For years we have been reading obituaries about the presumed death of the billable hour.
Could it now be actually happening?
For the first time, a number of chief legal officers at big companies – the main drivers of time-billing – are saying they expect a sharp rise in alternative fee arrangements in coming years.
Only a dwindling few say the time-billing model will survive.
“We are extremely close to the tipping point on this issue,” said Amar Sarwal, a vice president with the Association of Corporate Counsel (ACC) in a Washington Post article. “The billable hour’s day has passed. It’ll still be a part of the market but it won’t be a leading part of it.”
Spinning Wheels and Churning Time
Here are some figures from the recent ACC survey:
- 80 percent of law firm leaders say non-hourly billing will bring a permanent change in the legal industry. That’s up from 28 percent in 2009.
- 37 percent of general counsel expect the use of alternative fees to increase at their companies.
- Only four percent expect a decrease.
Even more telling is what’s happening on the ground. Just in the past few years, a handful of the nation’s largest firms have abandoned time-billing altogether.
In place of hourly fees, large firms in growing numbers are experimenting with alternatives like flat fees, success fees and contingency fees. This experimentation is expected to trickle down to all practice levels, including solos.
Firms like hourly billing because it’s easy and you can budget around it. Turn on the meter, go to work and send a bill each month.
Clients dislike it because it’s open-ended and appears to reward effort over results.
Flat Fees in Litigation
Some areas like real estate have historically used fixed fees because it is in everyone’s interest to know just what the final legal bill will be. Another reason: in real estate closings lawyers can predict with reasonable certainty what will have to be done and how much time it will take.
Litigation, not so much. The unpredictability of trial work makes it the last bastion of hourly billing. Who knows how long a court case might drag on? Who can predict what will happen at trial? Hourly billing is the only way to go.
Or is it?
“[I]n-house legal departments realize litigation isn’t all that mysterious,” says Steven Greenspan, head of litigation at the 330-attorney legal department of United Technologies, in the Post piece. “There are rules and processes. You should be able to price a case in most circumstances and negotiate for carve-outs with outside counsel in the event that something unexpected happens.”
Greenspan practices what he preaches. His company uses hundreds of outside law firms and pays flat fees for more than 70 percent of their litigation work.
Here’s how it’s done:
- United Technologies and outside counsel break down each litigation matter into phases.
- Phases include investigation, legal research, discovery, trial preparation, etc.
- The company pays a flat fee per phase.
Billing Time and Getting Paid
Simple, right? Nice and neat.
Well, yes, for the company at least. “We believe the hourly rate is dead, and we shouldn’t engage outside counsel on an hourly rate basis,” Greenspan said. “I almost never get pushback [from law firms] today. Two or three years ago, I got pushback all the time.”
Even so, some firms are less enamored than Greenspan by “phase billing.” They would contend trial work can’t be easily sliced, diced, packaged and priced. How much pre-trial preparation is appropriate? Do you get paid for researching two cases but not three? How do you put a price tag on a soaring, spectacular closing argument?
Not to mention the fact that law firm compensation is often linked to billable hours. That’s a pocketbook issue that won’t quietly fade away.
Jay Reeves a/k/a The Risk Man is an attorney licensed in North Carolina and South Carolina. Formerly he was Legal Editor at Lawyers Weekly and Risk Manager at Lawyers Mutual. Contact firstname.lastname@example.org.