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Legal Commentary

: Adam Smith, Esq.

The NYT's Obit for the Billable Hour

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When The New York Times features it on the front page, it must be real, right?

I'm referring to Billable Hours Giving Ground at Law Firms, which features Evan Chesler flatly arguing that "This is the time to get rid of the billable hour." Unfortunately, if you're looking for real insight into the issues underlying the stress on the billable hour, this is not the article to read--unless, as I perhaps suspect, the article was pitched to an audience oblivious to the entire issue prior to picking up that day's Times.

Shall we review the bidding on this topic?

Pro the billable hour:

  • It's familiar, both to lawyers in private practice and to their inhouse lawyer clients. It's been the dominant revenue model since the 1960's which, for all practical purposes, is the professional lifetime of anyone working today.

  • It's measurable. David Wilkins of Harvard says:

    "Does this make any sense?" said David B. Wilkins, professor of legal ethics and director of the program on the legal profession at Harvard. "It makes as much sense as any other kind of effort to measure your value by some kind of objective, extrinsic measure. Which is not much."

    David (a friend) is of course right, but the alternative to an "objective, extrinsic measure" is some variant of subjective and judgmentally laden approximation, which requires trust.

  • Clients--this is my theory, at least--have been largely bluffing this past decade or more when they've moaned and complained about the billable hour. After all, from their perspective, it has some indisputable virtues:
    • They can say to their financial green eye-shade types, "Well, look, they actually did the work. Says so right here."
    • And, for that matter, they can say that they negotiated the "most-favored nation" rate and, on top of that, got a 15% discount; so don't argue that we didn't get value for money.

  • Again, clients might not be too comfortable with the alternatives. Why is $375,000 "for services rendered" the right number? How does one defend that internally against the purchasing agents and cost accountants? (And don't assume their instinct will be to ask why it's not a higher number.)

Con the billable hour:

  • It provides, obviously and somewhat tendentiously, an incentive for firms to run the clock rather than solve problems. I say "tendentiously" because this assumes lawyers put their own very short-sighted self-interest ahead of professional responsibility, ahead of a satisfied client, and ahead of simple integrity in their professional dealings. In my experience, to the extent time-sheets did not reflect utter reality to the second decimal place, it was because lawyers engaged in self-administered haircuts on the time they'd actually spent, fearing they'd look inexperienced or simply making an on-the-spot judgment about what the activity they'd performed "was really worth."

  • It starts from "cost of production" rather than "value to client." This, to me, is its core economic failing. To be sure, no firm can long sell its products or services at less than "cost of production," but unless you're in an absolutely commmoditized industry, that is the merest of starting points.

  • It's dehumanizing, reducing talented and highly educated professionals to fungible units as factors of production. Worse, it contains no rewards for brilliance, insight, judgment, or even plain old efficiency. Lawyers have every incentive to work day and night, and no incentive to recharge their batteries, take in a performance of "Trovatore," read "The Merchant of Venice" or The Federalist Papers, or simply enjoy a moment outdoors in the sunshine. We can debate whether, in the long run, this will produce pale and narrow automatons or whether utter and uncompromised dedication to a profession, 24/7, is the only route to serious excellence, but the point is that decision should be made by each individual with free will unfettered by the hands of a stopwatch.

  • Ultimately, it limits law firms' revenue. (Clients--you can skip this paragraph.) Each of the variables that goes into revenue under the billable hour model has intrinsic limits: Rates, hours, realization, and leverage. This is worth a separate column, or more, of its own, so I'll go no further here.

Are we, then, about to witness in some grandiose fashion the "death" of the billable hour, much less its dropping back into the shadows of small-beer practices or quaint and creaky backwaters?

As you can tell by how I phrased the question, I see no such incipient revolution. And the primary source of life-support I would cite is clients, not law firms. Indeed, if there's a single remark in the Times article that's wrong-headed at best and offensive at worst, this is it:

[There's a] risk to law firms experimenting with other payment arrangements: If lawyers set too low a price, they lose money. Many lawyers may not be good enough businessmen to pick the right price, said [Frederick] Krebs, [President] of the Association of Corporate Counsel.

"The difficulty is, we don't really know what it costs us to do something," he said.

Wrong on the count that we don't really know what things cost, and wrong on stilts that lawyers aren't good enough businessmen to set a fair price.

First, if you believe that actuarial science has continued to survive and thrive for centuries for a reason, and that statistics, while subject to abuse for rhetorical or polemical means, are fundamentally a powerful tool, then you subscribe to the notion that we can tell "what things cost."

Second, if you believe lawyers can't set a price that both profits their firms and continues to win loyal clients, I would ask you to explain how the share of GDP going to lawyers, as well as the total percentage of lawyers as a component of the workforce, have continued to grow essentially unabated (well, until the last six months...) throughout our lifetimes.

So where, then, do I think the future of the billable hour lies?

As the old political joke has it, "You can't beat somebody with nobody," and part of the billable hour's durability to date has been a failure of imagination in nominating "somebody" to run against it.

But for the first time in awhile, "somebody," in various guises, are appearing. Here are just a few suggestions:

  • Flat fees for a large portfolio of litigation over time and space.
    • Imagine you could handle all of Wal-Mart's employment litigation west of the Mississippi for three years (a made-up example). With the help of some of our good friends the actuaries, you could put a reasonable, albeit approximate, price on that.
    • But beyond that, imagine how landing that contract would change our firm's behavior the day after signing: All of a sudden, your incentive would not be to let Wal-Mart slide carelessly into court, ramping up your billable hours, but precisely the contrary--to keep them out of court, because going to court costs you dearly against your fixed-price contract.
    • Wouldn't you, then, embark on a campaign of employment-law compliance counseling at Wal-Mart?
    • And did you notice how this aligns the client's and the firm's interests? All of a sudden there's genuine risk-sharing: The more the client is sued (unpleasant and expensive), the harder the law firm has to work and the less profitable it is (unpleasant and expensive).

  • An 80/120 deal.
    • With a willing and innovation-friendly client, agree that such and such a matter should cost, say, $1-million, but ask them to pay your firm as progress fees just 80% of that as the matter proceeds.
    • When it's done, the client gets--in its sole discretion--to evaluate how successful the outcome was for them. If they don't like it very much, they've paid your firm 80% and the matter is closed.
    • But if they like the result a lot, they pay you 120%.
    • And of course, 99% of the time, they pay you more than 80% but less than 120%.
    • What do you wager that the average recovery your firm would make on deals like that would exceed 100%? I would happily take that bet, as everyone working on the matter at our firm will know that this is a client they have to please.

There are surely other models inventive minds can think of.

The billable hour is dead. Long live the billable hour.

Full post as published by Adam Smith, Esq. on January 31, 2009 (boomark / email).

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