General Counsel Keep Billable Hour Hanging On

By Anne Urda

Law360, New York (November 06, 2009) -- As much ink as has been spilled about alternative fee arrangements, the notion that general counsel really want to see the billable hour become extinct remains in doubt, complicating things for firms trying to figure out how to please this all-important constituency.

At the 2009 Working Mother & Flex-Time Lawyers Best Law Firms For Women conference in September, the senior vice president and general counsel for Allstate Insurance Co. talked about the “schizophrenic attitude” often displayed when it comes to the billable hour.

“The inconsistency lies with the in-house counsel,” Michele Coleman Mayes said during a panel discussion. “Firms will say, 'Even when I propose something novel they come back and ask me to work up the hourly numbers, too.'”

The comment earned a laugh, but legal experts say firms face a serious challenge in coming up with a financial solution that will satisfy general counsel, who are still searching for the best bang for their buck.

“What I think the general counsel are concerned about the most is just to get the best value and the best-quality attorney to work on their cases,” said Kathi Lemons, the director of client services for Legalbill Inc. “Everybody right now is going through a period of time where they are trying to be conscious of costs and find the best deal.”

To that end, The Association for Corporate Counsel, which has about 25,000 members representing about 10,000 companies, recently launched an initiative that aims to address what many in-house counsel view as a growing disparity between the value provided and the costs charged by law firms.

Through the Value Challenge, ACC encourages in-house counsel to pick their three best law firms or practice groups, then invite them over for a two-hour bag lunch to discuss how to improve the value of legal services. Law firms are encouraged to do the same with their three best clients.

Still, figuring out exactly how to achieve better value is easier said than done for general counsel, Lemons said.

“A lot of the time, flat fee or alternative fee arrangements sound like a good deal, so they may want to take it, but they are worried that the work is going to suffer and they are going to get less-experienced people,” Lemons said.

And general counsel can't determine the best route without considering the long-term value of a proposal, Lemons said.

“Firms can put together proposals that look like they are cutting every way around, but it's not always the best value in the long run,” she said.

Of more concern to general counsel than the billable hour itself or the rate a particular attorney is charging is the overall cost of the case, according to Lemons.

“You can have a firm whose attorneys do their work in a short amount of time and produce an excellent result,” she said. “Then you can have a firm that is going to throw a lot of people at the matter, and you end up spending way more than you would normally even need to spend.”

Part of the general counsel's fear of committing financially has to do with the number of factors in play, according to Lemons.

“They have got to keep the case load managed, you need lawyers who are experienced, you need to keep the costs down,” she said. “It's a catch-22 for the general counsel.”

Another problem is the lack of trust on the part of the general counsel, according to Altman Weil Inc. principal Dan DiLucchio.

“Even if a firm comes back and says, 'Here's an alternative fee arrangement that is going to be in your best interest,' the general counsel are saying, 'How do we know this is going to be the best deal?'” he said. “They may agree to the alternative fee arrangement and say, 'We want you to keep your hours, too, and compare.'”

One way to assess whether they are getting the best deal is to look closer at e-billing, according to DiLucchio.

“Most law departments are still using e-billing to process bills, but the next step will be to analyze data you are collecting to see what it costs,” he said. “They have to get a better handle on what the costs are so that when a law firm comes to them with a proposal, they know what's best.”

One tool ACC has offered through the Value Challenge is an online economic model that allows users to input different numbers, billing rates and salaries for associates and partners into an Excel spread sheet, then test various staffing approaches to see the results.

While it may be easy to demonize the billable hour, a flat fee does not necessarily guarantee fairness, either, Lemons said.

“It is so easy to look at a lawyer or a doctor and say, 'They charge how much per hour?' What you don't realize is that they are only taking 15 or 20 minutes to do something that might take an attorney charging less than half that hours to do,” she said.

DiLucchio has observed the varying degrees of enthusiasm among general counsel with the billable hour, noting that some are perfectly content with the current system.

“I think overall some general counsel are perfectly happy with the hourly rates and discounts,” he said. “Part of the reason for that it is really easy to calculate savings. You can quickly do the math and say, 'We save this much money,' and some people are still perfectly satisfied with that situation.”

But in a chief legal officer survey Altman Weil conducted in summer 2009, the consulting firm found that nearly 40 percent of corporations are putting some pressure on law firms to change the value proposition in their delivery of legal services.

When asked whether they thought law firms were serious about changing to a value-based delivery, general counsel expressed skepticism by an overwhelming majority, according to the survey.

The survey does suggest that some firms may be getting the message, with the number of general counsel using nonhourly work arrangements rising by 20 percent in 2009 from the previous year.

While that trend is likely to continue in coming years, DiLucchio said, the billable hour will be hard to eradicate given the subculture it has spawned.

“What we are finding is that as law firms move to alternative fee arrangements, they are also having to rethink the way they measure and set up their metrics to measure contributions by the lawyers,” he said.

The ACC and other organizations are seeking to help firms do just that by encouraging them to move away from evaluating the worth of a lawyers' contribution by assessing the pile of hours the lawyer has amassed.

“The true value of the lawyer is the solution or outcome they help the client achieve, so compensate and evaluate lawyers on their competency, efficiency and ability to solve client problems, not whether they took a long time doing it,” Susan Hackett, the senior vice president and general counsel for the ACC, has told Law360.

Charles Green, the founder and CEO of Trusted Advisor Associates, remains skeptical as to whether value-based billing is more than just a theoretical argument at the end of the day.

“Value-based billing sounds great in principle, but if you are providing these services, you don't want to get into some emotional discussion about value, which is what it always ends up being,” he said. “Clients are afraid to use it.”

The billable hour also wins out in the end due to the competitive nature of the legal industry, Green said.

“There is a limit on being able to capture price for value, and that limit is the competitive presence of other lawyers,” he said. “No matter how great the value is, there is a natural mechanism in the industry that somebody else will do it for a lot less than what you are charging.”

Given that the billable hour is likely to stick around, general counsel must pay attention to the overall cost of the case as well as how the firm staffs, Lemons said.

“There is a lot of talk and speculation, but I do not think the billable hour is going to be going anywhere,” she said. “I think you will see combinations of both the billable hour and alternative fee arrangements going forward.”

--Additional reporting by Jocelyn Allison