It may not be in its final hour, but more and more lawyers are conceding the billable hour is being put in its “proper place” and is in steady decline. However, its replacement requires equal effort from clients and law firms for both to be successful.
“The billable hour isn’t dead, but from my perspective it’s certainly becoming less of a high-water mark in terms of what clients want,” said Mark Crane, a partner at Gowling Lafleur Henderson LLP in Toronto. Crane was speaking as part of a Canadian Bar Association (CBA) webinar recently called, Alternative Billing Arrangements: Is the Billable Hour Dead?
Crane added that what clients want is more cost predictability, value, efficiency, risk-sharing, and transparency. “You can feel the trend in the marketplace,” he said. “It’s just a matter of figuring out the right balance. It’s clear the menu is growing in terms of the different approaches used.”
Crane cited numbers from the 2014 Canadian Lawyer Corporate Counsel Survey that indicated while the billable hour is still the No. 1 choice of in-house counsel, more than half don’t see it as their first choice. There was a considerable drop to 47.3%, compared to 55.2% the prior year, in terms of those who indicated the billable hour was their primary fee arrangement.
Crane discussed a number of alternative fee arrangements (AFAs) including discounted and volume discounts (e.g. a 15% discount on the standard hourly rate, for example, when fees billed exceed $100,000 a year), and blended hourly rates (such as $400 per hour blended rate for all lawyers on a file, or $300 per hour for associates and $500 per hour for partners), as well as fixed and capped fees. (Fixed fees are another option for matters such as a takeover bid when it can be accurately scoped in advance.)
“In terms of where we are in the marketplace, there is a lot of competition and in-house counsel are doing more work in-house,” said Crane. “There are alternatives that can be appealing to external counsel and in-house because they have the balance of power in their favor at this stage.”
For many of the AFA tools to work, they require some prep work and research to be done by both the law firm and in-house counsel. Also, the challenge for external counsel is to build up their precedent databases and have solid knowledge of the costs of matters, even though they don’t always play out as expected, especially on a file such as a transaction. There is also the move towards using “success fees” for types of legal work that have not traditionally gone that route.
“What you are seeing more of is contingency or success fees. You see it in plaintiff and personal injury litigation but you are also seeing it more generally. It’s more of a challenge for the defendant bar, but we are starting to see success fee arrangements for the defense bar that can be transferred to the corporate or transaction side,” said Crane.
Moving to AFAs doesn’t mean law firms have to reduce profit, said Adriana De Marco, a partner with Borden Ladner Gervais LLP in Toronto and another panelist on the CBA webinar. “We’ve heard about the death of the billable hour for 25 years and it really isn’t dead, but the alternatives are increasing, in part due to the change in the market and internal pressures on clients and increased emphasis on predictability,” she said.
In developing an AFA with a client, De Marco says it is important to accurately scope work. “It’s a common pitfall that occurs that there wasn’t a mutual understanding of the mandate,” she said. “If you have a wide range of work, it may be that a blended rate makes more sense. It offers a great opportunity to be creative and partner with your client.”
“Nobody ever has the time to do this, but it’s those who take the time who can leverage it to the max… Start with clients you trust, obsess over value in everything you do and with everyone on your team.”
If you have a lack of good historical information it can make developing a pricing arrangement more difficult. But creating a new fee arrangement should not only be about cutting costs or a race to the bottom. In fact, Tyler Langdon of Cognition LLP, another panelist on the CBA webinar, stressed that it’s not about law firms doing more work for less money. “If done properly it can have the opposite intent,” said Langdon. “It can increase profitability and increase long-term relationships.”
Langdon emphasized the importance of considering value-based billing in which a portion of the fee is determined subjectively by the client depending on the value they perceive the external firm brought to the matter. “I think this scares the heck out of a lot of lawyers, but gives you a feedback system and lets you know the client perceives you as giving value,” he said. “The reality is you’re going to get beat sometimes, but you will start to get it right more often than not.”
Langdon, a former in-house lawyer at McCain Foods for eight years until last July, said firms should want to be known as taking steps forward to alternative fees and process management. “Be one of those firms people are talking about to help drive your market share and for profitability growth,” he said. “Be proactive. Nobody ever has the time to do this but it’s those who take the time who can leverage it to the max, and it becomes mission critical. Start with clients you trust, obsess over value in everything you do and with everyone on your team.”
De Marco agreed. “To make these alternative fee arrangements successful, there has to be a willingness to look at new ideas such as legal project management and legal process improvement,” she said. “It’s important to have a built-in review mechanism and regular reporting systems or meetings to communicate.” De Marco also recommends evaluating who is the best person to perform the task—the senior lawyer, junior lawyer, clerk, or the in-house lawyer/team? She said AFAs offer the opportunity to be “creative about the business of law” and strengthen client relationships and service.
Crane added that it is not just large firms that can make alternative fees work for them. “There are no barriers—it’s about having a meeting of the minds and adding value to clients, and it can be profitable for law firms,” he said. “An AFA doesn’t necessarily mean less revenue.”
[This blog was originally posted on the Canadian Lawyer website. Canadian Lawyer is a publication of Thomson Reuters Canada Ltd.]