The Scourge of the Billable Hour

Could law-firm clients finally kill it off?

It’s a classic, needling lawyer’s question: Spend two hours at your daughter’s soccer game, or bill the time and pocket $1,400?

For years, critics have argued that tracking the work day in six-minute intervals—the standard billing system used by big law firms—discourages creativity and efficiency. Hourly rates are blamed for driving women out of the profession, and for leaving little time for mentoring, pro bono volunteering, or anything like work-life balance. The American Bar Association sounded the official alarm in 2002. “The profession’s obsession with billable hours is like drinking water from a fire hose,” wrote Justice Stephen Breyer in the forward to the ABA’s report, “the result is that many lawyers are starting to drown.”

The criticisms lobbed by academics, associates, and bloggers have had a negligible impact. Making such a significant change takes a more powerful force in law firm life: the client. And now, finally, the companies that pay millions in hourly rates are striking back, forcing their law firms to cut some tough, nonhourly fee deals. If anyone can tame the billable beast, it’s the clients who feed it.

Companies are attacking the billable hour out of a growing frustration with rising legal costs. “Put most bluntly, the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour,” said Cisco’s general counsel, Mark Chandler. In a speech at Northwestern University’s law school last January, he called the billable hour, “the last vestige of the medieval guild system to survive into the 21st century.”

Hourly rates first took hold in the mid-1950s. At the time, they were encouraged by clients, who then saw them as a means to more transparent bills, and by bar associations hoping to gin up profits. A 1958 ABA pamphlet suggested a quota of 1,300 hours a year for associates. By the mid-1980s, large firms demanded closer to 1,800 hours, and top bonuses and making partner in big cities demands closer to 1,800 hours billed (which translates into many more hours worked). The trade-off at top law firms, though not at others, are starting salaries of $160,000 and partner pay of more than $1 million. Hourly rates have increased annually by 5 percent since 2001, according to ACC data, and for a few partners in the legal stratosphere, reached the $1,000 an hour mark.

Lawyers who work in-house for corporations—making only as much as a third or fourth-year law firm associate—think their companies, when they outsource legal work to firms, unintentionally fund the salary extravaganza. And so Cisco, Pitney Bowes, Caterpillar, and several other large corporations have begun to force their law firms into alternative billing arrangements. The companies push flat fees and volume-based discounts, and ban young associates from working on their business, hoping to avoid paying through the nose for work that could be done more cheaply by paralegals or temp lawyers. They say that by eradicating or at least limiting hourly rates, they avoid cost creep, cut their bills, and better predict their expenses.

Law firms, notoriously risk-averse, are reluctant to go along. Only about a quarter of companies used alternative billing last year, according to a 2006 study commissioned by the Association of Corporate Counsel, an industry group of in-house lawyers.

If this is the future of the legal world, then the business will eventually spilt into three fairly autonomous markets. The top end of the spectrum will remain largely unchanged. Companies will still pay hourly rates to hire white-shoe law firms for specialized, bet-your-company kinds of work. On the opposite end, however, clients will stop taking their rote legal work to law firms altogether. Companies already outsource relatively simple matters like document review to consulting services. And as technology improves, more programs will let companies handle their own contracts online.

In the murky middle between one-of-a-kind advice and dime-a-dozen contracts, the push for alternative arrangements will prevail. Cisco, for example, already pays a fixed fee to law firms for filing patents at the Patent and Trademark Office. The firm’s total charge must decrease by at least 5 percent each year, as a firm becomes more efficient; if not, it is replaced with a smaller one willing to take the work.

Smaller, regional firms are slowly starting to go along. If companies continue to snap up the relative bargains on offer, more work will be spread across the corporate law spectrum. And maybe, lawyers will get off the clock and find that they like what they do, when they don’t have to do it all the time.