This Just In:  Results of "Savvy Blawgers" Query
#2

The second query to this august group concerned the future of
the billable hour.  My original email to the Savvy Blawgers
reads in pertinent part:

• As
  much criticism as is directed at the billable hour, it seems
  indestructible.  Why does it persist as the “default” billing
  model?
  
• Is
  the billable hour model a better deal for the lawyer or for
  the client?
  
• If
  a lawyer told a client they were open to other
  types of  fee arrangements, how often do you think
  clients would suggest an alternative?  And what would
  that alternative be?
  
• Do
  you have anything nice to say about the billable hour?  Somebody,
  please rally to its beleaguered defense!
  
• Tell
  me something I haven’t thought of.

As should be expected given the combined intellectual horsepower
assembled to tackle this notoriously difficult issue, responses
varied wildly.

Prof. William Henderson of Indiana University School of Law/Bloomington,
had this to say:

"Bruce, this is a terrific topic. The billable hour is a terrible
thing. Everyone in large law firms is better off by scuttling it,
with the exception of the dishonest and inefficient, who will fare
poorly. The savings garnered by the client can be split with the
honest and efficient lawyers.

Here is
an amazing ABA report on the topic. One of my students found
it and cited it in his paper."

[The 2002 ABA report is indeed a wondrous creature, and I
encourage one and all to download it.  As Associate Justice
Stephen Breyer puts it in his Forward to the report:

"The villain of the piece is what some call the “treadmill”—
the continuous push to increase billable hours.
As one lawyer has put it, the profession’s obsession
with billable hours is like “drinking water from a fire
hose,”
and the result is that many lawyers are starting to drown."

And the Preface by Robert Hirshon, then-President of the ABA,
contains this:

"It has become increasingly clear that many of the legal
profession’s contemporary woes intersect at the billable
hour. The 1960s marked the coming of age of the
billable hour – an economic model that was created to
address antitrust concerns with bar association fee
schedules, to provide lawyers with a better handle on
their own productivity and, more urgently, to address
clients’ demands for more information about the legal
fees charged.
"Today, unintended consequences of the billable hours
model have permeated the profession.  […]

"The
billable hour is fundamentally about quantity over quality,
repetition over creativity. With no gauge for intangibles
such as productivity, creativity, knowledge or technological
advancements, the billable hours model is a
counter-intuitive measure of value."

There are many more gems in this report.—Bruce.]

J. Craig Williams, to be converse in the extreme, responded
in the entirety as follows:

"Bruce,
I think it’s fairly simple, and there’s no need for
significant analysis.  The billable hour is alive
and well and it’s prognosis is good for a long and healthy
life.  Certainly it will evolve into new and different
variations, but most of those we’ve already seen:  the
flat fee, value billing, and the well-known contingency
fee.  I don’t think the English system of “loser pays” will
ever make it across the pond.  That’s my 0.1 of an
hour thought on it."

Thanks, Craig; your check is in the mail.

Ron Friedmann essentially makes a similar prediction
about the robust durability of the billable hour, but
in sorrow if not anger:

""What is the future of the billable hour?
"For the high-end, non-commodity work that large law
firms do, the billable hour will prevail, at least
for next decade or two and likely beyond. When I started
in the legal market in 1989, I was sure alternative
billing was just around the corner. It appears very
little high-end work has moved away from the billable
hour so I am now reluctant to predict radical change.
I’ve spoken with lawyers eager to offer alternatives
but clients decline. The billable hour will stay for
the same reasons it has not yet gone away: risk aversion,
lack of disciplined and business thinking by attorneys
in firms and law departments, and a failure of imagination.

"As a proponent of best practices and the application
of technology to law practice, I wish it were otherwise.
A move to fixed fees would create strong pressure for
efficiency, which would favor adoption of demonstrated
best practices and more technology to automate wherever
possible. If e-billing spreads and if general counsels
actually analyze the data rigorously (the latter being
a BIG IF), then there might be a move toward tighter
project management and budgets. This would at least vitiate
some of the pernicious impact of the billable hour."

