Pardon the Disruption: The first thing that needs to go—the billable hour

November 7, 2013

Attorney time track billable hourThe legal industry has been painfully slow to embrace change. While all around us industries re-invent themselves to reflect the times, our complexion is largely the same as it was 15 years ago (which in many ways resembles the practice of law 15 years prior to that). And in areas where we have changed, it has frequently been for the worse—e.g., the homogenization of BigLaw through merger mania, declines in job security and professionalism, etc.

Many current and aspiring attorneys view the profession’s outlook as bleak. Law school enrollment is down, and graduates face massive debt and few job prospects. Clients are increasingly frustrated by having to “pay by the hour.” Private law firms struggle to form their own identities or instill in their attorneys a sense of a greater purpose. Public interest lawyers and courts have gotten the worst of it—fighting the good fight while operating on anemic budgets.

But turmoil often serves as the impetus for meaningful reforms. That is the rationale behind this blog: Our industry is primed for radical and much needed innovation. We’ll discuss some topics that have been written about by others already (and we’re not pretending to serve up earth shattering suggestions with each post). But our overall hope in writing this blog is to offer creative—and concrete—solutions to problems facing the legal profession. To do that we’ll draw on lessons from interdisciplinary studies, as well as our experiences as plaintiffs’ attorneys who practice at the relatively new intersection of consumer protection and emerging technologies.

For our first post, we take aim at an ongoing issue that plagues firms of all sizes: how to charge clients. The vast majority of firms still live under the tyranny of the billable hour. Sure, there are defense firms out there that claim to use alternative fee arrangements (AFAs), but the reality is that most AFAs are simply flat fee (or capped fee) arrangements based on lawyers’ predictions about the total hours that they’re likely to spend on a given matter. This simply masks the problem of equating an attorney’s value with the time he spends on his work, as opposed to solving it.

Billing models based on the accrual of time create some pretty ugly incentives. The “churn that bill, baby!” e-mail that leaked earlier this year was an embarrassing episode for attorneys, but it reflects a culture that few of us are wholly immune to. The simple truth is that, when we charge by the hour, our interests are often at odds with those of our clients. If our client gets sued, we end up profiting more than if we had prevented the suit in the first place. Business transactions that take longer to complete put more money in our pockets—the same goes for cases that take longer to litigate.

The flip side is that hourly billing can also be exceedingly unfair to attorneys. Lawyers who have become experts in their fields can create tremendous value for their clients in short periods of time. Yet while our clients would likely prefer quicker turnarounds, short bursts of high-value legal services come at a price: less money for the firm. This creates other byproducts of inefficiencies as well. Law firms have little incentive to streamline processes like legal research, brief writing or contract drafting, because doing so would only subtract from the ability to bill future clients for redundant work. Younger attorneys benefit more from doing superfluous tasks in pursuit of billing the most hours humanly possible than from trying to quickly improve the quality and efficiency of their work product.

Perhaps most importantly, however, is that equating time and value is incongruous with modern clients’ way of thinking. In today’s marketplace, companies that excel have often figured out ways to align their financial interests with those of their customers and business partners. A quick assessment of the benefits of advertising in Google’s pay-per-click system rather than traditional print illustrates the point.

So what’s the solution? The obvious answer is that it’s time to walk away from the notion that a lawyer’s value correlates to his or her time records. That means making time-based fee structures the exception rather than the rule. One idea making waves in the tech world is companies that offer IT solutions are starting to price their services using an “outcome-based” model, which basically means that the client pays when predefined business results are achieved. Lawyers should adopt principles from the outcome-based model as well.

Forming arrangements using predetermined business goals would require truly understanding what a client’s motivations are and then shaping a fee arrangement around them. It also shifts risk back onto the firm, so that the parties are more akin to business partners. Following are a few practical examples.

If the client’s goal is solely minimizing costs and payouts in defending a case, fashioning a reverse-contingency agreement might do the trick. The firm could bid on a defense case by assigning an expected value to the lawsuit (“we think that the value of the case is $7 million and you would ordinarily spend $2 million in attorneys fees to get to settlement, thus leading to a total valuation of $9 million”) and then asking for a contingent interest in any savings (“we’ll take a one-third of any money you pay out under the $9 million figure”). For transactional work, the structure could focus on set deliverables or the client avoiding litigation. Here’s a hypothetical that hits close to home for us: The client wants to use its mobile application to mine data from consumers’ smartphones without running afoul of state and federal privacy laws. If we identify a solution that the client likes, we’ll get paid $X. And if the app goes live and the company stays out of trouble for Y amount of time, we get a $Z bonus.

“Jay, Chandler,” some will say, “our practice is subject to so many uncertainties—how can we possibly have the foresight to anticipate whether we’ll meet a client’s business objectives at the outset of an engagement?” In other words, how do you quantify the value of a piece of litigation or a transactional matter? It’s a valid point, and in an upcoming blog post (Moneyball and the Legal Profession) we’ll explain how this endeavor doesn’t have to involve purely qualitative analyses. We hope that you’ll stop back by and read it.

However, it is critically important to recognize that the ability to value—truly value—a case is a skill that takes practice. Just as we study case law to determine the strength or weakness of a given legal position, valuing a case takes focus and effort; it takes the acuity to see where a given legal matter will end up and how it will play out along the way. Make no mistake: It’s not easy. When our firm started focusing on plaintiff’s work, we frankly had no clue how to evaluate cases. It took several years to refine and adjust our valuation concepts. While this may seem like a tedious and time-consuming task, once the skill is mastered it pays in spades.

In our own experience with corporate clients, it also makes it much easier to distinguish yourself with potential clients and prove that you’re willing to put your money where your mouth is. (Which, like anything, can be pretty scary at first.)

Nevertheless, the fact that using models like the above will appear difficult and daunting to many is probably a good thing. Perhaps the most important truth—which will be a recurring theme of this blog—is that when people resist changing because a new course seems difficult, or scary, it means less competition and more opportunities for those willing to take the risks inherent in pursuing innovation.