Thursday, 11 Mar 2010
Banishing the billable hour
06 February 2009
Time is running out for hourly billing
More fundamentally, claimed the accompanying report, Stop the Clock, many general counsel felt that time-based billing failed to reflect the real value of the work involved, often to the advantage of the law firm.
Yet, while the range of arguments against hourly billing are well-reasoned and well-rehearsed, the billable hour not only persists, but remains in widespread use. Despite its inherent disadvantages, very few companies have dared to take the leap into the unknown and refuse, point-blank, to pay for legal services by reference to the clock.
This year, however, saw the first major UK company – commercial television giant ITV – finally break the mould when it announced its first ever panel review in the summer. When new head of legal Andrew Garard – former head of legal at Cable & Wireless and newly arrived from a year-and-a-half as a partner at Dewey & LeBoeuf – sent out requests for proposals (RFPs) to each of the 46 firms that the company was already instructing, one stipulation stood out: the billable hour was banned.
That review was completed in November, with nine firms making the cut - Addleshaw Goddard, Charles Russell, Dewey & LeBoeuf, DLA Piper, Goodman Derrick, Lovells, Olswang, Slaughter and May and Wiggin & Co.
Here, Strategic Legal Advisor asks Andrew Garard how he convinced law firms to wean themselves off the clock, what benefits he expects to reap and what, exactly, is wrong with buying legal services by the hour.
What's your problem with paying for legal services by hour?
I think that the billable hour is a recipe for inefficiency and potential abuse, especially with the number of firms that give their associates targets. Why get something done in half an hour when you can bill three hours? However, if a project is based on a fixed fee then it does encourage the firm to staff the matter efficiently and ensure that anyone working on that transaction will want to make the best use of their time.
The relationship between a company and its advisers, be they financial, legal, PR or anything else, has got to be built on trust. Corporates must operate according to budgets because they have to produce returns to shareholders. So how then, when you have a relationship that’s based on time, can the trust be there? I think that takes a pretty efficiently-driven law firm to consistently deliver on the billable hour and not use it as a model for inefficiency.
Value for money was a driver. The net effect of this for us should be a reduction in the overall spend on an apples for apples basis, but at the same time I think it will result in firms being able to deploy their resources more effectively and they should also become more profitable.
Working as a partner in a firm did actually make me alive to the possibilities that this is just an inefficient way of utilising a resource. Talking to many other partners of law firms, it became clear that there isn’t a lot of business planning that’s done in many firms. There’s no account management, there’s no risks, threats, opportunities, there’s no scenario planning, there’s no five-year plan, they’re not run as businesses. I think one of the things that the external community of legal advisers needs to develop is a keener business sense.
How do your fee arrangements work?
For the majority of matters where the scope is definable there will be a fixed fee. For those matters that are less well defined in scope – a regulatory investigation or a piece of litigation, for example – there will be payments by stage of the process. And for some of the lower end pieces of litigation a lot of the successful panel of firms have committed to fixed fees as well.
We are working with each of the firms to actually define the inputs which will be necessary to get the figure for the output. You can't really have a template because I don’t think any two pieces of work are the same.
We don’t calculate anything by reference to time. For example we would pay X for a letter before action then Y for drafting and serving the particulars of claim for the defence then we would agree another fee once we know what the extent of, for example, discovery looks like. And then we would look for a fee if we took the matter through trial.
Once we have agreed the scope of the fixed fee and the matter remains in scope then it’s the law firm’s risk. Indeed, if a matter turns out to be far easier to conclude than we thought, then I suppose you could say that’s our risk. If a matter is out of scope, for example, the due diligence on the acquisition of a company throws up a number of problems which one cannot have foreseen at the beginning, then we’ll agree an additional fee for that 'out of scope' work. It's no more complicated than taking your car for a service. You agree a fee for the service and when they tell you that your tyres are bald you pay for the tyres.
It will also enable us to more accurately compare what different panel members will charge for a piece of advice or project. For example, if we’re going to be making an acquisition and we’ve got a pretty good idea of the inputs required – the extent of due diligence required, what level of warranty protection we would be looking for, speed of execution and location – we should be able to go to two or three of the firms and say here’s the inputs, what’s the price? We won't only be driven by price, however. The best person to do a job is a function of expertise, availability and price.
Does this create an additional administrative burden for you and your team?
It will probably involve more work up front, but then as soon as the work has been completed or the milestone has been reached the invoice is raised and it's paid – there is no need to quibble over bills.
Most in-house lawyers get rather bored of sitting there and wading through bills and time sheets. That’s not an effective use of their time whereas being able to give up-front, proper instructions based on a defined scope, is more rewarding.
How difficult was it to persuade law firms to give up charging by the hour? Did some of them refuse to entertain working without the billable hour?
Yes, some of them did, but we had made a decision that we were not going to entertain the billable hour any more so those firms we let go, much, I think, to their surprise! Even though ITV had a good relationship with some of these firms, law firms need to be more than just legal advisers producing dry advice in a vacuum. They need to become trusted business advisers and the business context here was we don’t want to pay by the hour.
I did find it surprising that some firms submitted a half-hearted response [to the RFP] rather than actually addressing what we had has asked for. You don’t go into Marks and Spencer and ask for a red jumper to be given a black bra!
The firms that were ultimately successful in being appointed to the panel responded with enthusiasm. There were a few firms that actually came up with ideas that they considered were innovative, but the underlying unit was the billable hour. I was pleased at the innovation a lot of the firms came up with, but I would say the vast majority of firms were still wedded to the billable hour.
Experienced practitioners should know within a spitting distance, roughly how much its going to cost. Unforeseen contingencies can never be factored in and as long, again, as there is a deep relationship between client and corporate, you should be able to discuss that and agree an amended fee. Nobody is expecting the law firms to put a red cross above their front door. They’re in the business of making money, we understand that, we just want to have a better way of modelling our own business cash flow and I think for the law firms, they will derive greater revenues by making better use of their assets which are their people.
Slaughter and May have, for a number of years, not really charged by the hour. They give you a price for a job, and their profitability looks remarkably good to me.
Do you expect that moving to fixed fees will affect the proportion of work that you send to external law firms?
I don’t think it will fundamentally change the balance. We have a core amount of work that we need to undertake within ITV, a lot of it based around the making and purchasing of programmes and the distribution of content that we produce, both in the UK and internationally. So the core set of work we will probably not outsource because that’s part of what we do.
Why do you think you are the first major company in the UK to completely banish the billable hour?
To be honest, we’ve been relatively fortunate in the timing. When we kicked off this process earlier in the year nobody was predicting the impact of the credit crunch or the recession and firms were relatively busy, albeit that M&A activity had been curtailed. As the year has gone on, firms have realised that work is going to be more difficult to come by.
There is, to some extent, a lethargy among some in-house counsel who, instead of actually pursuing an idea to its conclusion, are reluctant to force the issue because they perceive that good external advisers are a scarcity and they don’t want to scare their panel firms off. I’ve actually found though that through a process of discussion with the law firm and actually being prepared to make the commitment to it being a two-way relationship, that law firms are surprisingly receptive to these ideas.
There is a greater desire on the part of corporates to do this because the level of legal spend has risen exponentially over the years, especially as we live in an era of hyper-regulation. So there is a perfect storm that’s come together to enable us to achieve this.
