Beyond The Billable Hour: 6 Key Insights

What does the rise of alternative fee arrangements mean for both law firms and their clients?

Reports of the billable hour’s demise might be greatly exaggerated, but there’s no denying the (slow) change on that front. One recent study found that alternative fee arrangements have grown from approximately 5 percent of total Biglaw revenue in 2008-2009 to around 22 percent in 2015.

This is pretty consistent with what I hear from the Biglaw partners and in-house lawyers I speak with. A lot of the AFAs are pretty vanilla, nothing that kinky — say, a modest discount off the “rack rate,” but with a “kicker” for a specified good result — but they are spreading.

With alternatives to the billable hour on the rise, now is a good time to explore the implications. At the recent NALP conference in Chicago, I attended a panel called “Beyond the Billable Hour: The Intersection of Client Value Pricing, Efficiency, and Associate Professional Development.” Here’s the panel description:

It’s no secret that law firm clients are demanding more predictability in fee arrangements and lower fees in general. Law firms have responded in a variety of ways, including by offering discounts, value-pricing, and alternate fee arrangements, as well as by establishing off-site service centers and hiring pricing directors. Any of these solutions require lawyers to change the way they practice and how they define productivity. Accordingly, associate evaluation, compensation, and bonus systems must evolve to encourage behaviors consistent with profitability: efficiency, client service, and project management. Hear the perspectives of a law firm managing partner and a professional development director and learn how one firm is moving away from the billable hour in developing its talent.

And the panelists:

  • Susan Hackett, Founder, Legal Executive Leadership
  • Stacey Kielbasa, Director of Professional Development, Attorney Recruiting and Diversity, Chapman and Cutler LLP
  • Timothy P. Mohan, Managing Partner, Chapman and Cutler LLP

I’ve distilled the thoughtful and wide-ranging discussion down to six key points.

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1. “Being an excellent lawyer is table stakes. Clients expect that from all of us.”

That was Tim Mohan’s memorable formulation. There are lots of great lawyers out there who are more than capable of doing the work. Clients know this, and they are increasingly mobile. Your client is no longer your client for life; you need to keep delivering or risk losing that client. And you need to deliver value; the clients want the work done for less and less.

2. Firms must ask themselves: what work do we want, and how do we go after it?

At the same time, not all clients and matters are worth pursuing. Firms must give careful thought to the type of work they want and how to get that work.

Citing the work of Professor Bill Henderson, Mohan identified three types of work: “extraordinary events,” “operational” work, and “commodity” work. Biglaw firms generally try to steer away from the commodity work, which tends to be less sophisticated, less interesting, and less lucrative. (Mohan mentioned that when a fellow Chapman and Cutler partner wanted to set up an LLC for a personal business venture, he did so using LegalZoom.)

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It’s not always easy to figure out which category a certain type of work falls into. As Susan Hackett joked, lawyers like to flatter themselves and claim that every matter they work on is strategic — “even if they’ve done that type of project 200 times a year.”

3. It’s the talent, stupid.

The current battle for clients takes place against the backdrop of a battle for talent. Referring to the well-known bi-modal salary distribution curve, which he compared to a barbell, Mohan noted that a fair number of law grads are earning $160,000 a year in their first jobs, and a fair number are earning in the $40,000 rnage.

He also pointed out that today’s graduates expect to have multiple jobs over the course of their careers. Firms still want people who will stay at the firm for 30 to 40 years, but firms need to recognize the reality of today’s job market. How can firms help nurture talent and help lawyers with their professional futures, even if those futures might lie with other employers?

4. “You can’t cut your way to success.”

Tim Mohan noted today’s “flat revenue environment” for many law firms, with sluggish demand for legal services. Susan Hackett gave a shout-out to Bruce MacEwen’s book Growth Is Dead: Now What? (affiliate link) — which she urged people to read, but not without a tasty alcoholic beverage at hand.

Faced with these realities, firms are trying to improve profitability by managing expenses. But the panelists agreed with Mohan’s argument that “you can’t cut your way to success.” Instead, as Hackett argued, firms must excel at serving their current clients, because so much work comes from referrals. Many clients don’t want to hire a firm unless and until they have talked to past or current clients of that firm.

5. In moving beyond the billable hour, data is your friend.

Susan Hackett objected to the term “alternative fee arrangement” because it implicitly sets the billable hour as the default. She urged attendees to speak in terms of “customized fee arrangements.”

In developing customized fee arrangements that don’t rely upon the billable hour, firms face a challenge in knowing what price is right. To meet this challenge, firms must get better about managing their processes and knowing how much it costs to handle a certain type of matter. Then they can price that matter in a way that delivers value to the client and profit to the firm. Firms shouldn’t simply focus on the profits per partner they want to achieve and the rate hikes necessary to get there, which is unfortunately what some firms have done in the past.

Large departments at large law firms have massive amounts of data available to them about past engagements, how much time lawyers spent on them, and how much revenue got generated. But many of these departments lack matter-management systems that allow them to make effective use of the existing data. There’s a world of difference, Hackett pointed out, between having the data and using the data.

Firms definitely have an advantage over their clients on this front because they work across more matters. But few firms are taking full advantage of the data that’s available to them. Firms that are proactive rather than reactive in terms of analyzing their data and proposing customized fee arrangements will enjoy greater success than firms that are reactive and stick to the billable hour.

6. Different billing structures require different approaches to professional development.

Stacey Kielbasa of Chapman and Cutler focused her remarks on the implications that the move away from the billable hour has for attorney recruitment and training. Chapman has reduced its focus on the billable hour and shifted its focus to efficiency. The firm wants to track and reward behaviors that drive client value, not just the racking up of hours. The firm went so far as to get rid of minimum billable-hour requirements (although after associates “freaked out” a bit over the absence of guidance, the firm added back in some “expectations” regarding productive hours).

The firm no longer wants to incentivize high billable hours that don’t produce value for the client. Lawyers shouldn’t be rewarded simply because they hit some arbitrary hours target. At the same time, lawyers who don’t rack up huge hours but who do provide value should be acknowledged and compensated for those efforts. At the end of the day, it’s all about the client.

2015 Annual Education Conference [National Association for Law Placement (NALP)]