October 12, 2010 5:50 PM

Shifting Away from Billable Hours...Eventually

Posted by Tom Huddleston Jr.

The Legal Intelligencer continues its weekly look at the current state of law firms--including how they've adapted to a changing marketplace in recent years and what direction they're headed in as the economy begins to recover.

Last week, as The Am Law Daily noted, the Intelligencer's Gina Passarella examined the move by some firms to put fewer associates on a partnership track--and pay them less in the process. This week, Passarella writes about what appears to be a (slowly) evolving billing model for firms and the in-house counsel that hire them.

As Passarella notes, amid the downturn many clients have balked at paying standard billing rates, while some are going so far as to demand alternative fee arrangements (AFA) that provide a more flexible plan.

AFA proposals have not caught on with all firms, the Intelligencer reports. In some cases, clients don't trust that an alternative plan will prove to be as good as it sounds and so are sticking with that old standby, the billable hour.

In other instances, Passarella writes, some clients are asking outside firms to present inventive billing plans, then taking the best of the lot and pitching them to firms with which they already have longstanding relationships.

In the article, Susan Hackett, general counsel of the Association of Corporate Counsel, likens the situation to a high school dance, with boys on one side, girls on the other, and both waiting for someone to make the first move. Most clients want the firms to raise the issue of AFAs, because the latter have a better handle on billing metrics and are therefore better positioned to put a workable offer on the table.

Hackett does say that while change is slow, some is occurring. "This has never been about killing the billable hour, it's about removing it as a default," she told the paper. "We are seeing people ask, 'How do you want us to bill this?' which isn't a conversation people had more than a year ago."

On a related topic, Corporate Counsel's Shannon Green reports on a recent ALM survey of in-house law departments that showed 72.8 percent of fees paid to outside counsel in 2009 were based on alternative billing models. Also, 33 percent of the 114 respondents noted seeing an increase in the frequency of alternative billing offers from outside firms.

It's unclear whether these numbers reflect a commitment by clients to simply navigate through an economic crunch, or foreshadow something more profound. Still, there's enough going on to believe that the old ways of billing may soon get a run for their money.

That being said, Green also is quick to point out the effect of discounted rates on the statistics in ALM's survey. Of the alternative arrangements cited in the survey, 77.8 percent were the result of discounted hourly rates, with the rest representing fixed, capped, or flat fees.

Rees Morrison, president of Princeton, N.J.-based consulting service Rees Morrison Associates, told Green that firms shaving off the top of hourly rates is not a harbinger of billable hours going by the wayside. "To me, that doesn't change how law firms work," he said.

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