I promised a novel goody for those who pressed on past this article’s introduction and here it is. The Georgetown report breaks with past custom and practice—one followed here at Adam Smith, Esq., in fact—and recategorizes pricing and revenue arrangements that have their roots in the billable hour—but include fixed-prices, caps, and/or budgets—as full blooded Alternative Fee Arrangements, and not as mere changes being rung on what is at heart a billable hour paradigm.

At a stroke this boosts the market share of AFA’s from the 15 to 20% estimate we’ve all become accustomed to, to as much as 80 to 90%. If the authors simply declared this semantic shift ex cathedra, you (and I) might quibble, but on reflection I think they have a point. Fee arrangements that may have their historic and cost-accounting roots in the billable hour world take on a very different cast in reality when caps are superimposed:

Plainly, the imposition of budget discipline on law firm matters forces firms to a very different pricing
model than the traditional approach of simply recording time and passing the associated “costs” through
to the client on a billable-hour basis. In fact, from a law firm standpoint, a budget approach is in some
respects worse than an AFA, since it imposes a fixed price (in the form of the budget cap) but forces firms
to “earn their way up” to the fixed price through recorded billable hours (which may themselves be deeply discounted). Moreover, even if the budget caps imposed by clients are subject to renegotiation on some basis, the existence of the budgets themselves may result in self-imposed restraints on partners to push for adjustments. Firms may choose to regard these budget-driven arrangements as billable-hour-based pricing, but they are substantially different from the traditional model that largely prevailed prior to 2008.

The final point is the one that brought me ’round on this. Fees set under such provisions bear no meaningful economic kinship with the Classical Era Billable Hour, which was a cost-plus pricing model par excellence.

I want to pursue the question of the primacy of the billable hour in a slightly different context, but first may we pause to celebrate its evident diminution in importance in pricing?

Let us recall what’s intrinsically wrong with the billable hour as a revenue model:

  • It begins life in “cost of production,” not “value to client;” this is probably its Original Sin. Do I care what it cost to produce a BMW, a dress suit, or for that matter a restaurant meal or a haircut? Not a fig: Never have, never will. I care first and last about its value to me.
  • Obviously, it rewards the law firm for being inefficient; this is such a fat pitch it’s almost embarrassing to mention it.
  • Somewhat more subtly, and I believe more corrosively, it places 100% of the risk of the engagement in the client’s lap and not the firm’s. Whatever happens to the client as a consequence of their encounter with Law Land, the firm gets paid and paid handsomely.

This bill of particulars is familiar enough.

Do the Thomson Reuters findings mean the billable hour is defanged?

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