Reprinted from http://www.njbiz.com/
Are billable hours going away? Experts differ, but all agree: How we pay for legal services is undergoing a big change
Corporations were forced to find ways to cut back on their spending – and weren’t afraid to ask to renegotiate payment structures for the services they used.
Law firms, needing to maintain their client base, were forced to change. What they didn’t realize, industry experts say, is that they were creating a new norm.
And this new norm has many firms and clients playing by a new rule: No more billable hours.
Patrick C. Dunican Jr., chairman and managing director of Gibbons PC, said firms have had to learn to adjust.
“We are seeing things in the private practice of law we have never seen before and all signs point to the fact that it may not go back to the way it was,” he said.
“Companies are buying legal services through procurement means as if we were selling a widget.”
Michael X. McBride, managing partner of Roseland-based Connell Foley, certainly feels that way.
“A lot of companies are looking for innovative ways to budget legal costs,” he said. “Clients are looking at legal services in a more task-oriented way. They call with specific legal issues and want to budget on a transaction-basis.
“More and more clients are looking for alternative fee structures, which may include discounts on standard billing rates or bonuses based on performance.”
Dunican, who is the sitting chair of the board of visitors at Seton Hall University School of Law, said how quickly a client pays also is up for discussion, noting it’s not uncommon for clients to ask firms to accommodate alternative fee structures, including extending payment terms as far out as 120 days.
The trend is everywhere.
According to a recent study by Altman Weil, a national legal management consultancy, 80 percent of lawyers believe non-hourly billing is a permanent trend within the profession.
That’s not surprising to Mark A. Robertson, the former chair of the American Bar Association’s Law Practice Division, a current a delegate to ABA congress and the author of “Alternative Fees for Business Lawyers and Their Clients.”
He said the ability to adapt to the new pay structure will help determine winners and losers going forward.
“The firms who have been having the most success are breaking litigation into bite-sized pieces and determining the costs involved,” he said.
The trend is not only changing the way firms do business with clients but how they do business with their own associates, as many firms are changing the way they determine salaries and bonuses.
Labor and employment firm Jackson Lewis P.C., which has two offices in the state, eliminated the billable hour metric in January.
Perhaps the biggest reason the billable hour has lasted this long: It is an extremely profitable model for firms.
According to the National Association for Law Placement, on average, firms require associates to bill a minimum of between 1,900 and 2,500 hours per year. At midsized firms, clients are charged an average of between $300 and $400 per hour.
If you split the difference and charge $350 per hour for 2,200 hours of work, that’s $770,000 in annual revenue. If you use an average annual salary of $250,000, you quickly see how profitable such a setup can be for the firm.
Company officials said they will now evaluate their associates based on several factors, including the ability to work with a team, efficiency, responsiveness to clients, pro bono work and more.
“Paying our people to bill more time does not align with our clients’ interest,” said Vincent A. Cino, chairman of Jackson Lewis. “We want our associates to work more effectively and work as a team, and so do our clients.”
The payoff can be a healthier work environment, as tying compensation to billable hours can lead to burnout – and create temptation for fraudulent billing, especially when firms were using the number of hours an associate bills as the basis for his or her bonus.
But don’t be confused: The death of the billable hour is not easy.
And it is not certain.
The move toward alternative fees has gained momentum, but there are corporate clients who still prefer traditional hourly billing.
Cino, in fact, said that when he was considering eliminating all billable hours – whether requested or not – the idea was met with stiff resistance from some corporate clients, which still use billable hours as a means for auditing their legal services.
Bill Ferreira, principal of Morristown-based Ferreira Law, wasn’t surprised.
Ferreira said the success of an alternative fee or billable hour for both the firm and the client is largely dependent on the practice area or type of service being provided.
With some clients, Ferreira has served as an outsourced general counsel and had success with a monthly retainer fee.
“In some cases, it is so important that we are the first call our clients make that we don’t want them to hesitate because they are concerned the clock is running,” he said.
But, he said, that doesn’t always work.
“For certain types of cases, there is no more accurate way to assess costs related to a person’s time,” he said.
He feels the billable hour will live on.
“To say the billable hour is dead would be a gross overstatement,” he said.