One of the topics most regularly (should I say, "compulsively?")
bruited about, with far and away the least actual
impact on anything to show for it, is "alternative
billing," also known as anything but the billable hour.
I have my own theories as to why the billable hour
endures despite condemnation from high and low—for
example, the ABA’s famous 2001-2002 "Billable
Hours Report" opens
with "It has become increasingly
clear that many of the legal
profession’s contemporary woes intersect at the
billable
hour," and continues more or less in that vein for
90 pages. Primary among the life-support
mechanisms for the billable hour (duly noted in the
ABA Report) are that it lets law firms make a lot of
money, and that it’s well-suited to lawyers’ inherent
risk-averse nature.
But my favorite theory is actually a bit different: We
all know the political folk wisdom that "you can’t
beat somebody with nobody," and I believe that pretty
much all of the commonly proposed alternatives to the
almighty billable hour amount to "nobody."
There has not, in other words, been a logically persuasive,
economically sustainable, mutually-agreeable (between
client and law firm) alternative.
I’d now like to float one, which I’ll call the McKinsey
Billing Model because—you guessed it—it’s
patterned on how McKinsey bills.
First, I’ll describe the essential elements, or components,
and then I’ll walk through how it works in practice.
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.
How it actually does (should) work:
When a client asks McKinsey for help on something,
McKinsey assesses the challenge and responds (hypothetically): "Great;
that will take a small team four months, so expect
it to cost $880,000." The client decides
whether that’s a valuable economic proposition, and
assuming they give the green light, McKinsey goes to
work.
One of three things now happens:
- It indeed takes a small team four months, and the
analysis/report/recommendation is delivered as promised. - It turns out to be simpler than McKinsey thought,
so they report after two months, "We think we’re
done; we’d like to show you what we have, and if
you agree, we’ve stopped the clock." - It turns out to be more complex than McKinsey thought,
so they report after (say) two months, "There’s more
to this than first appeared (if we’re to deal with
it in a fashion commensurate with our standards),
and we now think it will take the team eight months. Would
you like us to proceed, or to call it off?"
Under all these scenarios, McKinsey comes away fine
(as they deserve to), assuming only that they can price
their services rationally—and since they’ve been
doing this for over
75 years, I think that’s a safe
assumption.
Likewise, I believe the client comes away fine. In
scenario #1, they get exactly what they bargained for;
in scenario #2, they get "more" than what they bargained
for (and are likely to be an even more loyal McKinsey
client given McKinsey’s non-self-interested candor);
in scenario #3, they learn something about the complexity
of their issues and, whether they stop or whether they
proceed, they have the satisfaction and confidence
of knowing they posed a non-trivial question.
What courageous law firm might adopt this billing
model? The obvious answer is: No
one, not any time soon. Why not? It is
eminently sane and reasonable; it presumes only that
your client has an appreciation for, and can rationally
assess for themselves, what is value for money, and
it treats all concerned as adults. But
no law firm of any size (that I’m aware of—please
pipe
up if you know something) is doing it. And
since a lawyer’s response to a novel proposal is,
"Who else is doing it?," it may take another generation
or so.
Unless: Unless lawyers want to change.
Why would they? Only because, of course, it
might be in their interest to do so. And I predict
that the billable hour gravy train may be running out
of running room. After all, you cannot increase
forever:
- total annual billable hour expectations
- hourly rates
- leverage ratios of associates to partners, or
- hours consumed by projects, cases, and transactions
your firm has done before many many times.
If, then, firms cannot forever play the game of increasing
revenue through increasing all the metrics orbiting
around the billable-hour model, they may have to find
another way.
You could always hire McKinsey to figure out what
that other way might look like.
