RSS SyndicationPatrick Lamb posted an entry on billable hours ("Flash Announcement: The Billable Hour is Dead") that received many comments, including one by Ron Baker of VeraSage Institute. Ron makes a number of good points but I took issue with his statement that a fixed price model for services is the "silver bullet". Here is my comment.
"Ron:
"I’d like to get a shovel and help you dig the billable hour’s grave. But your view that the fixed price business model is “the silver bullet” is too narrow. "As aggressive as many businesses are about cutting costs generally, they don’t seem to be able to grapple effectively with their legal costs, which have become exorbitant by any standard. Let’s look at the numbers:
"Assuming that traditional hourly-rate law firm attorneys are required to bill 2,000 hours per year (38.5 hours per week), with associates billing between $300-400 per hour and partners $500-600 per hour, the retail cost of an associate is between $600,000 and $800,000 per year and a partner, between $1,000,000 and $1,200,000.
"Many companies, cognizant of this, hire in-house attorneys to handle a large part of the workload. They do so for a number of reasons, not the least of which is because they can pay the talent at “wholesale rates” ($125,000 – $300,000 per year). This is a sound strategy and companies work hard to find the appropriate balance between in-house and outside legal talent. But it’s not a perfect solution. Not all in-house legal staffs are equipped to handle every type of matter. Legal needs change or companies may not want carry the long-term costs. Also, a large number of businesses (e.g., emerging, middle market and small-cap companies) do not have the work load to support even a single full-time, in-house attorney or believe they cannot afford to hire one.
"There is a fairly deep labor pool of qualified, highly experienced former in-house lawyers. With 10+ years of experience, they find it increasingly difficult to land new jobs when they are in transition (which is happening with greater frequency with the current high volume of M&A activity). They constitute an ever-growing source of supply.
"A nascent industry of placement agencies is taking advantage of the cost disparity between law firm and in-house talent by utilizing this supply. My company, The General Counsel, LLC, has a business model that more closely mirrors the attorney as an employee of the client. Clients pay daily or weekly rates. Attorneys actually spend their time at the clients’ offices for the time contracted. That can be adjusted to accommodate changing needs, giving the arrangement great flexibility. Work is always done by highly experienced professionals, especially the day-to-day “commodity” work that would otherwise be pushed down to low-level law firm associates.
"While we are still charging on the basis of time, truly employed, in-house attorneys are also paid by time with their monthly salaries. Though the time increments are different, we get a lot closer to approximating the cost the client would pay for an in-house attorney than does a traditional hourly rate law firm.
"The appropriate approach for any consumer of legal services is to understand all of the various pricing and resource alternatives and use the ones most appropriate to their needs."