Pressures to rein in legal costs have pushed more and more in-house counsel’s offices to require law firms to bill by way of arrangements outside of the billable hour, and the number of those arrangements is only likely to go up.
That was the consensus during a panel discussion this morning at Jackson Lewis’ annual corporate counsel conference. This morning’s panel “The Death of the Billable Hour?” focused on what the alternatives to the billable hour are and what it takes to put those arrangements together.
Michael Roster, chair of the Association of Corporate Counsel’s Value Challenge steering committee and a former general counsel of Stanford University, opened his remarks by citing a study conducted by the Corporate Executive Board which found that costs to U.S. companies have risen 20% over the past decade. During the same time period, however, legal costs have risen 75%.
“That’s embarrassing to the profession of law,” Roster said. He said that in-house legal departments are suffering from a problem they created themselves 40 years ago, when they began demanding bills based on the number of hours worked. That “nightmare” reduced the incentive for law firms to be efficient, he said. And only now, in the wake of an economic crisis, are some corporate clients beginning to demand a shift away from the billable hour.
Roster added that many companies and law firms now report that as much as 40% of their work is billed on alternate billing arrangements that include flat fees, phased billing, and contingencies.
Margaret Madden, vice president and assistant general counsel at Pfizer Inc., said that two years ago Pfizer launched a program in which it named 16 “preferred” firms that do work for the company through alternative billing arrangements. She said that the program has encouraged the firms to become “true partners” of Pfizer's and to encourage “value-based” billing arrangements.
Arrangements such as Pfizer’s and a similar program at Capital One can help to foster long-term relationships between a client and a law firm, said Carol Rick Gibbons, associate general counsel at Capital One. “These arrangements can make legal costs much more predictable and allow for the right billing tool for the right matter,” Gibbons said.
Sandra Schlafge, employee relations senior counsel at Target Corp. said alternate billing arrangements are not simply about reducing costs. They are about “maximizing value,” she said.
“That’s true,” said Jackson Lewis’ Vincent Cino, who chairs the firm’s litigation practice. He said a common question he hears about alternate billing arrangements is whether clients can expect the same quality of legal representation as they try to reduce legal costs.
“I always tell them that we are trying to foster long-term relationships. To do that, we have to make sure we’re putting the best lawyers on a matter as possible,” Cino said.
Madden said that it’s been much more difficult to encourage firms outside the United States to get on board with alternate billing arrangements. “That’s especially true in places like China, whose entire legal system has developed around the billable hour. We approached our firms in China about making a switch, and you can tell that they just didn’t quite get it,” Madden said.
But despite all of the talk about whether the billable hour is “dead,” Roster said it does still have a place in the legal world. It is a good way to determine how resources are being allocated, he said. But he said that he thinks law firms are going to have to make a more dramatic shift away from the billable hour as more and more clients push for alternatives.
He said firms should focus less on hours billed and more on individual practice profits to determine whether lawyers are properly applying themselves.
“It’s like manufacturing. Ford used to pay people by the hour. But then they switched to unit production to gauge whether people were achieving value,” Roster said. “Firms are going to have to find a way to judge unit production and not just how many hours are being billed.”