2/9/17

Billable Hour Deathwatch: of that day or hour no man knoweth

I always get so much mileage from the great data and charts in the annual Report on the State of the Legal Market from The Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Legal Executive Institute. This year is no different. All praise to them. But, first, a minor quibble (it is my nature).

The headlines upon the Report's release were clear on the main takeaway:
Billable hour pricing is effectively dead because of budget caps, report says
Death of billable hour kills of traditional law firm franchise
The billable hour is effectively dead
The Billable Hour Isn't Dying - It's Already Dead
The headlines were consistent with the text of the Report:
Death of Traditional Billable Hour Pricing. One of the most potentially significant, though rarely acknowledged, changes of the past decade has been the effective death of the traditional billable hour pricing model in most law firms. This isn’t to suggest that most firms have done away with billing based on hours worked; indeed the majority of matters at most firms are still billed on an “hourly basis.” But focus on that fact alone misses a fundamental shift that has occurred in the market.
This change has been overlooked principally because of a definitional problem. In much of the writing on this subject, the focus has been on so-called alternative fee arrangements or “AFAs,” pricing strategies that are based on fixed-price or cost-plus models that make no reference to billable hours in the calculation of fees. Since other pricing models typically incorporate some reference to billable hours, it has often been assumed that only AFAs are genuine non billable hour alternatives and every other approach is simply business as usual. That conclusion, however, overlooks a major shift that has occurred over the past decade: the widespread client insistence on budgets (with caps) for both transactional and litigation matters....
Although today AFAs probably account for only 15 to 20 percent of all law firm revenues, budget-based pricing is much more prevalent. Indeed, in many firms, these two methods combined may well account for 80 or 90 percent of all revenues.
Quick, someone go find Jeff Carr and tell him that Don Quixote has vanquished the windmill! I would love to interrogate this data and find it to be righteous. But it is so contrary to my personal experience that, absent more compelling evidence, I just can't accept it despite the credibility of the source. That skepticism probably comes, in part, because of how many times I've read about the death of the billable hour (for fun, I rounded up 20+ instances at the bottom of the post).

I encounter a number of clients with written requirements that all matters must have a budget. I see fewer who actually enforce such requirements in any meaningful way. And it is passing few that seem to impose discipline around the budget number to the point where it functions as a cap. This is not to say that such clients do not existsome absolutely doit is to say that I haven't found enough of them for that 80 to 90 percent number to be automatically assimilated into my mental models of how the world works.

That said, I've had reason (NBA, MLB, POTUS, NFL) to call into question my mental models. So I come at this from a place of epistemic humility.

Everything else in the Report is as fantastic as ever. I've already updated my slide decks with the charts on demand and realizations. The former remains flat, the latter continues to fall. But I'm sure we can square both trends with increased profits and then paint a picture of long-term sustainability, right? It's not that I am skeptical that we are in for some sort of reckoning. I just don't think it will be an abrupt end, let alone that it has arrived in a final, categorical form like the death of the billable hour. For an actually balanced and nuanced parsing of the import, I recommend Mark Cohen. And for his eternally amusing (and always brilliant) foretelling of the apocalypse, I must share Ken Grady. Myself, I actually have a different TR report I want to dig into next post.



As promised, the many deaths of the billable hour (it's like a terrible version of John Wick but with a few awesome cameos):
An Obituary for the Billable Hour (2016)
Is the Billable Hours Obsolete? (2015)
Your Clients Want Alternative Fees (2015)
Is this the death of hourly rates at law firms? (2014)
More In-house Lawyers Question the Billable Hour (2013)
Watch Out, Billable Hour: Alternative Fee Arrangements Continue to Grow (2012)
The Case Against the Law Firm Billable Hour (2012)
Law firms look for alternatives to the billable hour (2012)
Billable hour's time is up (2012)
Curbing those long, lucrative hours (2010)
Alternative Arrangement (2010)
Forever in Flat Fees (2010)
Billable Hours Giving Ground at Law Firms (2009)
In Corporate Counsel's 'Who Represents Whom' Survey, GCs Say They're Serious About Alternate Billing (2009)
Has the Billable Hour Met Its Tipping Point? (2008)
Kill the Billable Hour (2008)
Lawyers Ditch Billable Hour Structure (2008)
The Scourge of the Billable Hour (2008)
Killable Hour (2008)
The Billable Hour Must Die (2007)
The Tyranny of the Billable Hour (2005)
And some counter programming:
The Billable Hour Just Won't Die, Report Finds (2016)
The unkillable billable hour (2015)
Billable Hour's Death Greatly Exaggerated (2015)
In Defense of the Billable Hour (2014)
In Defense of the Billable Hour (2014)
In Defense of the Billable Hour (2013)
Despite Stagnant Economy, Movement Toward Alternative Fees Still at a Crawl (2012)
The Billable Hour Endures (2010)
Surprise! The Billable Hour is Not Dead (2009)
_______________________________________
D. Casey Flaherty is a legal operations consultant and the founder of Procertas. He is Of Counsel and Director of Client Value at Haight Brown & Bonesteel. He serves on the advisory board of Nextlaw Labs. He is the primary author of Unless You Ask: A Guide for Law Departments to Get More from External Relationships, written and published in partnership with the ACC Legal Operations Section. Find more of his writing here. Connect with Casey on Twitter and LinkedIn. Or email casey@procertas.com.

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1 comments:

Toby Brown said...

Insightful as always Casey.

My 2 cents - With a few twists and bends, one way you might declare some sort of death is to view the issue from another angle. How much work done by firms is performed without pressure on rates or hours?

In the past when people have asked me how much work is done under "AFAs", I respond with that question. The answer to this question highlights a dramatic shift in the market.

But otherwise I agree - the death of hourly billing is highly over-rated.

 

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