"Reports of my death have been greatly exaggerated."
—Mark Twain, in a cable from London to US publishers, who had mistakenly
printed his obituary.
And so, for the entirety of my career, has it been the case with predictions
of the demise of the billable hour. If the best predictor of what will
happen is what just has happened, then the billable hour is here for keeps. But
I wonder.
If you can say nothing else about what’s going on now, you can say that the volume of the dialogue about alternatives to the billable hour has never been higher.
Last month the Association of Corporate Counsel announced their "Value Challenge," through, among other venues, an interview with Susan Hackett, their GC. Some of her comments included:
Value from the corporate perspective means receiving a solution that addresses the client’s problem-for an appropriate cost. […] Take a look at the cost of legal services and the fact that they’ve been rising 6, 7, 8 percent a year, for as long as anyone can remember. But the services remain pretty much the same. And at the same time that outside firms’ costs are rising, the in-house law departments are getting better at their efficiencies and at lowering their costs. […]
We also want to measure whether people are starting to do more of their work on a non-hourly basis. It¹s one metric. I¹m not saying billable hours is the entire project, but it¹s one good way to look at this. […] You would see a lot less work done on the billable-hour basis, but I don¹t know what alternative billing will look like.
I don’t know about you, but it sounds like "billable hours is the entire project."
Consider another perspective: The dehumanization that comes with the billable hour. And dehumanization it is, is it not? Doesn’t it tell people that they’re fungible commodities? To be sure, their hourly rates vary, but they’re all and every reducible to cogs in the machine. No rewards for specific insight, no discounts for slogging through it, no premiums for remarkable efficiencies. You are your watch.
Or consider the perspective of the intersection of the core years to partnership tournament with the key family formation and child-bearing years. At the moment, these two critical life trajectories tend to overlap in people’s lives. Both are intensely time-consuming. Their intersection is, for many people, unsustainable; they are forced to choose one or the other.
Don’t misunderstand; I’m not suggesting that the pressures of the path to partnership years–and the partnership years themselves–can be substantially ameliorated, minimized, or underestimated. There is no substitute for hard work if one wants to achieve professional performance at the level partnership entails. But what I am suggesting is that the billable hour model exacerbates the tension between familly and work precisely at the time it matters most. Without it, contributions could be more readily recognized "on the merits," without the quota of hours in the office or on the BlackBerry.
Two other perspectives are, I believe, more important and will be more consequential. One results from the tsunami of changes in the complexion of the financial services industry in the last year and the other results from an inherent structural problem with the billable hour model for firms themselves.
Financial Services
The industry is unrecognizable from its form a year ago. Bear Stearns, Lehman, Merrill Lynch, gone, and Morgan Stanley and Goldman Sachs essentially far different from what they were. Balance sheet leverage ratios of 30:1 or 40:1 are ancient history. New regulations, of forms we can’t yet predict, are certain. Old forms of regulation may go by the wayside, but the net result, to be sure, will be an overall increase in oversight.
Which brings me back to the billable hour: If financial services comprise a substantial part of your clientele, look forward to their being more heavily regulated than before. With congressional oversight. Care to explain to, say, Barney Frank, why $1,000/hour is a fair and economically justified rate? Wouldn’t you far prefer to explain why (say) $750,000 as a flat fee on a $50-million transaction is reasonable?
Also, Bank of America buys legal services very differently than did Merrill Lynch. RFP’s, beauty contests, bakeoffs, diversity quotas, expectations about first and second year associates (don’t bother putting them on the bill), and so forth: It will be a new world.
Structural Issues
I have long predicted that the demise of the billable hour will only come about when law firms find it in their own self-interest to call a halt, and perhaps at last the stars are beginning to align. Consider the four variables that determine your firm’s revenue and profitability under the billable hour model:
- Rates;
- Hours;
- Realization; and
- Leverage
Faithful readers will know that I’ve pointed out that all four of these variables have intrinsic limits:
- Rates: $1,000/hour? £1,000/hour? At some point there is a limit to clients’ stomach for it.
