Bye Bye Billable Hours

I love it when I’m right.  I don’t gloat too much, but today will a bit, as part of my Law Firm 2.0 series is proving true:  the eventual demise of the billable hour.

I won’t reiterate all of my thoughts on the subject.  If you are curious, check out my prior postings, but the NY Times recently published an article on how the economy is affecting the concept of the billable hour

It’s not surprising, but I was still happy to see the results.

Now the only question is whether or not this will ever affect the accounting industry.  Let’s all cross our fingers.

  • This is indeed good news, especially if big firms move to this model as other firms will then follow suit. At the least it makes costs more transparent. But, don't count the lawyers out yet: From the article:

    “Firms are approaching the limit of how hard they can ask lawyers to work,” he wrote, in an e-mail response to a reporter’s query. “Without alternative billing schemes, lawyers will not be able to maintain the rapid escalation in incomes that big firms have seen.”

    So maybe the fees will be higher than what you would have paid by the hour.

    As an aside, it is interesting how downturns force (often long overdue) changes in behavior. For example, it was really the 2001 downturn that finally allowed Intel servers and desktops to push proprietary hardware servers and workstations out of the market.

    Let's hope this really is the end of the billable hour and the start of *reasonable* fixed fees.

  • As encouraged as I would be by losing the billable hour, I think we're looking at more of a slow process over the next 2 decades than an immediate sea change. What I find interesting about the many recent articles and blog posts is that I haven't seen any deep analysis of what alternative fee arrangements actually consist of. I have a sneaking suspicion that the main reason why is that a truly effective arrangement requires a lot of work on the part of the client. In particular, the client needs to be disciplined and end the slow response times, incomplete documentation, and endless meetings, conference calls and revisions that make law firms very uncomfortable with the idea of a flat fee.

    When I was in-house counsel, I negotiated an alternative fee arrangement with an open minded partner at an AMLAW 200 firm for an outsourcing deal. The partner quite rightly insisted on the "incompetent client" clause, which stated that if the firm exceeded a certain hour threshold, they would start billing us over and above the flat fee we had agreed on. I negotiated a concession, though, which was that the rate would be at a 25% discount for the first 10 hours. My main goal was to also incentivize the law firm to look at its own inefficiency. Ultimately, we went over both the hour threshold and the first 10 hours due to our own inefficiency, no matter how much I tried to "wrangle the cats." I just don't see that changing anytime soon in corporate america. And startups are some of the worst, most crazed clients when it comes to being helpful in allowing a lawyer to do their work.

    That said, I'm not trying to blame the victim here. Law firms' entrenched business model and lack of interest in using document creation software, extranets and other productivity enhancements definitely is the main problem. But if clients share the blame, too. If clients really wanted the end of the billable hour, it could happen immediately. General counsels of major companies, as well as close corporations, VC firms and startups, would just need to insist on it. If everyone did, law firms would have no choice but to change. So far, there is no consensus to insist on an alternative, and I don't see a willingness among clients to do so soon.

  • Interesting article, Jason. Thanks for pointing it out. I've been experimenting with flat fee billing as well and found a built-in amount of guesswork. I try to estimate how much a project will cost. Sometimes I get it just about right and occasionally I underestimate. There's a lot of pressure to bid low so overestimates are rare, but well received by clients!

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