Taking On the Billable Hour
Photo by Klotz / Dreamstime.com

In the Cole Porter classic, "Let's Do It," "Birds Do It, Bees Do It ..." every human, animal, bird, fish and reptile does it - in that song, fall in love.

I keep thinking about that song in relation to the billable hour. "Doctors Do It, Architects Do It...." Why can't we do it? In our case, move to flat or success-based fees?

Recent articles, including one earlier this year in the New York Times, have reported that clients want project-based, flat or results-oriented fees. Firms are told in no uncertain terms that they will not be able to hire top associates if they keep basing productivity on the billable hour.

Firms will continue to face the terribly expensive brain drain as talented attorneys who want some balance in their lives leave private practice. The 2009 American Lawyer Associates Survey listed billable-hour requirements as an area of associate dissatisfaction.

Indeed, I would posit that failure to adopt project-based billing may be the end of many firms. This scenario is reminiscent of the hubris of Swiss watch makers who wrongly assumed that watch buyers would always continue to pay for watches made with gears. The American Bar Association commissioned an entire study of this topic and issued a report seven years ago! And yet, firms are hesitant to tackle the issue and find a better way to price.

Last month, a confidential plan leaked out of O'Melveny & Myers indicating that the firm was embarking on a five-year plan to switch from the billable hour.

Why in the world should it take so long? With that large firm's financial reports and databases, they should be able to introduce project pricing by the end of 2009. The data exists. They just need to analyze it, and make some strategic decisions on how to use it. The same is true for every firm, large and small. Why do lawyers have to operate as a herd and wait for other firms to "Do It" first?

In fact, the magnificence of flat or success fees is that they open up opportunities for business development. Picture the firm that figures out how to better charge a client on a basis that realistically lets the client have budgeting certainty, while overall reducing the clients fees. I'd like to conduct that meeting for the firm! "Client... We realize you've been good to us for years. We've gone back and assessed the way we price our legal services, and we think we can reduce your fees and provide you with some more financial certainty as to your legal fees. We want you to feel that we are on your side and we are business partners for everything, including your pocket book." Wow. That is (sadly) revolutionary.

So, what's the problem? Why is this taking so long? Why, in fact, is there so much discussion about reducing the use of the billable hour?

Well, for one thing, firms are used to it. And they've been making a lot of money under the billable hour system, so reluctance to change is strong. Second, most determinative law firm financial factors are currently tied to the billable hour: revenue projections, staffing levels, attorney and paralegal compensation plans, and evaluations. But each one of those items is capable of being reexamined according to flat or success-fee models. It's not hard - it's just hard work.

Every firm and every matter type can have a different flat or project fee. These prices can and should vary according to certain key variables, including type and style of firm. But once the assessments are done, the infrastructure is in place for the foreseeable future. It's like building a house: Once the planner decides the style, location, approximate size, etc., the house can be designed and built. That same blueprint can be used in a different location, rooms can be added or removed, and the style can be adjusted. But the basic house and therefore the basic infrastructure remain the same.

When a surgeon repairs a hernia, the price for that surgeon's work is the same whether the operation takes one hour or two hours. If something material and unforeseen occurs, the price may go up. Sometimes the surgeon makes a higher profit margin (when the surgery is quick and uneventful), and sometimes the profit margin is lower (when it takes longer or something unexpected transpires), but in the end the surgeon is still making a profit. When serious unforeseen events occur, more can be charged.

The same applies to lawyers. A fee agreement can easily stipulate that in the event of material unforeseen circumstances, a fee supplement may be assessed. This will have the added business development benefit of encouraging ongoing communication between lawyer and client as the matter unfolds. And, guess what? Clients aren't stupid. They know when things blow up or significant events in the life of a legal matter occur, and they understand they will have to pay for those necessary changes in direction.

Next time, we'll turn to how firms can phase in flat or success based pricing. And, will clients really give up hourly billing?

About the author: Audrey Rubin is the founder and president of Rubin Solutions Ltd., which provides project and ongoing chief operating officer services to firms. She has served as a consultant, business executive, general counsel, law firm partner and corporate officer for over three decades. She previously served as chief operating officer of Wildman, Harrold, Allen & Dixon LLP and Butler Rubin Saltarelli & Boyd LLP.