Legal Commentary

Wall Street Journal Article Is Further Evidence Of Move Away From Billable Hour

By Patrick J. Lamb

The front page of today Wall Street Journal contains an article, 'Billable Hour' Under Attack,that poses more questions than it answers.  Amongst the useful insights:

• corporate spending on flat fees is up 50% over the same period last year
• corporations using flat fees are experiencing 15% average savings over those not using flat fees

But the article contains some stunning quotes that merit some commentary.  Barry Ostrager of Simpson Thatcher is quoted as saying "a client can't expect to have the absolute best team of lawyers from a a firm and have the lawyers give up all the other work they could be doing on a regular fee basis to work 18 hours a day on flat fee engagement."  I'm certain many clients are asking "why not?"  After all, firms like Bartlit Beck and Valorem, as well as others, do this routinely because the focus is on payment for results, not payment for time.  After all, you can spend lots of 18 hour days and if the client doesn't get the results it needs, are the 18 hour days all that meaningful?

There's more.  The article states:

Orrick … has tripled the revenue it generates from alternative billing arrangements …but maintained profitability through efficiencies. … Financial analysts file biweekly reports describing how lawyers' time is being spent. 'You find that someone may have spent 200 hours on something' that isn't crucial…'

That's great--the firm has added to its overhead to catch the wasted 200 hours, something it apparently did not do before when the client paid for that waste.  But more importantly, if the fixed fee is really working as it should, the firm should have a handle on the work that is going to be done before it is performed so that only necessary work is undertaken.  I've written before how BigLaw doesn't get it when it comes to fixed fees, and that one cannot suddenly stop being a fish and become fowl.  It doesn't work, and this kind of example illustrates the point perfectly.

Then there's this. Saul Ewing, which offers fixed fees only for certain due diligence and Pennsylvania Insurance Department administrative hearings, is featured thusly:

Saul Ewing recently investigated a client's potential acquisition under a six week flat fee engagement. The matter was handled about 10% more cheaply than it would have been under a billable hour deal. … 'It was still fair to the firm because we were incentivized to get done in 10 hours what another lawyer at another firm may have spent 12 hours doing.'

One must immediately wonder about that 17% wasted time under the hourly system and why Saul Ewing could only do it 10% more cheaply.  But Saul Ewing aside, the point is that the firm has just admitted that it can do ABC work on a fixed fee as effectively but more efficiently that it did when it was doing it on an hourly basis.  Why would that same conclusion not hold true for all its work, including the substantial majority of work it is not doing on a fixed fee basis?  Why would any of its clients pay full freight again?

The Wall Street Journal article should provide major impetus for change.  Anyone refusing to at least  discuss AFAs and experiment with them may be having an interesting discussion with the CFO in the near future.

Full post as published by In Search of Perfect Client Service on August 24, 2009 (boomark / email).