Mark this day down on your calendars, kids. We will one day look back on November 18, 2014, as the first day in the long anticipated end to the dreaded billable hour.

From today’s American Lawyer:

Law firms have been calling for the end of the billable hour for decades. And since the 2008 recession, they have increasingly offered cost-conscious clients alternative fee arrangements.

Now Jackson Lewis says it wants to take the next step in the evolutionary process of alternative fee arrangements by eliminating the billable hour as an evaluative tool for its 293 associates. As of Jan. 1, associates at the labor and employment firm will be assessed on efficiency, client service, responsiveness, team-orientation and pro-bono commitment in an effort to align the way Jackson Lewis “deliver[s] legal services with clients’ needs,” according to firm chair Vincent Cino. (The firm’s compensation model for partners is based on revenue rather than hours.)

“The billable hour is directly opposed to the best interest of the client and to the provider of service because by its very nature it adds an artificial barrier to the accomplishment of the only real objective, which is a quality legal product for a set and expected price,” Cino says.

Whether you agree or not that the “billable hour is directly opposed to the best interest of the client” you have had to wonder, at some point in your career, “Well, how did we get here?”

Basically, blame the United States Supreme Court.

In 1975 the Court’s decisions in two cases not only broke ground for legal marketing, but opened the door for the billable hour  across the legal landscape, ushering in the concept of business development.

In the first decision, Bates v. State Bar of Arizona, the Court rightly held that lawyers have the right to advertise, giving rise to the career of the legal marketer as the marketing/communications expert.

In the second decision, Goldfarb v. Virginia State Bar the Court held that lawyers are engaged in commerce (BUSINESS), and that the fee-schedules previously set by bar associations and courts violated antitrust laws. And with the signature of the pen, we now introduce the concept of business development.

In short: Bates allowed lawyers to market, and Goldfarb allowed lawyers to compete on price.

Comparing the profits per equity partner (PPEP) of the AmLaw 100 from the late 70s, when they first started to track it, to the PPEP of today, you cannot argue that there has been great success … if you are judging success by PPEP.

A steep price has been paid for this increase in PPEP, and that is in the relationship between lawyer and client, partner and associate. If I was trying to put my finger on it, I would say what is missing today is the concept of the “profession” of being a lawyer. It really has become a big business.

Fast forward to the 2008 recession and the bitching and moaning by clients in regards to costs got really loud. Clients began to push back on rates; we saw the slashing of associate ranks, and the rescission of offer letters for first years; followed by the introduction of the procurement departments and their insistence on AFAs and reverse auctions. Savvy law firms are responding to these trends with one of the hottest legal careers: the pricing and profitability specialists.

Yet none of these things have impacted the PPEP of the AmLaw 100, which begs the questions: “Why get rid of the billable hour requirements for associates now?” A few things come quickly to mind:

  • For several years the trend has been for general counsel to refuse to pay for first and second year associates on the job training. These freshly graduated lawyers are making upwards of $160,000 with no experience, and yet the clients will not pay for them to work on their files, making it very expensive to have associates do anything other then bill 2000 or more hours per year. They need to get trained some how.
  • Law firms are not just competing against the firm across the street, they are now competing with their clients. The billable hour for many attorneys, especially within the AmLaw 100-200 has reached a point where it is often times cheaper for the general counsel to bring the work in house, save for the extremely sophisticated and specialized work. And this is not just for associates, but for partners.
  • The pricing and profitability specialists are teaching lawyers how to bill for their services, and make a profit, without billable hour requirements. I am 100% certain that Jackson Lewis will not lose money with their new business model.
  • GenY, AKA the Millennials, are not motivated by money as a whole. They work to live. They are not going to turn the majority of their waking hours, 7 days a week, 365 days a year, over to a law firm. They just won’t do it. They might join a private practice right after law school, but the minute their loans are paid off, they will be gone. Law firms will have to adapt.
  • And just because I like the generations: There are close to 80 million Baby Boomers (50-69 years old); 46 million GenXers (33-49); and 76 million Millennials (14-32) in the United States. We have a wave of associates that is just starting to build. There are not enough billable hours out there to meet the current needs. However, if law firms do not hire and train them and build their work experience, we will lose that intellectual capital when the GenX generation begins to retire in 15-20 years.

By removing the billable hour requirements, you are alleviating the pressure on associates to just churn hours for the sake of churning hours; partners can now focus on developing the legal talent and skills of the younger attorneys. By removing the billable hour requirement for associates the barrier to bringing an associate along to sit in on a trial, or a deposition, or attend a conference has been removed. Now they can go along and learn.

I am excited to see how the changes at Jackson Lewis impacts behavior for both the associates, partners, and clients. I am certain the firm’s new business structure will allow for better pricing of their legal services, which is a win for the client, which will bring in more business.

Will law firms across the country follow suit? Of course (Hello, Gunderson anyone??). But it will happen slowly. AFAs were a big enough shock to the business model. To make the business case that associates should be “free”? This is going to be an interesting challenge. There are still too many law firms and lawyers trying to adjust to the idea that they are a business, as well as a profession.

  • I disagree that we can blame the Bates and Goldfarb decisions for the billable hour. First, the billable hour appeared long before 1977. Law firms began to charge for time decades before that after consultants recommended that they would be more profitable were they to keep time records (initially for internal purposes but later for billing purposes). In-house attorneys began to ask for documentation to justify the bills that their companies received “for professional services” (and a single, large charge), so the firms provided the time entries to satisfy that demand. From there to billing for those time entries was a short step.

    Second, when the Court prohibited price fixing (i.e., the fee schedules set by bar associations), it did not mandate that prices be set by the amount of time devoted to the tasks. Were that so, all industries subject to similar antitrust directives would have the same urge to set their prices as did lawyers.

    The problem lies at the feet of the law firm model (i.e., the pyramid and the leveraging of associates’ time for partners’ profits) and the failure of in-house lawyers to demand something different.

    • Bates allowed advertising and has nothing to do with rates.

      What Goldfarb did, by removing bar and court appointed fee schedules, was allow for competition across the board. Did some lawyers bill by the hour pre Goldfarb? Yes. But not the majority. And it was not the industry standard.

  • Great post. Our philosophy is that most legal advice can be segmented into flat-fee ‘products’, giving rise to our “Legal Advice Products™’ on http://www.SvPerbar.com .An Attorney who is experienced in his work will know generally, more or less, what something will cost, and allowing a client the comfort of knowing upfront what her legal spend will be, would be a major boost not only to trust, efficiency and transparency in the profession, but also to the reputation of attorneys who are inundated with bad press and reviews precisely because of this problem.