Lawyers rethink 'billable hours' in down economy
For the graduating law class about to embark on a career that lives and breathes in six-minute increments, Stephen Ellis had an unusual message.
The commencement speaker at Case Western Reserve University Law School told students that a mainstay of the legal profession — the billable hour — was a recipe for attorney and client unhappiness.
"Hours are being recognized as an irrational measure of value," the Tucker Ellis & West partner told the assembly.
Tucker Ellis was a voice in the wilderness when Ellis gave his address in May 2008. But a tough economy has made clients more demanding, and persuaded law firms to sell their services for flat fees and other nonhourly methods of billing.
The shift is evident in northeast Ohio. Interviews with locally headquartered firms in recent weeks found all of them giving increased emphasis to billable-hour alternatives. The firms said that fixed charges, contingency arrangements and other fee variations now account for 10 percent to 50 percent of their revenue.
"The downturn was so well timed for us," said Susan Hackett, senior vice president of the Association of Corporate Counsel, which represents in-house lawyers that hire outside law firms. "We're making lemonade."
Hackett's group is pushing its members to demand non-hourly pricing on a quarter of their outside work by the end of the year. But dislodging a practice increasingly common by the 1970s and total entrenched by the 1980s will not be easy.
"Companies just heave it over the wall and the (outside) lawyers begin to work on it," Hackett said. "Then they're surprised when they get the $75,000 bill for the $50,000 matter."
Legal thriller author Scott Turow, whose day job is as a criminal litigator in the Chicago office of Sonnenschein Nath and Rosenthal, said alternative billing creates "a more honest relationship between lawyers and clients, one in which lawyers are not rewarded for inefficiency."
Other pluses include predictability that allows companies to forecast their legal expenses; more risk-sharing between lawyers and clients; and an increased focus on successful results as opposed to piling up hours.
Still, less than 2 percent of matters handled by firms worldwide are on a nonhourly basis, Legalbill Co. estimates. Multiplying the number of hours worked by a lawyer's hourly rate will still prevail 10 years from now, accounting for at least 80 percent of firm revenues, Legalbill predicts.
"There are many more people talking about it than actually doing it," said Nicky Mukerji, director of business intelligence at the Nashville-based consultant.
Tucker is something of an exception. The firm was founded in 2003 by 80 attorneys set adrift by the collapse of Cleveland-based Arter & Hadden. The lawyers decided their new firm would try something besides hourly billing that didn't make them or clients very happy.
Tucker had already shifted a good chunk of its work to alternative fees when Ellis gave his commencement address. But most law firms clung to their traditional ways.
Then came a period like no other in modern-day U.S. law: 2009 closed with more than 12,000 lawyer pink slips. Demand for attorney services was flat. Profits-per-partner slipped.
Suddenly, an idea bandied about for years had traction. Billing by the hour could run counter to finding quick solutions to clients' problems.
"It breeds inefficiency. The incentives are all wrong," said Jeffrey Healy, chairman of Tucker's trial department. "It's been us versus them, almost like a Cold War."
"Nobody calls a lawyer asking them to please spend 20 hours on a project," Ellis noted to the newly minted Case graduates.
Internally, the shift to alternatives freed Tucker lawyers from being cogs in a machine, Healy said. Attorneys complain about being yoked to a system that rewards them based on a ticking clock. Weary young associates boast of chasing mind-numbing tallies of 2,000, 2,500 or more hours a year.
Law firms point out that some clients are uncomfortable with alternative fees. And not all legal work fits a preordained cost. Complex class action cases are poor candidates for fixed fees. Moreover, some firms that lack pricing savvy have woefully miscalculated.
"You have to devote considerable time to thinking through and quantifying these arrangements," said Craig Martahus, a member of Thompson Hine's executive committee. "It requires a very high level of communication between the client and the law firm."
Tucker charges an annual fixed fee for the asbestos defense work it does for United Technologies Corp. It handles litigation for Rockwell Automation in Cleveland under flat fees and capped fees. And it's part of a novel alliance of 19 firms that has the entire portfolio of Pfizer Inc.'s outside legal work under a flat fee set with each firm once a year.
Pfizer Associate General Counsel Bradley Lerman said the advantage is not primarily to reduce the pharmaceutical giant's costs, though the alliance does. Rather, it's the extra value Pfizer gets from legal services because it asks the firms to collaborate with each other and the company.
"We get inquiries from other companies all the time," Lerman said. "I think you'll see that this is a model that is going to be relied upon."
Information from: The Plain Dealer, http://www.cleveland.com