Legal Marketing Blog

Evan Chesler, presiding partner at Cravath, Swaine & Moore shocked a lot of people within the legal community with his recent opinion piece on Forbes.com advocating the death of the billable hour.

Basically, he states that the billable hour “makes no sense.” Making more money by dragging out a matter (or in his analogy, making more money by getting “bogged down a land war in Asia”) is “frankly nuts.” Pretty strong words from a firm that doesn’t really have to worry about clients questioning their bills, I wouldn’t expect.

Even though tons of folks (too many people to mention here) in blogosphere, including yours truly, have long advocated doing away with the billable hour, Chesler’s comments, one could argue, clearly takes the debate to a higher level. Not many would expect such a position from a BigLaw firm of Cravath’s stature. Now maybe the concept of alternative fees, although not new, will take on a bit more momentum.

Although there have been many different suggestions for alternative fee arrangements (see Continue Reading below for a few of my posts on the topic), I found a couple of ideas from a named partner in a 10-lawyer Philadelphia area firm worth considering.  Gary Lentz of Bochetto & Lentz wrote an article published in The Legal Intelligencer and on Small Firm Business suggesting a couple of approaches that could attract new clients and enhance fee opportunities  in this down economy.

The following two variations on the same theme are worth consideration by firms of all sizes:

• Multi-phased Fee Agreements
  • Phase I - an initial flat fee to evaluate the case, develop strategy, negotiate and “prompt resolution” (with a potential for a bonus) and drafting complaint, if necessary;
  • Phase II – a mix hourly, fixed fee and/or contingency, if necessary to file and pursue the matter in court.
• Blended Contingency Fee Agreements - an initial flat fee to cover the evaluation of the case and drafting the complaint, followed with a contingency fee based on outcome of the matter.

Take a look. They may just work for your firm, particularly with clients who are encountering their own uncertainties in the current economy.

At the Legal Marketing Association annual meeting last month in LA, the chairperson and the general counsel of the Association of Corporate Counsel, along with two other members on their panel, let law firm marketers know how they felt about the increasing rates and associated legal costs of outside counsel.

According to a post by Mark Beese on his Leadership for Lawyers blog entitled “We’re Not Going to Take It,” the ACC reps laid out the realities in-house counsel are facing, specifically:

• Pressure to contain and predict legal costs,
• Frustration with double-digit rate increases,
• Off-the-scale associate salaries (and corresponding hourly rates); and
• Perceived unwillingness by law firms:
  • to discuss alternative fee arrangements, and
  • create lower cost methods for commodity work.

So, what's my point? Talk to the in-house counsel you know about your fee structures, and willingness to discuss alternatives to the traditional hourly rate. There’s a lot of work out there for medium-sized and smaller law firms because of their lower fee structure and flexibility. 

If large firms aren’t yet fearful as to how serious corporate counsel are about finding solutions to these pressure points, they will be soon enough. And just think how you can help them along by picking up more of their corporate work in the meantime.

A story by Leigh Jones that appeared in the New York Lawyer Monday claiming the death of the billable hour (free registration required), may have just given 170-lawyer Ford & Harrison the marketing coup of the year. It has eliminated the associate billable hour requirement for first years in their firm. That will:

• Please new associates (and aid recruiting),
• Probably make clients happy (for reasons that aren’t spelled out. Certainly the work will have to be picked up by more expensive associates), and
• Annoy competitors (for obvious reasons).

However, the jury is still out as to whether other firms will follow, or even if Ford & Harrison will continue the program after trying it for awhile. Although the firm has not discarded the billable hour system, by removing the requirement for first years, they may have allowed the camel’s nose to get under the tent. We’ll see.

Nonetheless, it is a gutsy move.

The results of a survey by Bruce MacEwen at Adam Smith, Esq. leads him to conclude that based on responses by 63% of respondents (there were only 87) "the billable hour will remain intact for all practical purposes." The responses to the question "Will the billable hour ever lose its dominance?" are:

*Yes, but only for commodity work - 31%
*Yes, pretty much across the board - 29%
*Only for clients who absolutely positively insist - 32%
*Over my dead body - 8%

I have a slightly different slant. For years Bill Cobb of WCCI-Cobb Consulting, a consultant for more than 25 years to law firms on strategic and value-added issues, has used an interesting graph to depict the risk factor and legal expertise need based on the variables of the "volume of legal work available" (X axis) vs. "relative value added" (Y) by lawyers. What is especially interesting about the chart is that (based on ABA figures a few years back), commodity work was 60% of volume of legal work available.

If that is still the case (with technology it is likely a higher percentage today), based on Bruce's survey results above, it can be argued that 60% of the respondents believe that hourly billing will lose its dominance for the majority of legal work available to lawyers.

Interesting.

Over the years, ABA surveys have indicate that legal fees only get ranked between number 5 to 7 on the lists of top concerns by clients. This fact often escapes lawyers because clients DO COMPLAIN about the cost of legal services. However, when one looks deeper, often what one uncovers is that clients are really complaining about the services provided, the lack of attention to their matter, the failure to communicate adequately, unpleasant surprises, overworking a file, and the likes. Basically, clients are complaining about the service and value received.

