guess my other main concern is with how this affects hiring. OMM’s decision appears designed to lower the firm’s overall size and focus recruiting on a small group of elite schools. If that trend spreads to other firms how does that impact schools that are producing talented and qualified graduates but aren’t as highly ranked?

If it leads to making jobs at smaller firms more attractive that’s a net positive as more students will be attracted to them by necessity and preference.

Full post as published by Fight The Hypo on September 18, 2009 (boomark / email).