As I said last month:
You gotta wonder how much longer the legal biz can get away with a pricing structure that does so little for clients. In this economic climate. Just because this is the economic model that is convenient for law firms as currently structured? I don't think so.
Indeed, I suggested that the survival of the billable hour was itself evidence of serious problems with law firm structure.
Today's NYT suggests that the billable hour may be the next victim of the economy. Even Cravath may be rethinking it!
“This is the time to get rid of the billable hour,” said Evan R. Chesler, presiding partner at Cravath, Swain & Moore in New York, one of a number of large firms whose most senior lawyers bill more than $800 an hour. “Clients are concerned about the budgets, more so than perhaps a year or two ago,” he added, with a lawyer’s gift for understatement. Big law firms are worried about their budgets, too. * * *
The article cites a case in which a firm negotiated a fixed fee with a bonus of amount saved from the worst case scenario. Lawyers settled for less than the target, got more than the hourly rate and made the client happy.
Compare the billable hour result:
In litigation, firms that charge by the hour can suffer if they are too successful and end a lawsuit — and the stream of payments from continuing work — too quickly. One law firm that recently collapsed, Heller Ehrman, was hurt in part because a number of cases had settled.
Fear of settlement might otherwise be called "agency costs."
The article points out that
If lawyers set too low a price, they lose money. Many lawyers may not be good enough businessmen to pick the right price. . .
Oy. Does that mean that lawyers may actually have to become "good businessmen"? Yes, sharper competition can have even that drastic effect.
The billable hour survives because it's convenient for law firms. This convenience is a form of seller's surplus that the economy is squeezing out of law practice.
The death of the billable hour will make it much harder to sustain the current law firm model – a pyramidal structure of many associates supporting a few partners. Talented lawyers will have to find some other financial structure to leverage their skills. That, in turn, will put pressure on the ethical rules that sustain the current structure.
In other words, big law firms are meeting Elvis's fate, as I said on Monday.
Maybe more lawyers will work for insurance companies:
http://brokensymmetry.typepad.com/broken_symmetry/2008/01/can-the-law-fir.html
Posted by: Michael F. Martin | January 30, 2009 at 11:46 AM