- Hours: 2,200/year, 2,600. 3,000? At some point the body rebels, and the talent pool capable of sustaining these super-human schedules thins out.
- Realization: >100%? I think not.
- Leverage: At what point do associatesl look at the odds and simply check out?
But on the profitability side of the ledger, there are no intrinsic limits. How
high is "too high" for PPP? Sarah Palin Joe
Six-pack probably thinks $2-4-million/year would do just nicely, but when you’re
a partner at BigLaw regularly rubbing shoulders with hedge fund managers and
private equity folks—or plain old Fortune 500 CEOs—you’re a piker
by comparison. Consider also the baffling silence over the fact that corporate
execs get equity in the form of stock, restricted stock, or options. Lawyers,
even the best of them, toil for ordinary income. Yes, you can make a
very respectable income and if you sock it away prudently (we Scotch Presbyterians
can give you advice on this if you’d like), you’ll end up with a very comfortable
nest egg. But it will have been gained by the sweat of your brow and
not the true alchemy of returns on capital. So we have, under the billable
hour model, inherent constraints on revenue but no inherent constraints on
the desire for ever-increasing profits.
This brings me to the point: Won’t firms find it in their own self-interest to get beyond the billable hour in the pretty darned near future?
Do not, I hasten to add, be afraid. "Alternative billing" is not code for "reduced revenue."
Indeed, we have every reason to expect that getting away from the billable hour will lead to less micro-management of billing, fewer he-said/she-said spats about whether this, that, or the other micro-activity was justified, and less general embarrassment over tiny charges for faxes, messengers, and other costs of doing business.
I’ll suggest another reason more potent than "embarrassment" for ditching
the billable hour: Doesn’t it fundamentally reflect a lack of trust between
your firm and your clients? Rather than being able to say "For professional
services rendered…." and have confidence that hte client will trust you to
have put a fair price on things, the billable hour reflects a green eye-shade
mentality, notoriously subject to auditing (now, even by bespoke software programs
designed to ferret out inconsistencies and discrepancies of the most minute
and trivial nature). The billable hour, I believe, starts from a relationship
of mistrust: "See, we can prove we actually did the work!" And
the GC or other inhouse counsel can, in turn, tell their finance department,
"Yes, see, they really did the work."
This is not the premise from which mature relationships of trust and confidence
arise.
At the risk of piling on, I’ll suggest yet another reason the billable hour
disserves our profession: Economically, it begins life with "cost of
production" rather than "value to client." Except for
the rawest and most basic of commodities, "cost of production" should have
virtually nothing to do with price. (OK, before the microeconomists in
the audience start piling on, permit me to issue the immediate caveat that,
in a perfectly competitive marketplace, price will equal marginal cost
of production, but I stoutly question the assumption that the marketplace for
services of BigLaw is remotely "perfectly competitive.")
To be sure, firms need to meet their costs and then some to make a profit,
permit reinvestment in their businesses, and appropriately reward their owners
and investors. In this technical sense, then, "cost of production" is
clearly a relevant variable when determining price. Price best exceed
cost of production by a reasonable margin if the firm is to survive as a going
economic entity. But for price to be mathematically determined to the
second decimal place by "cost of production" is flatly irrational. Worse,
it ignores (again) what the perceived value of the services is to the client.
Now, don’t pretend you can’t put a value on those services. We value
complex baskets of goods and services all the time, and markets for those goods
are highly liquid. Why is a haircut at "Frederic Fekkai" on East 57th
Street worth hundreds and hundreds of dollars while one with Sal the barber
on Upper Broadway is worth $30 including a hefty tip?
Finally, a failure to bill "for professional services rendered" represents,
I must believe in my heart of hearts, a failure of courage. Do you mistrust
what your services are worth? Do you mistrust whether your client agrees
with your perception of their value?
If that is the root cause of the continued dominance of the billable hour,
then we have far more work to do than turning off "timeslips elite." But
for the health of our profession, for our self-respect, and for the benefit
of clients, turn it off we ultimately must.