We warned you this group has opinions—"lack of
disciplined thinking," "risk aversion," and "a failure
of imagination"!—if you can’t stand the heat,…

Dennis Kennedy puts the ball back in the clients’ court:

"Answer: The future of the billable hours is in the
hands of clients. Without client pressure, there is little
reason to expect many lawyers or firms to change the
current system on their own. Ultimately, however, there
will be practical limits for how high rates can go and
the number of hours lawyers can work. Until then, I expect
alternative billing to remain in the realm of experiment,
primarily used by innovative lawyers who will be criticized
by some of their peers and praised by their clients.
Here’s a great experiment: ask lawyers whether they like
to have repair, construction or any other services done
on an hourly billing basis, without an estimate or cap.
If lawyers don’t like that approach for their services
(and, believe me, they do not), what makes them think
that their clients like it any better? Forces for change
are building, but the pressure has to come from clients
and, even then, change will be slow."

In other words, Dennis, the storied life of the billable
hour will come to an end only when it bumps up against
"practical limits" on how much revenue it can generate
for law firms?  I guess that answers our earlier
question of whether it’s a better deal for clients or
for firms—and as soon as it’s not an optimal deal
for firms, they’ll turn to something else.  Now
I understand.

The never-reticent Monica Bay is more confident in predicting
change:

"For about the last seven years, I have been preaching
that the billable hour will be dead in five years. What’s
a little hyperbole among friends?

"In all seriousness, I truly, truly believe that the
profession is undergoing a sea change, or, to use Andy
Grove-ism, a paradigm shift. Fees are one of the touchstones.

"And while, at first blush, many lawyers bristle at
the idea, there are so many benefits for clients and
lawyers and firms alike that I am frankly stunned there
hasn’t been MORE movement.

"After all, in an average 24-hour day, you can only
legitimately bill about 36 hours via the traditional
hourly rate. But if you restructure fees so they vary
depending on the assignment, opportunity, etc. — AND
you look for opportunities to leverage your "intellectual
capital" so
that you can "earn money while you sleep" —
and if you adopt technology to assist you along the way
— you can open up not only more "revenue streams" but
happier clients and lawyers (and support staff.)

"From a simple will (why would you want to work hourly,
when the bulk of the intellectual processes are done
for the first client?) to "bet the farm" litigation
— where savvy firms get a "stake" in the outcome
by using a graduated fee structure to reward wins —
to automating "commodity" legal functions,
exploring non-billable hours is just plain prudent.

"Obviously, this is just the proverbial tip of the iceberg."

Monica indeed makes it seem so obvious that the billable
hour divorces cost from value received, and perverts
incentives by pitting the client’s interest in (a) efficiency
and (b) a financially happy outcome, against the firm’s
interest in (a) maximizing revenue and (b) avoiding any
direct or indirect financial participation in the outcome. 

Econ.
101 is screaming between my ears at the irrationality
of this model.  But wait!  There are more unintended
consequences to be explored, according to Denise Howell:

"Is the billable hour model a better deal for
the lawyer or for the client?

"Let’s put it this way: it’s a way to help ensure your
lawyer will
bestow upon your case the time it requires and deserves.
I have heard
tell of reprehensible situations where clients in flat
fee
arrangements were provided with a bare minimum of attention
from their
"counsel." I realize the better solution is to
drum such scum out of
the profession, but ask yourself whether that can happen
in a
sufficiently timely and comprehensive manner to eliminate
the problem.

"Another thought on unintended consequences. Where my
first example
involved a lawyer putting too little time into a case,
this one arises
from the danger of being forced to work too much.

