LAWYERS START TO STOP THE CLOCK
There are few professions where the adage "time is money" is more apt than the legal business. In the 1980s, law firms prospered mightily by charging hourly billing rates of as much as $450 to their big corporate clients. But now, corporations--battered by the recession and buoyed by a lawyer glut--are wrangling major concessions from their clock-obsessed lawyers.
The newest weapon is "value billing." Instead of charging by the hour, companies and lawyers agree at the outset to a fixed fee based on expected costs and the top amount the client is willing to spend. Proponents will try to convert skeptical American Bar Assn. members in mid-August, when 13,500 attorneys meet in San Francisco at their annual convention.
`WRONG DIRECTION.' Lawyers are scoffing. Many are ailing from the business downturn and a more competitive market. Ditching hourly rates could also drain profits. Others say quality will suffer. "I wonder if our corporate clients will understand the new incentives when they consider filing malpractice suits against us," says James W. Jones, managing partner of Arnold & Porter in Washington.
A booster of the concept is Hartford-based Aetna Life & Casualty Co. Last year, Aetna paid $400 million to about 1,200 law firms--when its total profit was only $505 million. At the ABA meeting, Zoe Baird, Aetna's general counsel, will unveil a new Brookings Institution study commissioned by Aetna. It shows that hourly billing leads to needless and expensive legal work. The system "pushes economic incentives in the wrong direction," Baird says. Lawyers may be tempted to stretch out their time rather than aim for efficiency or results.
Companies are clamping down in other ways, such as calling in auditors (table). But value billing is the most radical tactic and may offer the longest-lasting solution.
The big law firms are most likely to resist sweeping changes. They made millions in the 1980s by hiring hordes of associates every year. The bigger the ratio of associates to partner, the more profits the firms could generate from work by associates billed at a higher hourly rate than their salaries. But if corporations push their lawyers to abandon the billable hour, the mega law firms may soon be dinosaurs, because associates will become costly burdens rather than profit centers.
Upstart law firms, hungry for work, are more willing to experiment. Dallas-based Bickel & Brewer handles two-thirds of its cases by value billing. William A. Brewer III, who co-founded the 60-attorney firm in 1984, says firms must look for such techniques to stay in business: "We count ourselves lucky to be alive when the supply and demand no longer favors lawyers but clients."
FINAL PAYMENTS. Last year, B&B earned record profits, contrary to expectations that value billing means less income. Although the firm had charged discounted fixed fees, its clients had agreed to pay a percentage of any awards. These bonuses brought in extra cash. One typical arrangement involves Dallas-based client Prentiss Properties Ltd. After racking up $600,000 in legal fees in a real estate case, it agreed to pay the firm $150,000 and legal costs, plus share some of the final award above a certain amount.
The implications go beyond the income statements of law firms. Without the incentive to roll up hours, lawyers could be more aggressive about settling and more efficient. Chicago-based Winston & Strawn, which does about 25% of its work on a value-billing basis, is using technology to cut people-hours. It uses form documents and data bases on prior research so that lawyers don't duplicate efforts. The firm hopes for a 20% savings in hours. Says Managing Partner Gary L. Fairchild: "Four people to do what might have kept five busy."
Management practices could change as well. Bickel & Brewer no longer pays partners on a lockstep scale--with bonuses tied to hours billed--but sets salaries by reviewing past performance. And it has stopped automatically hiring a set number of associates annually without projecting next year's caseload. While such techniques may seem elementary to Corporate America, they're revolutionary to lawyers. But law firms that don't adapt to a clockless era may find their time has passed.HOW TO SLASH LEGAL FEES
AUDIT YOUR LAWYERS Litton Industries and Johnson Controls hire legal audit
firms to uncover lawyers who inflate bills
DO IT YOURSELF Alcan Aluminum and MCI Communications assign work to cheaper
in-house attorneys or temporary lawyers rather than pricey outside law firms
FARM IT OUT Continental Bank folded a 65-lawyer staff and sent its legal work
to Mayer, Brown & Platt for a two-year fixed fee
GET A BETTER DEAL Aetna Life & Casualty negotiates volume discounts. General
Motors tracks by computer the productivity of its 600 law firms and fires the
ones that charge too much
Catherine Yang in Washington