Monday, January 12, 2009

Has the Billable Hour Become a Liability for Law Firms?

The billable hour and its place in the legal business has always been a hot topic for us. In a pleasantly surprising change, the issue has been raised recently by two high profile law firm lawyers. First, Fred Bartlitt asked the question “Is the litigation market at last ready for a new business model?” on the fascinating new site Legal OnRamp, an invite only site for the glitterati of legal thinking. Next, Evan Chesler of Cravath detailed his case against the billable hour in a recent Forbes Magazine editorial, which sparked a flurry of further conversation in the legal blogosphere (including a article, an blog entry, LegalOnRamp, and of course, the blog entry you're reading right now.)

This discussion is of particular interest to me because, in a very real way, the question of whether, and how, firms can move beyond the billable hour is the reason that my company, CT TyMetrix, was founded.

In 1994, TyMetrix was founded to answer a single question: How can corporations identify which of its firms is providing the most value for each legal service dollar spent. Since that time, we have developed business methods and solutions that are designed to do just that. Our clients gather the information required to assess the value being provided by their firms with our patented e-billing solution and collaborative matter management and case planning tools. They then use our business intelligence tools to mine the data gathered and determine which firms are providing the most value. Our clients then use the data that they have gathered to help firms value cases and implement alternatives to the billable hour.

There is a strong argument to be made that the hourly method of billing is no longer effective in all litigated cases. In fact, many of the top corporate legal departments are using TyMetrix 360 and similar tools to assign, plan, measure, and cost effectively manage litigation using alternative billing arrangements.

How do they do it? With the correct structure and data, it is actually quite simple. With a sufficient number of cases of a particular type (scores not hundreds), the exposure reserve, the litigation reserve, and the actual results, a company is able to use segmentation and a simple algorithm to accurately estimate which firms are resolving cases for the lowest total case cost. With this knowledge in hand, corporations are then able evaluate the staffing and tactics of the successful firms and share them with all the firms used by the corporation.

With a modest amount of historical billing data, they can work together to fairly value cases and set up alternate fee arrangements for matters or portfolios of work. Moreover, corporations and firms can collaboratively plan cases and effectively manage the staffing and workflow.

Using these methods, our clients have made some findings that are quite interesting. For example, based on our experience (which includes more than $20 billion in legal fees), there is strong evidence that cases are most cost effectively handled by small teams, often teams of one, and that the optimal staffing profile includes what can best characterized as junior partner level attorneys. This is the gist of Fred Barlitt’s argument on
Legal OnRamp.

In addition to the objective methods for assessing the value of a firm or attorney’s work, our clients rely on attorney and firm ratings. These ratings, while qualitative, often add necessary color to the quantitative findings.

This, of course, begs a big question. If the tools for correctly valuing and managing a case and the litigation expense associated with it already exist, then why does the billable hour continue on as the dominant model of billing for litigation?

Although there are as many answers to this question as there are companies, I would offer some of the following as examples that I have heard over the years.

  • I’m too small or I don’t have enough cases of a given type of litigation to have a meaningful segment.
  • My cases are unique/too large/too complex/et al.
  • Even if I have enough cases to have a statistically valid segment, I don’t want to share what I have found because it is a competitive advantage.
  • Even if I have enough cases to have a statistically valid segment, I don’t want to share what I have found because I have data security concerns.
  • I don’t want to offend my firms.

To these objections, I say this. It is your corporate prerogative to handle litigation as you wish but none of the foregoing is sufficient to continue to rely solely on the billable hour.

To make this work, I would offer a modest proposal: First, and without running afoul of any of the objections set forth above, we would need to agree to a standard for rating attorneys. This is an initiative that has been put forward by a number of companies although I believe that this type of standard is best put forward by a group like the members of Legal OnRamp, as an impartial (and "open source") exercise.

Second, we need to cooperate to build a highly segmented database that establishes fair value for the tasks and activities most commonly undertaken in litigation and, for that matter, in transactions, though that's another topic. Because there are already hundreds of companies that have most, if not all, of the required information through companies like TyMetrix, the data gathering exercise is largely complete. From there, we should consider the significantly larger task of agreeing on standards for the building and usage of a database that captures the data elements essential to enable companies and their firms to make educated bets on different projects or portfolios of work. Firms will have an educated basis on which to create alternate fee arrangements that align their interests with their clients, without the risk associated with blindly jumping into the risk pool. That's how a standard will emerge.

In addition to the existing standards for tasks and activities, we should consider standards for:

  • Case types
  • Exposures or reserves for the case and the litigation expense
  • Reserve segments
  • Staffing profile
  • The type of the resolution
  • The amount of the resolution

Because the quantum of data will be enormous, there will be no question about the validity of the sample size. Because the data will be anonymous, there should be no objections about privacy or a company or firm being singled out. The information could then be tapped by contributors whenever required.

I note that there are numerous precedents for this type of voluntary database. Notably, I think about ISO, to which virtually all insurers contribute “proprietary” information about their losses so that their policy forms reflect a broad risk pool.

I feel strongly that this is a critical issue. Fortunately, I think that there is a clear path to success for the entire profession.

I'd appreciate your thoughts.

John Weber
General Manager, CT TyMetrix

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