"The existence of a flat fee arrangement could, if the
opposing side
gets wind of it, motivate the use of harassing litigation
or
negotiating tactics. In other words, a lawyer or party
who knows the
other side’s counsel will be compensated a set amount
no matter how
much time is put into the representation could decide
it’s a useful
tactic to launch a blitzkrieg of discovery and law and
motion, or
otherwise "overwork" the matter. The endgame
would be to inflict
enough pain on opposing counsel — whose time is now
tied up to an
extent not likely anticipated when the fee arrangement
was negotiated
— that the lawyer ceases to be the client’s zealous
advocate and
instead becomes the other side’s ally in pushing a less
than optimal
resolution. The litigators reading this might already
recognize this
scenario from contingent fee situations. Again, this
may be more a
problem rooted in professional ethics than in the flat
fee arrangement
itself, but, as with the issue of putting too little
time into flat
fee cases, a flat fee arrangement could invite abuses
from the
unscrupulous that might otherwise be avoided."

If you’re not confused enough by now, I would only add
to Denise’s insightful remarks that "flat" and "contingent"
fee agreements alike can be crafted to defend the interests
of both sides (law firm and client, that is) against
"outliers" and abusive tactics visited upon them in hopes
of exploiting a rigid fee structure.  Indeed, I
would go so far as to say that, with:

• experience over time, and
• a sufficiently large cross-sectional sampling of
  cases by subject matter, by geography, or both

that firms and clients can arrive at statistically reliable
predictions about what it will cost to defend/prosecute
the "median" case.  For example, if a
firm like Baker & McKenzie wanted to bid on defending
Wal-Mart against all employee discrimination cases nationwide
for the next five years (at a fixed rate for the five
years—think insurance premium here), I bet a three-member
team of (a) Wal-Mart inhouse counsel prepared to share
the data on such cases for the past five years; (b) smart
outside counsel firm’s management team; and (c) econometrician/statistician,
could come up with a reasonable range of price tags,
after which "mere" negotiation would reduce the risk
to a single number (contingencies, again, happily included).

But enough of my editorial insertions:  On to Ernest
Svenson’s inimitable tour of the landscape:

"• As much criticism as is directed at the billable hour,
it seems indestructible. Why does it persist as the "default" billing
model?

"For the same reason that people climb Everest:
because it’s there. Or, because ‘it’s familiar’ and change
brings uncertainty, which lawyers eschew. But also, (to
answer the second question) it’s a good deal for many
lawyers, mostly those that practice in big firms. Was
it Abraham Lincoln who said "it’s easier to steal
a little bit from a lot of people than to steal a lot
from a few"?
Well, something like that principle (without the ‘theft’ part)
is in play with hourly billing schemes in that they allow more
time to be billed by itemizing than would be possible if the client
just got one large bill at the end of a case. By focusing attention
on the carefully described little chunks of time entries, you draw
attention away from the constant larger question that many large
institutional type clients used to have trouble gauging: "Is
what I’m paying for my defense worth the overall expense risk/reward
of litigation?" I say ‘USED to have trouble gauging’ because
those salad days are coming to an end. Clients became picky about
legal bills starting about 15 years ago. Then they started getting
mad, and then they started instituting systems and billing codes
and other things that annoy the hell out of lawyers. More recently,
they have started getting rid of lawyers and law firms that they
don’t trust to bill properly. And now they are starting to insist
on alternative billing arrangements in many situations that obviously
call for it.

"• Is the billable hour model a better deal
for the lawyer or for the client?

"Generally, and historically, it was a better deal
for the lawyer. Although, in the very beginning (see
below) it was probably a semi-good deal for many clients.

"•If a lawyer told a client they were open
to other types of fee arrangements, how often do you
think clients would suggest an alternative? And what
would that alternative be?

