Rumors of the Death of the Billable Hour Have Been Greatly Exaggerated

2666304350_62fd7514eeOr so it seems to me.  Lately, there has been a variety of articles proclaiming the death, or impending death, of the billable hour.  So goes the argument: Billable hours misalign incentives between lawyers and their clients; law firms and lawyers have faced increasing pressure over recent years to redefine their business model and move away from the billable hour, at least in part; and in this economy clients have the motivation, the leverage, and the moxy to demand alternative billing arrangements from their lawyers.

In theory, this may be true, and perhaps large clients (as in those who spend enormous sums of money with their law firms on an annual basis) have put some of this theory into practice.  But I’m not so convinced that the billable hour has earned its demise quite yet.  For one thing I work as in house counsel at a Fortune 1000 company and I see very few alternative billing arrangements.  (For another, I used to work at a big law firm that also saw few alternative billing arrangements.)  That is due in part to our own taste for risk.  After all, alternative billing arrangements must incentivize both parties, meaning the client may end up paying more for a given set of services than it otherwise would have under a billable hour system.

For instance, if I hire an outside lawyer to handle a litigation for my company and the lawyer agrees to take the engagement on a flat-fee basis, both my lawyer and I take on risk.  She bears the risk of cost-overruns (i.e. performing the work less efficiently than she anticipated).  I bear the risk that the litigation will turn out in such a way that it would have been cheaper for me to pay by the hour (e.g. a good settlement opportunity arises early in the case).  It is the latter risk that causes some clients to balk at the idea of alternative billing in some cases.

I may be overstating the case a bit.  I’m not personally afraid of the risk that my lawyer will work more efficiently and, as a result, make more profit.  In fact, I’m glad to see it because we’ve aligned our incentives–I get my lawyers behaving how I want them to behave (staffing cases leanly, working efficiently, focusing on lawyering and letting non-lawyers perform non-lawyer tasks), and my lawyers get to earn more money and act more like lawyers, instead of churning out billable hours on menial tasks that don’t require a law degree, or perhaps even a college degree.  But I know other in-house lawyers who are afraid of the risk that the current iterations of alternative billing arrangements just misalign incentives in other ways and create the risk that they’ll pay more than they would have under a billable-hour system.

The problem is viewing the lawyer-client relationship (or any relationship for that matter, if you’ll briefly indulge my pontification) as a zero-sum game.  It is not about making sure that the client wins and the lawyer suffers; although after years on end of the billable hour system, I assure you that is how some clients feel.

Instead, alternative billing arrangements will work when lawyer and client understand that both must benefit from the arrangement.  Clients can cap their exposure and create predictability for their business people, which is all most clients are after, and lawyers can stop writing down what they’re doing every minute of the day, focus on turning over the right stones instead of all the stones, and earn a good living doing it, while also sharing the risk with the client that lawsuits and legal transactions don’t always go as planned.

Until clients and lawyers figure out how to align their incentives–not an easy task–and accept that their financial relationship is not a zero-sum game, the billable hour is not going away.

Don’t get me wrong.  I’m not saying I don’t want the billable hour to go away, both for my lawyers’ sake and my own.  But I don’t believe it will anytime soon.  Inertia is a powerful force, and, as Donald Rumsfeld might say, unknown unknowns are more frightening than known unknowns.

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