ABA Journal

The New Normal

Get rid of the billable hour—but then what?

By D. Casey Flaherty

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D. Casey Flaherty

D. Casey Flaherty

The billable hour is not the immediate cause of all that ails the legal industry. Freedom from the tyranny of the billable hour would be a fine start. But there is much more to do and discuss. For proof, look no further than law departments. Many corporate law departments suffer from the same pathologies as law firms despite having cast off the perverse incentives of compensable time sheets.

The most common rejoinder to my suggestion that the billable hour is not the immediate cause of all evil in the universe is that law departments are populated by law-firm refugees. Whether or not this analysis is accurate, it concedes the basic point that culture, no matter the original source, is self-perpetuating and that simply eradicating the billable hour is not sufficient to drive the necessary changes. Law departments are filled with autonomy-seeking lawyers who, at a certain size, are highly unlikely to spontaneously organize into a well-functioning team. There are good reasons that traditional law practice has “no economies of scale” (PDF).

Rather, as law departments grow, they encounter the same diseconomies of scale that have plagued large law firms for decades. Progressive law departments have responded by moving away from being a law firm embedded in a company and, instead, have started to function more like the businesses they serve. Recent increases in and recalibrations of spend have been directed toward operations personnel and technology. Last year, for the first time, a majority of law departments used metrics. Last year, for the first time, a majority of law departments used an RFP process.

But haven’t we already seen this movie? Don’t large law firms have CFO’s, COO’s, CIO’s, CTO’s, CKO’s, CPO’s, etc.? Indeed, they do. But, despite the titles, the BigLaw caste system remains strong. The partnership and compensation models render systemic change excruciatingly difficult. The lateral-hiring frenzy makes manifest Jeff Carr’s long-standing description of law firms as “hotels for lawyers.” Any firm that decides to pursue major structural changes, infrastructure investment, or R&D absent crystal-clear client demand has to be prepared for some of its all-star partners to jump ship. And bankruptcy waits patiently around the corner, because despite stable revenues and high margins, individual law firms are inherently fragile (PDF).

Since insourcing likely has its limits, the burden therefore rests on clients to use not just exit but voice to leverage the power of the purse. Legal is a buyer’s market, and has been for a decade. Any shortcomings of the market to meet buyers’ needs is for the buyers to remedy, not because the failure is their fault but because it is within their power to fix.

In theory, law departments should be well suited to this role. No billable hours. Limited free agency. Completely invested in and bolstered by the success of the enterprise. Yet, many law departments have long paralleled the law firms that produced their personnel. Culture is sticky. And lawyers, it turns out, have a distinct psychological profile that values autonomy, is focused on immediate needs, and is skeptical of change. When a general counsel decides to transform her department or outside counsel relationships, she runs into natural barriers—i.e., lawyers. For all the ink spilled on the perverse incentives the billable hour creates for outside counsel, scant attention is paid to the fact that many of the same attractive features—familiarity, immediacy, flexibility, tractability, bigger budgets, lack of accountability—prove just as alluring to inside counsel. Change is hard.

Still, compared to managing partners, general counsel are imbued with more authority to drive change and to empower others to execute change on their behalf. As the statistics quoted above seem to suggest, that change may finally be happening. This change is not just a fluctuation in opinion—in recorded history, clients have never expressed satisfaction with their law firms—it is a cultural shift. Legal operations and procurement professionals with their technology, metrics, and RFP’s bring a process-driven approach to the delivery and consumption of legal services. If—and this remains the big if—they are part of, or at least supported by, law department management, they can exercise the kind of autonomy and authority necessary to alter the status quo. After all, a metric is only useful if it actually changes behavior.

At first glance, the rise of legal operations and procurement would seem to be bad news for law firms. And maybe it is. But it is also an enormous opportunity to finally engage in the structured dialogue that has eluded clients and law firms for so long. It is an opportunity for clients to communicate clear, specific demands for measurable change. It is an opportunity for law firms and alternative providers to compete on merit and be rewarded for innovation. It is an opportunity to transform the incentive structure—including the billable hour—in ways that have been more talk than action for decades.

The closest analogy is probably cybersecurity. Many law firms collected handsome sums for advising clients of the need to audit third parties who held the client’s sensitive information. Eventually, clients were so convinced by the logic of this advice that they determined to audit the law firms, who, after all, are third parties that hold of troves sensitive information. Law firms argued that this was unnecessary because, as evinced by the advice provided, they were well aware that cybersecurity was important. This argument actually worked, for a while. Eventually, clients audited their law firms for cybersecurity and found them to be the weak link.

Cybersecurity is a great example of the considerable gap between knowing and doing. It is also a prime example of how changing the kinds of conversations we have can change behavior. Moving from abstract discussions about the importance of cybersecurity to concrete measurement resulted in action displacing words. Cybersecurity is still an enormous problem. But it is one problem that is actively being addressed.

By the same token, the core problem in the law department/firm relationship is not a dearth of smart lawyers. Smart lawyers are the threshold consideration—there would be no relationship without them. With people in the place, the problems come down to the interrelated issues of process and pricing. Law department operations and procurement with their allied professional counterparts at law firms exist to drive exactly those conversations.

D. Casey Flaherty is the founder of the legal tech consultancy Procertas, provider of the Legal Tech Assessment. He was a 2013 ABA Legal Rebel. He also serves on the board of advisors of NextLaw Labs.

Editor’s note: The New Normal is an ongoing discussion between Paul Lippe, the CEO of Legal OnRamp, Patrick Lamb, founding member of Valorem Law Group and their guests. New Normal contributors spend a lot of time thinking, writing and speaking about the changes occurring in the delivery of legal services. You’re invited to join their discussion.

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