"I think the savvy clients,
especially those with a discreet and definable class
of recurring legal problems (i.e. Cisco with patent applications
and basic intellectual property questions), are highly
motivated and skilled at negotiating alternative fee
arrangements. But many other corporate clients are still
stuck with a dilemma: they WANT an alternative arrangement,
but the front-line decision makers responsible for hiring
outside counsel don’t know how to properly quantify the
risk (which is understandable since quantifying litigation
risk is not even classifiable as ‘an inexact science’),
and they are afraid, given the lack of objective data to support
their decision, to state in a formal document that they recognize
that a trade off of an alternative arrangement is that their outside
lawyers will have to severely curtail discovery and prepared for
trial in a ‘discount lawyer’ fashion. How’d you like to be an in-house
counsel telling your top corporate brass "well what we did
in this important litigation was to hire a discount law firm to
keep the legal fees down, and they are going save money by not
preparing as zealously as they normally would"? Somehow it
doesn’t sound right, does it? Especially when you have no objective
way of proving that you are making a sound decision by adopting
that approach.

"And yet, really, that’s what has to happen in many
alternative fee arrangements if the lawyers are going
to get interested. In other words, there has to be a
way for the lawyer to have a chance to make more money
with the alternative fee arrangement or your not going
to get him/her interested. Steve Sussman (God bless his
self-promoting little heart) has said that a lot of discovery is
useless (see article in American Lawyer at http://www.susmangodfrey.com/Articles/TopLitigationBoutiques.pdf).
But that statement is heresy to the vast majority of litigators
who have learned to prepare cases for trial (knowing that they
will likely settle) as opposed to preparing them for trial and
then actually showing up in court. In short, a lot of lawyer are
afraid to try cases. Not too many are afraid to do discovery. And
many in-house counsel are afraid to publicly acknowledge that they
are going to let their outside lawyers prepare for trial without
a typical discovery carpet bombing approach.

"• Do you have anything nice to say about
the billable hour? Somebody, please rally to its beleaguered
defense!

"Yes, sort of. I think that the billable hour
is a case of ‘beware of what you ask for ’cause you
might get it.’ I think it was instituted when corporate
america started telling lawyers who had formerly sent
out bills at the end of a representation with a large
number and a short description (i.e. ‘for services rendered’)
that this was not something that the corporate accountants
could stomach. Corporate lawyers quickly learned that
breaking their time into discreet chunks was actually
a secret passageway to more profits. More young lawyers
could be hired to do things like summarizing depositions
and launching MIRV discovery missiles and by responding
to the ‘multiple independently targeted re-entry vehicle’ missiles
that were launched at them. As long as your associates could
be trained to keep track of their time and break every
task down into, say, a minimum time increment of 1/4
hour, things could be good. Especially for lawyers who
received a lot of mail.

"So what’s good about it now? Well, I guess not much.
How many lawyers have heard corporate in-house counsel
say to them "hey
look I need you to charge me a lower than typical rate, but you
can make it up in the hours you bill and we won’t mind?" Answer:
more than one. And why is that? Because we still have clients (who
created this mess in the first place) who need a way to save face
within their corporate structures. It’s like the tax system in
the U.S. We all know that it’d be better if we just had a value-added
tax. There’d be no cheating and it would be easier to administer.
But the system we have now is so complicated that it’s too hard
for all the important king-makers to figure out a new system that
they could all make as much, or more, money in that’s also simple.
The solution, in the case of lawyers and alternative billing, is
that the system has to purge a few king-makers and make the remaining
ones scared enough to believe that failure to innovate might be
detrimental to their financial health."

Ernie wins the blue ribbon for breadth and depth—not
to mention true blue feet-on-the-ground, this is how
it really works, insight.

For my money (and I say this as someone who toiled in-house
as a securities lawyer at Morgan Stanley/Dean Witter
trying to reduce our umpty-ump million $$/year in outside
counsel fees—and "succeeded," if success is defined
as reducing the growth rate), Ernie puts his finger on
the devil’s bargain reached between the AmLaw 200 and
the F1000:  "[T]he system we have now is
so complicated that it’s too hard for all the important
king-makers to figure out a new system… [until we] purge a few king-makers and make the remaining ones scared
enough to believe that failure to innovate might be detrimental
to their financial health."  Sounds
like a realistic economic prescription to me.  And
next up, the value-added tax (just kidding).

