The Billable Hour Isn’t Going Anywhere

While the legal industry may be headed for grim days, the method of payment won’t disappear any time soon, says David Lat, founder of Above the Law.
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TRANSCRIPT

Question: How will the legal profession change in the upcoming years?

David Lat: I think we are going to see a lot of changes to the legal profession over the next decade or so, especially in the world of large law firms. This is an area that I've also been covering in the freelance writing for publications as well. And law firms have to change; they have to adapt to new circumstances. And I think the recession and the economic pressures that the recession has placed on firms are forcing what would have been a natural process anyway of evolution to take place more quickly. I think that's generally a good thing. I think firms have to figure out how to provide legal services more efficiently because their clients are no longer rich and fat and happy and willing to pay a lot of money for services that they can get more cheaply through, say, outsourcing.

There are outfits in India or the Philippines or other developing countries where you can have documents scanned and uploaded and even reviewed and tagged for a fraction of the cost that it would cost in the United States. And I think that law firms are probably going to have to start figuring out how can we utilize these services as opposed to wall them off. So I think one change is law firms will have to become more efficient. The second is just globalization. They will have to – as I was saying –recognize how to use resources from abroad.

A third thing that I think is compensation may come down. I don't know if that is going to be a long-term thing or not. We've already seen law firms cutting salaries for associates and profits per partner are declining at large law firms as well. It remains to be seen whether that is going to be a long-term trend or not. But until the recent recession, profits and the salaries had reached records highs and I don't know if that's necessarily going to be the case for awhile. Essentially, it's a matter of supply and demand. And right now, with all the laid off lawyers, deferred lawyers, unemployed lawyers, you just have a huge glut of lawyer talent. And when you think of lawyer hours, that is essentially what you are selling your clients, billable hours. There is a huge surplus of potential billable hours in search of work. And until that imbalance in the market is corrected, things are going to be a little bit grim in the world of big law.

Question: Do you think we’ll see a disappearance of the billable hour?

David Lat: I think that the billable hour is being eroded, but I don't think it will completely disappear, at least not in a very long time. One thing that's interesting is it's sort of like the devil you know. So I've talked to law firm partners who often say, "We want to do alternative arrangements. We want to do a contingent fee arrangement, or we want to do a flat fee, but with a premium for success." But the clients are a little bit nervous about it because at least a billable hour gives them some kind of metric. So, for example, say a firm handles a $100 million case for a client – Company X suing Company Y. And say the firm wants to do it on a contingency, so if they win, they get 30 percent, or 30 million. Well, that might be fine because if they win, it's a great result. But the in-house lawyer might think well, if I have to present a $30 million legal bill, my CFO – my finance guy, the company – will say, "Well, that seems really high." Why don't I try to do a billable arrangement and get a discount because oftentimes the firms will give a discount off their rates? And so he can say, "Well, I got X-million dollars in billable time, but I got a discount off it, and therefore I saved us money."

So the other thing is, people still tend to think in billable hours. So even when law firms are coming up with pitches – say they've been asked to submit a proposal to a client for a particular engagement. They will still think in terms of how many hours or how many people at their different rates will this project take to complete. So part of it is trying to figure out what is the alternative to the billable hour. So I think that these arrangements are definitely increasing. There's certainly statistical data on that. I think that in the past year – I believe this was mentioned in the Wall Street Journal – something like a selection on in-house councils were asked about alternative fee arrangements said that they went from being something like five or ten percent of their arrangements to somewhere between 20 or maybe even 30 percent. Like, they're definitely increasing, but the billable hour is still accounting for the majority of the work.

Recorded on November 6, 2009