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March 2014

Alternative fee agreements are not going to do away with the billable hour

From time to time there are articles like this one published in the New York Times last March, attacking the billable hour as the basis for billing clients for services rendered.  Such articles usually have two themes -- that the billable hour results in legal services costing too much, and that the billable hour system is in many ways corrosive to the legal profession.  Alternative billing arrangements are usually held up as the solution that might magically benefit everyone.  However, these are two different issues.  The measures clients impose to control their legal spend are a separate issue from law firms' internal culture.

Insurance defense firms usually are not mentioned in this debate, because we all have been operating under layered cost controls at least since the late 1980's.  These layered cost control measures have long included pre-negotiated and below market billing rates; stringent litigation management guidelines that require pre-authorization for extra staffing, for filing of motions, for depositions, for legal research over a minimal amount, and for other selected activities; detailed litigation plans, which have been a requirement dating back to the 1990's (predating the legal project management fad by at least a decade); detailed budgets organized by standardized ABA uniform task and activity codes; detailed and contemporaneous time records, with each entry coded with the uniform task and activity codes; submission of electronic bills in standard formats, to facilitate automated review and analysis of the bills; routine reviews of bills by claims departments or third party auditing services, resulting in write-offs or write-downs of time considered excessive or not compliant with guidelines; and random audits of sample closed cases, sometimes more than a year after they were concluded.  And yes, after all of that, the insurers are also adopting flat fee or other alternative billing arrangements.

So, with the perspective gained from having practiced under that regime for most of my professional career, I can say with confidence that the billable hour system is not going anywhere.

 The bottom line is that having access to the billing data and the analysis of that data is tremendously valuable to the clients/insurers.  I doubt that it would be possible to negotiate workable alternative fee agreements without having such data to analyze.

 All that billable hour data is necessary in the first place to structure smart alternative fee agreements, and to decide which parts of the services can be “outsourced” to cheaper providers, such as a captive "staff counsel" law firm.  I doubt that any insurer would want to move entirely to flat fee arrangements, for example, and be cut off from that data in its larger markets.


Law firms themselves are also dependent on the billable hour system to measure and control productivity, and have invested in expensive back office computer systems for the collection and analysis of billable hour data.   


In practice, alternative billing arrangements do not appear to be supplanting the billable hour system, but rather are yet another layer of cost controls that will overlay, and be dependent upon, the billable hour system.  For example, imagine that a corporation's general counsel sends a group of cases to a law firm to defend under a flat fee deal, and halfway through the contract period, one of the flat fee cases goes to trial and results in an enormous plaintiff's verdict.  Do you think that the corporation's general counsel is not going to ask for a copy of the entire file, including all the time records? 


In sum, the adoption of flat fee billing or other alternative billing arrangements is not likely to transform the billable hour culture of law firms.   The billable hour culture is in my view a consequence of the information age, in which it became economically feasible to record activity in six minute increments and then store, aggregate and analyze the data with computers over weeks, months, and years.  As we have seen in professional sports, see Moneyball, the technology is driving the collection and analysis of more data, not less.  


Later:  Here's confirmation from a managing partner interviewed by Jim Hassett:  "Clients could get more out of their law firms if they fully embraced change and trusted it. For example, we have a client that does a lot of fixed fee work with us. They require almost every project to be a fixed fee, yet we still have to submit detailed time reports that they use to see how they’re doing."  Of course.  The client there not only wants the predictability of the fixed fee, but it also wants the detailed time reports so that it can evaluate the fixed fee deal at its conclusion, use the data to negotiate the next fixed fee deal, and compare how different lawyers and different firms handle similar matters.    That client is actually being very smart.  They know that regardless of all the talk about embracing change, the law firm is going to keep detailed time records anyway, because the law firm needs the data for the same reason the client needs it, as well as for purposes of internal law firm management.  Since the law firm is going to keep detailed time records regardless, the client correctly concludes that there is no good reason not to ask for the detailed time records. 


I do wonder whether, in a flat fee environment, such time records are as meticulously entered and reviewed by law firms as in a normal hourly fee matter.  I would expect that time-keeping practices would get a bit sloppy in a flat fee matter. 


Keeping accurate and properly coded time records is an acquired skill that takes effort.  It's work.  On an hourly fee deal, there is a strong incentive to keep good time -- you want the bill to be paid, and be paid timely.  On a flat fee deal, what is the incentive to keep "good time"?  By "good time", I am not just talking about overstated or understated time  -- which is one possible issue -- but rather descriptive time entries that are properly broken down into discrete tasks with appropriate coding (e.g., no block billing).