Last up, we have a "ringer" I surreptitiously invited
to the Savvy Blawgers party on condition of anonymity.  I
will identify him only insofar as to confess that I know
him through the notorious Princeton alumni mafia, and
that he’s spent the last 20 years being a Deep Thinker
on issues of business strategy and alignment of incentives
with objectives.  He is not, I hasten to add, a
lawyer.  Try this on for a different take on our
conversation so far:

"I can’t help but think that the simplest view of the
billable hour is the view most likely to make some
sense of it.

"Selling time as the "container" of expertise
is simply logical when the purpose is to achieve a balance
between competing demand for expertise and a limited "supply" of
expertise.

"The problem is that the notion of "supply" has
changed quite a bit, as numerous new and viable delivery
vehicles (especially technological ones) have augmented
the solo person as the channel for delivering expertise.

"Since the solo person is no longer the only channel,
the end-user and the providers begin to explore what
*can* go through the diverse channels as opposed to what
*should* go through them.

"This means that, hypothetically, the billable hour
should be rated "strictly" in accordance with
the kind of "value-add" that is offered by
the distinctive channel (e.g., a person), but of course
as affected by the current or expected availability of
that kind of value-add.

"Expertise in the form of legal knowledge was never
the only value being delivered. Representation and Advocacy
were also being delivered, but there is the question
of how much was provided versus how much was ordered.
In other lines of business, this balance is achieved
through contracts, and the terms of agreement set forth
definitions of the provisions. Theoretically, there is
no reason why a billable hour should not be an ongoing
version of the contract; the issue is rather whether
the contract is a good one or a bad one.

"That suggests the model of "professional
services" continuing
as the perspective in which value is determined. What
does it mean to be "professional", and what
is the form (not the content) of the service?

"In that way, pricing issues such as quality, quantity
and assurance can be objectively detailed against histories,
certifications and reputations. If the prospective buyer
wants to negotiate, there should be an outside reference
of standards that the buyer can consult.

"But as long as Representation and Advocacy are prosecuted
in the form of "Best Effort", there is always
only an invented relationship between the cost of an
hour and the value of an hour. This is absolutely no
different from the considerations that take place when
determining how much to pay pro athlete X versus pro
athlete Y, to get on the field and play the same kind
of game for 60 minutes for "your team". In
this scenario, the law firm is "staffing" the
customer’s "team".

"The other side of the issue is within the firm — namely,
the engagement revenue accounting and service capacity
management involved. This is really not the buyer’s issue
at all; instead, it is the "shareholder’s" issue.

"So as for the future of the billable hour, isn’t the
problem first of all about how firms manage their internal
costs against shareholder value? Then secondly, isn’t
it about how Best Effort is cost-justified to the customer?

"By the way, feel free to correct me, and/or cite me
(on Adam Smith), of course…"

:[X]

Yes, that’s worth reading again (and possibly again)
for its elliptical but genuinely deep insights.

But I can’t leave you on such an empyrean plane.  The
final word does come from one of the Savvy Blawgers,
whose anonymity I will choose to safeguard for purposes
of this public posting (but you know who you are), and
who wins the blue ribbon for the fastest turnaround/response
to my initial query—as I recall, 10 minutes or
less:

I have to admit that
my initial response to this question was to recall
the ending moments of a memorable song from Johnny
Rotten.   Allow
me to quote:

"We’re
the flowers in the dustbin
We’re the poison in your
human machine

We’re the future your future

"God save the
queen we mean it man

There is no future in england’s
dreaming

"No future for
you no future for me

No future no future for you"

Further your humble editor sayeth not.