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"The Billable Hour"

Adam Smith, Esq. blog has an interesting post concerning alternative billing. Bruce MacEwen is the creator and host of the Adam Smith blog. Bruce provides a link to an often cited ABA "billable hours report" which is issued in 2001-2002.  Bruce knows that the ABA found that the profession and its clients suffer for the billable hour and has some theories as to why the billable hour perpetuates despite the profession's virtually, I guess, universally recognized shortcomings.

Bruce provides the "you can’t beat somebody with nobody" and believes there really are no persuasive economically sustainable and mutually-agreeable alternatives available today.

Bruce is right on his observation that most clients would have a heck of a time trying to locate a firm that incorporates alternative billing into their business model. Bruce proposes a billing model which is similar to the one we use at our firm which effectively involve a flat fee option, or a maximum budget or hourly rate whichever is less model. Bruce points to a company called Mckinsey, a large consulting firm which services the Fortune 500.  Bruce reveals that Mckinsey’s billing model contains the following components:

No one at McKinsey has an hourly billable rate.

Everyone does have a "per diem" rate, but it's not disclosed outside the firm or to clients, even upon request.

Projects are generally assessed in terms of how many months they will take, and whether they're appropriate for a "small team," a "medium team," or a "big team."

A "small team" might typically consist of, say, 20% of a senior partner, 50% of a junior partner, 100% of an associate, and 100% of two analysts.

Virtually without regard to the scope or substance of a project, McKinsey assumes that the team will call on colleagues who are not team members for an additional 20% of what they need (based on specific industry, substantive, or client knowledge, of course).

Teams are assigned monthly price tags: A "medium team," e.g., might cost $350,000 per month.

The Mckinsey firm budgets the project by the number of months it will involve, and the size of the team which it will be assigning to the project.  If the project gets done sooner, the fee gets adjusted downward because it did not take as many months as projected.  The "monthly clock" stops running.  If it is more complex, the McKinsey firm reports that there is more involved than originally anticipated and they allow the company to add more months or a larger team to the project, or fish and cut bait if they decide that it is more than they anticipated. Bruce proposes that both the McKinsey firm and the client come out fine under this scenario.

The one missing component in the McKinsey model is a true sense of value and delivery of results. Law firms need to allow for an adjustment of their bill, based on the quality of their deliverables.

Bruce suggests that the billable hour may or may not be on its way out any time soon. He does suggest that the underlying structure of the hourly billing model which involves adding associates to the firm at a continually faster clip and adding billable hour expectations to attorneys provide functional limits to the billable hour method.  I happen to agree and believe that the billable hour method will soon turn in on itself.  Law firms will not be able to sustain continued growth and will look for alternatives in order to sustain profits.  Perhaps inevitably, they will have to start talking about the value they provide to clients rather than the number of hours.  Perhaps they will have to start selling the results they deliver, as opposed to the minutes they spent working.

I happen to believe that the billable hour will find true competition in the market over the next five years. I also believe that virtual workers and innovative staffing solutions will be a large part of the transformation. The underlying problem with the billable hour method is that it requires you to add significant overhead with each and every employee.  Another problem, as noted in previous posts, is that it requires a law firm to make a financial commitment to an associate who may or may not be busy four months from now.  Like in so many industries, virtual workers provide a solution to these and other problems which law firms are facing right now. Technology makes those workers available to law firms.  Soon, there will be legitimate companies which match those law firms and workers, and provides the technology which connects them together.

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