Copywriter and direct marketer Bob Bly at Bly.com blog took issue with a statement by the author of a new book when he said "All things being equal, customers will buy on price." Bob particularly challenged the phrase "all things being equal," since things are rarely that simple. I completely agree, not just because it is impossible to place legal services on equal footing, but because in my experience in talking to firms' clients, price just isn't the determining factor in using one law firm over another.

So what is the answer? Do better than the competition on the quality of your services, and on bringing real value to clients' matters. Don't compete on price. Furthermore, if you are cheaper, you may not be as good in the eyes of potential clients.

In earlier posts I have talked about hourly billing and how it is bad for clients and lawyers, and how small firms can take advantage of alternative fee arrangements (here and here).

Ran across an interesting slant on the billable hour issue on The Greatest American Lawyer blog. The premise is that the hourly billing system is based on trust, and I must say that I hadn't focused on that angle before, even though it is so obvious. From the client's perspective, that is exactly what is going on, as in

"You can't tell me how much my legal issue will cost me, but you will charge me by the hour (billing periodically) until the task is completed at some unknown point in the future, hopefully with a favorable result."

That's about it, right? There is a whole lot of trust wrapped up in that statement I would say. I really believe trust is warranted in the majority of cases. However, how much better would the client feel if they KNEW what their legal matter would cost them, or at least a range. Having been on both sides, I can tell you how I felt when I was the client subject to hourly billing, and I didn't like it.

How do you think you would feel? Maybe it is time to consider alternative billing for your clients.

I have long advocated that the billable hour is not only bad for clients, but bad for lawyers too. From a client's perspective it is like government work, that is, cost-plus, because the more the lawyer works (efficiently or otherwise) the more the lawyer makes. From the attorney's standpoint once he or she has created a contract and billed the client, they can't bill the next client more than a fraction of a hour for the same or very similar contract even though both clients receive the same value. Nuts ain't it.

Richard Hall on his Managing the Business of Law blog has a post with another example of what's wrong with the billable hour. And check out the Attorney Work Life Balance Calculator which comes our way from JD Bliss to determine how many nights and weekends you need to work to meet your billable hour goals.

Get a marketing advantage over your competitors by pricing your legal work based on value rendered. There is risk involved, but if you have a handle on your costs, I believe you will increase your income over the long term and decrease the amount time watching the clock.

Thanks to The Greatest American Lawyer for pointing out Lawyers Weekly USA's article by Sylvia Hsieh on alternatives to hourly billing by small firms.

In an earlier post I pointed out how I believe small firms can get an advantage on larger firms by proposing alternative fee arrangements. Sylvia points out that "[S]mall firms have an easier time switching to new billing methods" due in part to larger firms' high cash flow needs. She also quotes Jim Calloway whose blog was the basis of my earlier missive.

Sylvia mentions four fee arrangements:

*Flat Fee (the most common alternative) - but make sure you know what your costs will be to deliver your services;
*Variations on Contingency Fee - not restricted to personal injury cases,
*Blended Fees - such as flat fees for certain deliverables, and a success fee, and
*Budgeted Fees - commonly used in litigation, and often with conditions if budget is exceeded.

A number of variations in her four examples makes this piece all the more worth a look.

In all my years in the legal marketing business, one of the most important lessons learned is that clients do not like surprises. Do any of us? Many years ago as an in-house marketing director, I produced a video in which clients stated their expectations of their outside law firms. I shared this with the firm's lawyers. Many issues were raised, but clearly one of the most important to clients is not being surprised. Ed Poll, who provides coaching services for lawyers, recently commented on how "Bankers abhor surprises." It isn't any different for law firm clients. So, lawyers beware!

Small firms can gain an advantage by looking seriously at alternatives to billing by the hour. Although large firms bill mainly based on hourly rates, they do use alternative billing such as fixed fees, discounted fees, premium based on results, etc. But they do not do much of it. Consultant Jim Calloway co-authored an article for "Law Practice Today," a publication of ABA's Law Practice Management Section, entitled "Alternative Billing for the 'Main Street Lawyer.'" He points out that both large and small firms serve, as he puts it, businesses that have "more in common with a consumer" when it comes to legal fees. Attorneys in small firms are closer to the road as it were, and accordingly have more flexibility in setting fees than do many attorneys in large firms. A lack of bureaucracy comes to mind as one reason.

Just like you want an estimate from your mechanic for car repairs, smaller businesses and individual clients are demanding to know what it is going to cost them for your services. They at least want a cost range, so they are not overwhelmed when the bill comes. No one likes surprises. This is where a small firm can exercise an advantage.

You can do so by determining how much time and what expenses were associated with like matters you have handled over the past few years. Recognizing that each case or matter is different, you can come up an average so you can at least determine a range of costs, so the client has some idea of what the legal fees will be. By doing so, the client is going to feel more comfortable up front, and a happy client is going to tell friends.