The Billable Hour is Still Under Attack—How Will Your Law Firm Respond?

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On my way to the International Legal Technology Association’s 2009 conference, I read the Wall Street Journal’s front-page article, “Billable Hour Under Attack – In Recession, Companies Push Law Firms for Flat-Fee Contracts,” with great interest. The initial talk about a change in the ways law firms bill their clients came as the financial markets were on the brink of collapse. Now, almost 12 months later, the evidence shows that there is a real shift taking place—and it may not be as temporary as the current economic downturn.

Some interesting facts from the WSJ article:

  • Pfizer will save 15-20% on outside legal fees “largely through flat-fee arrangements”
  • Cisco uses fixed fees or other alternatives to the billable hour for about 80% of its legal work
  • American Express has not had any firm tell them they would not consider alternatives to the hourly billing model
  • $13.1 billion has been spent on alternative billing arrangements so far this year, compared to $8.6 billion in the same period last year (BTI Consulting Group survey)
  • Lawyers reported average cost savings of 15% from using alternative billing arrangements (BTI Consulting Group survey)
  • 63% of the 370 in-house lawyers surveyed plan to increase their use of alternative billing arrangements (BTI Consulting Group survey)

With this type of compelling data supporting the use of alternative billing arrangements, it’s clear that the tide has turned. Whenever appropriate, companies will be asking their outside counsel for billing options that align the interests of clients with those of their counsel. This is in stark contrast to the traditional hourly billing model which favors the law firm at the expense of the client.

Firms are Shifting Their Focus to Productivity

Pfizer’s General Counsel, Amy Schulman, articulated the new legal billing mindset, stating that she did not want a discount on hourly fees, but a fundamental change “that will last beyond whatever people think they have to tolerate because of the economy.” 

This change is pushing law firms to look for ways to work more efficiently since, unlike the hourly billing model, they will now have an incentive to get more work done in less time. As an example, the WSJ article says that Orrick, Herrington & Sutcliffe in San Francisco has tripled the revenue it generates from alternative billing arrangements “but has maintained profitability through efficiencies,” according to their chief client-service officer, David Fries. How do they do it?  Among other things, the firm employs workflow technologies that substantially increase productivity. 

Now, this is not rocket science. Aren’t these essentially the same types of productivity enhancements that have become standard practice at most businesses (that aren’t working by the hour)? Implementing technologies that help you get your work done faster and better simply makes good business sense.

In working with hundreds of corporate law firms over the past 15 years, we at Two Step Software have seen remarkable productivity improvements in the more routine areas of business law, such as:

  • Calculating capitalization tables and managing ownership information
  • Searching for minute book records and historical filings
  • Creating documents, stock certificates and standard forms
  • Tracking compliance information and generating alerts
  • Sharing information and documents with clients

One example is our Corporate Focus customer Macfarlane, Ferguson & McMullen which is now “able to complete an organization from start to finish within 30-45 minutes” instead of the time it used to take to complete the process. The attorneys get the documents faster— which means their clients also get them faster, at a lower cost, and with fewer errors. (We’ve captured more of these examples in our Law Firm Productivity Kit.)

In the end, legal clients will shift more work to firms that offer the greatest value for every dollar billed. There’s no going back to the days when hours were not monitored carefully or alternative billing arrangements were not an option. External pressures from increasingly sophisticated clients are shifting the legal landscape in ways that were never even dreamed of five years ago. 

As I spent the past week at the 2009 ILTA annual conference, I spoke with CIOs from leading law firms across the country and discussed ways to improve the levels of efficiency and client service at their firms. Everyone is on the same page now and it’s an exciting time to be looking at how technology can help make a profound difference in legal productivity.

Gary D. Levine, President and CEO
Two Step Software, Inc.
www.CapitalizationMatters.com

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