The end of the billable hour?

The New York Times reports that the recession is causing law firms to re-think the basic business model of the billable hour. I wonder if this is really the case, but if firms truly do start to re-think the way they deliver and charge for legal services, I applaud the trend. Much has been written about the inefficiencies and perverse incentives created by what has become the standard business model. Charging by the hour penalizes efficiency, and encourages lawyers to engage in time-consuming tasks that may be of marginal benefit to the client. Coupled with the compensation structures at most law firms, which reward lawyers for racking up billable hours rather than for saving clients' money, this system seems ripe for re-examination particularly during an economic downturn when clients would like to reduce their legal expenses.



The Times piece acknowledges that there is only anecdotal evidence that law firms are actually offering alternative fee arrangements. Alternative billing arrangements have not become more prevalent in part because lawyers do not really know what their services are worth, and have little experience in estimating the total cost of a matter. In anything other than the simplest matters, many variables present themselves that make it difficult to determine in advance how much time and effort need to be put into an engagement. In my experience, clients have also shown some resistance to alternative billing arrangements. They are used to assessing the reasonableness of rates and the number of hours spent on a project, but less accustomed to evaluating the total cost of a matter.

I have always been open to alternative billing arrangements. Working on a contingent fee is often the most attractive way to proceed on a plaintiff's case, for both lawyer and client. When representing a defendant, it is more difficult to set a fee based on something other than a simple calculation of rate times hours spent. Defendants in a lawsuit rarely have an upside. They only have the cost of defense, and the cost of settlement or verdict. While a total victory for the defense can reduce the verdict cost to zero, the defendant still has to pay its own legal expenses, unless the case allows for recovery of attorneys' fees. So offering a flat fee for a defense case can be intimidating for both lawyer and client. If the case settles early, the client perceives a windfall for the lawyer. If the case proceeds all the way to trial, the lawyer may be underpaid for his work, and has less incentive to spend hours on case preparation. A realistic flat fee determined at the outset of a complicated case may be a larger number than the client is prepared to accept. Other alternatives are budgeted fees, flat monthly retainers, graduated fees for disposition of the case at various stages, and incentive fees based on the amount of the verdict or settlement. All these options are worth exploring.