Talking about Hourly Billing is Like Dredging up Bad Memories

I was one of a three-person panel recently speaking about law firm profitability.                  

I had not anticipated the emotional toll which would be had as a result of having to think about hourly billing.  The audience was mostly large or niche firms in the hundreds of attorneys who are getting their CLE credit and learning about how to increase gross revenue in an hourly billing environment. 

Before reminiscing down hourly billing lane, I want to say that the other two presenters were phenomenal.  I would recommend either one to any law firm looking to improve profitability. 

But here’s the problem.  I wake up in a world that is dominated by value billing.  Even on complex litigation, we always propose a flat fee alternative to the client.  I do not believe I was able to impress on their hourly billing brains that the difference between value billing and hourly billing had almost nothing to do with billing.  It has to do with incentive.  One post presentation question asked how it could possibly be ethical for me to receive more than what my hourly rate could spit out on a monthly bill. 

Value billing is really about making every hour deliver value.  But value is expanded beyond the sixty-minute hour.  The concept that a client would rather pay for hours than defined deliverables will be a difficult concept for most lawyers to grasp for a long time to come. 

Sure, I post on the Greatest American Lawyer Blog.  I’ve been doing it now for five years.  There are few bloggers who have driven as much content.  It has been an eye-opening day for sure.  I take my days for granted.  Hourly billing is verily a distant memory.  The feel of it as you walk in the office at the morning and as you try and leave at night is something I can’t feel any longer.  I have to say I was probably a little on feisty side.  The talk of hourly billing just gets my ire up.  I felt like I was trying to insight a revolution and knew every person on that call knew exactly what I was saying when I told them how I remember it used to feel when my spouse would call and after a few minutes I could only think about the fact that I was wasting billable time.  The mere concept of being unleashed by the obvious constraints of hourly billing must be a compelling thought, even though most would never admit it to be true. 

I also know there were people on the other end of the line who probably wanted to take me by the neck and strangle me.  What I was saying suggested nothing less than anarchy and risked that the fat cat who are doing very fine thank you, might have to answer to either clients or associates. Luckily, the only five people on the line who could speak out loud were the other two presenters, the sponsor of the webinar and the moderator from the online webinar provider.  Talk about a captive audience. 

I started off the presentation acknowledging that what I achieved was in part made possible by the fact that I started my firm from scratch and did not have Army Divisions of cynical and egomaniacal groups of partners to convince.  It made me believe, once again, that companies in the service business especially which are large will continue to have a hard time competing against smaller, more nimble and risk tolerant smaller firms which can implement and deploy technology on moments notice. 

I need to tell you one of my other favorite questions today.  It was how you pass the cost of technology on to the client in a flat fee system.  Of course, I answered that in a flat fee system, the law firm benefits based on value proposition for the client as against the firm’s ability to generate quality deliverables as efficiently as possible.  Efficiencies provide greater profits for the firm.  I explained of course that you would never pass that cost on to the client under our model.  You would simply purchase and deploy as quickly as you possibly could, and get everyone trained as part of a firm-wide process.  I wondered once again “too big to not fail?”

I’m not saying it can’t be done.  I truly believe that a law firm of any size with the right leaders can implement a cultural change where employees are valued for being able to continue to learn and advance skill sets surrounding the functionality of the implementation and function of technology.  Employees that were adverse to change would be disfavored at bonus time.  That is really what technology is all about.  Every day, new forms of communication collaboration are born on the internet.  Cell phone technology and the built-in digital dictation system on my Blackberry Curve provide me the instant ability to work any place, any time.  But a law firm has to breed a mentality which accepts the challenge of perpetual and continuous improvement and efficiency.  Law firms have become obsessed with hours.  It is all they can think about.  That’s only because hours can be like a virus.  At some point, neither your mind nor your body can fight it off.  It seeks to perpetuate itself. 

Anyway, I’m sure I’ll be saying a lot about some of the things I’m being forced to think about these days.  The next time I get invited to a presentation to a group of lawyers about the opportunities of more innovative business models for law I willknow to have a drink on-hand for when I am finished.  Tomorrow I’m going out to lunch with a local attorney who is interested in our business model.  No rest for the wicked!

Comments

[Carolyn Elefant]

What I find truly amazing about all of this is that at a time when biglaw is struggling, they still remain shockingly resistant to ideas that just might rescue them.

[GAL]

Carolyn: The tide is turning. I can feel it. As big firms continue to fail and restructure, the potential for change will increase drastically. We are at the edge, and this economy is going to push us over. Many firms will fail to see the opportunity. Those that do will help re-create the practice of law.

Economic growth tends to perpetuate norms. Economic contraction and its resulting carnage causes many to question those norms. This economic downturn will be a very important part of our continued move to perfect capitalism.

[GAL]

I have been asked to do the presentation again which was apparently very popular. Apparently, lawyers like being poked in the eye. :-)

I guess I am now a member of the national speaking circuit....

[Joseph Dang]

How does a new attorney determine their flat fees? Trial and error at first?

From my first internship until now, I always felt that hourly billing was, not pompous but along the same lines. I always thought to myself, "I would never pay anyone $200/hour" yet I was going to one day try and sell just that. I've always felt flat fees with hourly billing for special exceptions would be a better model.

[GAL]

It all comes down to 'value to the client.' How bad does the client need your deliverable? How bad do they need you (i.e. does anyone else offer the flat fee option?). Theoretically, the flat fee is not about your years of practice, it is all about value from the client's perspective.

[tph]

Value to the client may be the goal, but as a practical matter it's not easy, especially for the lawyer, to figure out what prices to ask for and for what deliverables. I've been thinking about this from the perspective of transactional real estate law, my practice area. If a client is trying to buy or sell, the client's ultimate goal is to accomplish the closing of the purchase or sale, but most of my work is involved in doing that in a manner that protects the client. Here in Colorado, a party can close a purchase or sale without any lawyer at all. The added value from having a lawyer lies in getting a better deal with less long-term liability to the other party (and, for the buyer, making sure the property you're getting is actually what you think it is). Quantifying that isn't easy. Fees contingent on closing would misincentivize the lawyer (and for that reason are generally forbidden by ethical rules, or are at least understood to be so). But so would fees contingent on finding things wrong with the property. Maybe some kind of premium for creative solutions to problems could be figured out, but it would be difficult to agree to a price structure not knowing up front what kinds of problems you might run into. Every client and every property is unique.

Leasing work would probably be a little easier to figure out, because if there's a term sheet for a lease, one can more readily gauge the complexity of the work up front. That may sound like I'm still thinking in terms of the cost to the lawyer rather than the value to the client, and to some extent I am, but this much is also true: The more complex a lease deal is, the more likely it is that it is a high-value lease. Landlords and tenants don't bother with lots of complexities on leases that aren't worth a lot to them.

Anyway, I still have a lot of thinking to do about this, and some parts of it are easier than others. But since I'm an associate at a big firm, I don't have the option to use alternative fee structures anyway. Yet.