RIP To the Billable Hour
The billable hour has – once again – been officially pronounced dead.
This time the obituary comes in the 2017 Report on the State of the Legal Market, released by Georgetown Law’s Center for the Study of the Legal Profession and Thomson Reuters Legal Executive Institute.
“One of the most potentially significant … changes of the past decade has been the effective death of the traditional billable hour pricing model in most law firms,” according to the report. “Although firms still technically bill a majority of their work on a billable hour basis, budget caps imposed by clients mean that as much as 80 to 90 percent of law firm work is now done effectively outside of the traditional billable hour model.”
The culprit, according to the report, are budget caps. The typical capped-fee model requires firms to earn their way up to the fixed level at rates that may already be deeply discounted, says the ABA Journal. As a result, although it’s called hourly billing, it’s actually something less than that.
Even if you don’t bill by the hour, the report contains bleak news. Among the findings:
- Stagnant demand for legal services.
- Declining productivity in most practice categories.
- Growing pressure on rates.
- Declining profit margins.
- Increasing client needs for greater efficiency.
- Outsourcing more work to legal service providers.
- Reduced use of new associates.
Adapt or Die
When it comes to legal services, the market is strongly tilted in favor of the buyer, the report says. In such an environment, firms that cling to the old ways of hourly billing will continue to lose market share until they wither away altogether.
On the flip side, new competitive realities open the door to new ways of delivering legal services and innovations in getting paid for it.
Here are three takeaways:
- The earth is still shaking. Ten years after the Great Recession, the aftershocks are still being felt in the form of a “steady erosion of demand, rates, productivity, collection realization and profitability,” the report says. “While the overall market for legal services continues to grow, law firms are dealing with new competitors and changing client needs.”
- Clients are driving change. Clients are upending traditional law firm business models by demanding lower costs, disaggregating services to non-law firm service providers and imposing new pricing models.
- Half measures will fail. Firms that merely place “bandaids on the old models” will face an increasingly uncertain future. Those that are flexible and creative in everything from pricing to hiring will thrive.
“It has been a difficult 10 years for law firms in many respects, and looking ahead, significant long-term challenges remain,” said James W. Jones, a senior fellow at the Center for the Study of the Legal Profession and the report’s lead author. “Actions that have helped sustain firm financial performance over the past few years, such as expense controls and reducing the equity partner ranks, are not likely to be as effective in the future. Firms need to embrace a longer-term, fundamental shift in the way that they think about their markets, their clients, their services, and their futures.”
- Georgetown Law http://www.law.georgetown.edu/news/press-releases/legal-market-report-2017.cfm
- 2017 Report on the State of the Legal Markethttp://legalsolutions.thomsonreuters.com/law-products/solutions/peer-monitor/complimentary-reports
- ABA Journal http://www.abajournal.com/news/article/billable_hour_pricing_is_effectively_dead_because_of_budget_caps_report_say/?utm_source=internal&utm_medium=navigation&utm_campaign=most_read