Closing arguments on the billable hour

Evan Chesler, head of the old line New York law firm Cravath, Swaine & Moore L.L.P., caused jaws to drop in early January when he challenged lawyers to dispense with the hourly billing system that had sustained the industry for generations.

The system rewards inefficiency, frustrates clients and has little economic logic, he argued.

Chesler verbalized what many law-firm leaders had been silently mulling for years and triggered an enormous debate over the potential benefits of alternative billing arrangements, such as flat fees, or discounted rates linked with incentive payments for favorable results.

But to what degree has the industry actually changed the way it is charging clients?

So far, the answer appears to be not so much.

In the great majority of cases, the billable hour still reigns supreme. While many law firms have rushed to offer clients alternatives, the institutional obstacles to change remain daunting, say industry insiders.

Billable hours are a key measure of productivity and for determining compensation at most large law firms, as well as a measure of profitability of individual practice areas. Moreover, many of the lawyers who run the in-house legal departments of big companies, and who select their companies' outside law firms, are themselves graduates of those law firms and thus more comfortable with the billable hour than alternative rate structures.

"We don't think this is going to become the dominant billing method for some time because there is so much inertia in the system surrounding the billable hour," said Bill Brennan, a profitability adviser at the Newtown Square-based legal consulting firm Altman Weil. "What I can tell you is there is absolutely a great deal of interest on the part of the buyers of legal services to adopt alternative fee arrangements to replace the billable hour."

Altman Weil surveyed 200 law firms in March and April and found that while there was some movement toward alternative billing, it still accounts for only a small portion of revenue. In the survey, firms with 1,000 or more lawyers projected that only between 1 and 10 percent of revenue this year would be attributable to alternative billing.

Smaller firms projected higher percentages but no firms with more than 100 lawyers reported that more than half their revenue would be attributable to alternative fee arrangements.

Much of the push for alternative fee structures has come from the Association of Corporate Counsel, which represents thousands of in-house lawyers who themselves are under pressure from chief executives to cut legal costs.

A position paper published by the association earlier this year was revealing. It noted critically that the rise in legal costs had far outstripped inflation, suggested that law firms tended at times to overstaff engagements, and implied that they charged clients for redoing research that likely had already been done on another matter.

It urged that firms be more creative in offering alternative fee arrangements that reward efficiency.

While the results in terms of actual revenue remain relatively small, firms are scrambling to respond. Michael Pollack, a partner and senior manager at Reed Smith L.L.P., a 1,700-lawyer, Pittsburgh-based firm with a large presence in Philadelphia, said a third of the firm's new engagements involve some form of alternative fee structure.

He said the trend was even more accelerated overseas.

Saul Ewing L.L.P., a 260-lawyer firm based in Center City, said recently that it would offer clients flat fees in some insurance, due diligence and employment matters.

The firm's managing partner, David Antzis, said that like many mid-sized firms, Saul Ewing has long offered clients alternative billing for predictable and routine assignments such as will preparation or patent filings and that between 10 percent and 15 percent of the firm's business fell under that category.

But he said the firm was aggressively seeking to boost such business. It is now handling employment discrimination cases for a large supermarket chain on a fixed fee basis where the client is charged for tasks such as discovery or motions rather than by the hour.

"If we find we are being killed, we can always go back and negotiate with the client, he said.

Andrew Kassner, managing partner of the 680-lawyer Drinker Biddle & Reath L.L.P. of Center City, said the new focus on flat fees, incentive payments and other alternative forms of compensation means law firms need to be very careful about how they deploy their lawyers.

High-level partners, for example, shouldn't be doing legal research that can be left to a more junior, and less-expensive lawyer, while the partner should handle client contacts and the broader legal strategy.

"What law firms have to do is have the right lawyer at the right level in order to satisfactorily complete the task," Kassner said. "My clients expect me to be correctly staffed and very efficient."