Legal Business

The billable hour: How sick is it?

The failure of the billable hour to die is back in the news. 

In a recent AmLaw Daily post entitled The Billable Hour Endures, former Kirkland & Ellis partner Steven Harper argued that, "Regularly over the past 20 years, optimists have declared [the billable hour's] imminent demise...yet it survives because it has powerful defenders, including the U.S. Supreme Court's conservative five-man majority." 

Harper listed several reasons that the billable hour remains strong, but it was the Supreme Court reference that got the blogosphere buzzing.  He described an April 2010 US Supreme Court ruling that addresses how, "attorneys fees [are awarded] under the federal statute permitting winning plaintiffs to recover from the losers."  The court's "lodestar method" is based upon multiplying hours worked by the hourly fee.  The implication is that, "lawyers maximizing their chances for court approval of their fees will adhere to hourly billing. Innovators experiment at their peril because, depending on the type of matter, they risk not getting paid."

Whenever a post appears that argues in favor of the billable hour, lawyers and consultants rush from all sides to add their support.  This is the message that lawyers want to hear: "The way you've worked for your entire career is the best way to meet client needs.  You don't have to change a thing.  Just keep billing hourly, and when the economy improves you'll make as much as ever.  Maybe more." 

In every profession, sellers love the billable hour, because it puts all the risk on the buyer side.  Believe me, if I could sell all of my company's services on an hourly basis, I would switch over in a heartbeat.  But I'm stuck with fixed price work, because I sell to lawyers, and they hate buying services by the hour.  They know better. 

Which brings us back to the ACC Value Challenge and the widely heralded revolution in what legal clients want.  Will lawyers take the risk of non-hourly billing if clients continue to demand it?  Oh wait, the revolution in client demand is also being questioned.

Last Thursday, Paul Lippe sent Legal OnRamp members an update email came with the subject line, "How Many GCs Does it Take to Change a Paradigm?"  It highlighted a post by Patrick McKenna entitled The Demand Side of The Market is Not Demanding, arguing there is "a lot of smoke, but...where's the fire?"

Patrick cited a number of experts about client preferences for billing by the hour, including an excellent article by Alex Novarese in Legal Week, which argued that clients "are not only generally failing to enforce change, they are, if anything, more conservative than the law firms, which is saying something."  Patrick's conclusion?  "In the end things will change...but on the client side, it may yet be a long, protracted process."

The day after Patrick's post appeared, a colleague emailed me a link.  He knew that Patrick and I had co-chaired a panel in Chicago a few weeks ago on "Overcoming Lawyers' Resistance to Change," and he was surprised that Patrick had a substantially different view of alternative fees than I do.  I wrote back to say that actually I agree with most of what Patrick wrote.  Clients are moving very slowly. 

My LegalBizDev Survey of Alternative Fees quoted a number of law firm leaders to this effect, such as the partner who said, "At least half the time, maybe more, when the client says alternative fee, what they are really saying is, 'Give me a larger discount than you gave me before'" (p. 32).

In that survey, I also asked chairmen, senior partners, COOs and CFOs from 37 of the largest law firms in the US to estimate the percent of AmLaw 100 revenue from alternative fees then and five years in the future.  Every single participant said it was going up. 

When senior decision makers at 37 of the largest law firms in the world unanimously agree on a trend, something very important is going on. 

Only headline writers are predicting the death of the billable hour.   But there can be no doubt that, as Bruce MacEwen of Adam Smith Esq. elegantly put it in the foreword to my survey, "The billable hour's market share has peaked."

Read more on the Legal Business Development Blog.