Just thought you would want to know.

At the Law Firm Leaders Conference in San Francisco, Dan DiPietro of Citibank declared "the billable hour is dead."  He went on to say that  "I really believe the business model is tired and old and not working for a lot of firms."

Ya think?

  • Well, it somehow works for us. Good clients still like the BH–so we still like it. We’ll change if they do. Color us greedy followers and market-responders.

  • I would be delighted if Dan were right but I am skeptical – Is the billable hour really dead? (Has the body been located?) Did Dan mention a cause of death? I think an autopsy is in order!

  • Moe Levine

    only a lawyer or general counsel would refer to time based billing as a “business model.” has no one ever bothered to spend a saturday afternoon in a public library reading Drucker and Hamel? a business is comparing McDonalds and Panera Bread. Both charge by the meal, but their business models are very different.
    dan hull is absolutely correct—you can only look at the question from the point of view of the client—clients are the ones who determine how attorneys are paid and clients like time based billing because it is the cheapest way to buy legal services, especially when you are a constant buyer.
    to understand why, read and consider Coase’s Theory of the Firm (1937)
    if one believes there is a cheaper way for clients to buy legal services, what is that magic silver bullet? The first big firm to adopt such would become the Wal-Mart of the legal world. It hasn’t happened and will not happen.
    what will happen is that large law firms will continue down the specialization path best described by Mark C. Suchman in early 1990s paper to the Chicago Bar, while clients do more and more for themselves, cutting away at the bottom. Also consider Anthony Kronman’s, The Lost Lawyer. One can see this daily in the drop in the number of “equity partners” at big firms and the actions of Mayer etc., to manipulate the the numbers to see this inevitable trend in action
    it is not only happening to law. the same is happening in the business world,which is my so-much of “corporate” profits now go to financial firms. if one doesn’t see the connection . . .

  • Moe–
    Just so you know, Dan DiPietro, the person who uttered the comment about “the business model,” is neither a lawyer nor a general counsel. He is a banker.
    As to your comment about only clients determing how lawyers are paid, it is true that the final decision is always the buyer’s. But frequently suggestions from the seller can influence the buyer’s decision. And if you don’t get a sense of growing and significant animus against the billable hour, you are not speaking to the same inside lawyers I am.
    By the way, you should ask Bartlit Beck how they feel about alternatives to the billable hour? They certainly do not lack for clients who will try AFAs.
    Pat

  • Moe Levine

    animus against the billable hour is totally irrelevant to the conversation. if you want to learn about supplier animus, talk to some who does business with Wal-Marts.
    the proposition, well explained by Drucker and many others, is that you can only charge what clients believe is the lowest possible price they will have to pay for the service. that means, most all the time, hourly billing or some variant of such. you can break it down–so much for motions, briefs, depos, page of discovery, it really doesn’t matter–these are all just variants or approximations of effort based billing. some are approximations. hourly billing is not different in kind, just more certain.
    again, I repeat my earlier question–what silver bullet will be cheaper than hourly billing for most clients, most of the time?
    or said differently, take all of your billing schemes and answer these, first two client questions: By this scheme, how much will I save over hourly billing? Will you guarantee that savings and back up the guarantee with a bond or letter of credit? if you don’t believe these are fair questions, read read Flight of the Buffalo about guarantees of a product or service. And, understand it got to be a twin savings—same or better result in the lawsuit or deal, at a lower fee.

  • The problem with the billable hour is not that it leads to the cheapest service–quite the contrary. If clients were buying based on finding only the cheapest service, hourly rates would be much lower than they are now. The problem with the hourly rate is that people feel safe with it even though it puts the economic interests of buyer and seller at odds. Eventually, that will change, and there is substantial evidence that the change already has begun.

  • moe levine

    first, the silence on my principal points admits those propositions. the “sound and fury” about hourly billing is nothing more or less than self promotion by consultants wanting to sell services.
    As to the statement, “The problem with the hourly rate is that people feel safe with it even though it puts the economic interests of buyer and seller at odds.”
    Pat, the economic interests of buyer and seller are always at odds, which is the fundamental driver of a free, open market. It is why markets work. As Tom Collins says, the only necessary ingredient to a successful law practice is a group of clients paying adequate fees.
    Wal-Marts always wants to pay less and its suppliers always want to charge more. There is no “moral proposition” governing the contest between the two.

  • Dan DiPietro is right, the billable hour is dead, it’s just that law firms don’t know it yet. Name for me any other business that prices by the hour? Even plumbers are enlightened enough to give you a fixed price these days.
    Dan Hull: Clients don’t get to pick your pricing strategy, you do. That’s the seller’s, not the buyer’s decision. I didn’t ask the airlines, hotels, rental car companies, software developers, or retail stores to change to Yield Management. Yet, most of them have. Historically, pricing changes ALWAYS come from the seller, never the buyer. Even law firms changed to hourly billing from fixed pricing (in the 1940s), not at the client’s request, but on their own.
    Gerry: The autoposy reports can be found in the millions of words I’ve written on this topic. But, unfortunately, you are correct, in the legal world, the billable hour is alive and kicking.
    Moe: I’ve read every book by Peter Drucker and Gary Hamel. Of course the client is the ultimate arbiter of value, but that’s not the point. The point is the pricing strategy the seller uses to capture the value created. Clients do not like the billable hour, and the evidence is all around. If it’s such a good pricing strategy, why don’t hotels, airlines, cruise ships and other service providers use it?
    Customers want to know the price up-front, before they buy, not after. The billable hour places the risk on the client, and I defy you to find a customer who enjoys additional risk.
    I’ve also read Coase’s theory of the firm, and it’s simply not relevant to this discussion. It discusses why firms exist, lower transaction costs, etc. It does not mention pricing strategies.
    This isn’t about “cheaper” services, it’s about establishing a price commensurate with the value to the client, not efforts, costs and profit wishes of the seller. I suggest instead of Coase you study the labor vs. subjective theories of value, and especially the Marginalist Revolution of 1871.
    What makes us think clients always want the cheapest price? This would be the dagger in the heart of first-class airfare, AMEX’s Black Card, Starbucks coffee, and a myriad of other services to numerous to mention. No doubt, low price legal options should be available. But a healthy market, and a sign of sophisticated pricing, are industries with a full range of price points to cover everyone’s tastes and ability to pay.
    Pat and Moe: I challenge you to find me ONE example of a situation where the buyer changed the pricing strategy of the seller. Wal-Mart doesn’t count, since they just beat the hell out of their suppliers, but even they don’t dictate the seller’s pricing strategies. Also, not all businesses are as concerned with price as Wal-Mart. Ever been to Nordstrom? Disney? Drive a Lexus? Ever hear of concierge medicine?We’re a rich country, we spend a small fraction of our GDP on necessities, the rest is spent on luxuries.
    Also, Drucker was an enormous fan of price-led costing, which has been used by Toyota since day one. In fact, they are so good at it, they don’t use a standard cost accounting system. You can read about this in Profit Beyond Measure, by H. Thomas Johnson, the man who started the Activity Based Costing movement.
    The silver bullet is fixed pricing, given to clients in advance, like every business on the planet. My mechanic does it. My contractor does it. My earthquake insurance provider does it (and they deal with more risk and uncertainties than lawyers can even dream of). If these other businesses can do it, why can’t lawyers? I believe the first firms who do it will have an enormous competitive advantage.
    Moe, your discussion of a guarantee of hourly billing’s savings versus another pricing strategy is senseless. Buyers purchase prospectively, not retroactively. An apple today is a different value than an apple tomorrow, and an airline seat purchased six months in advance is different than one purchased 10 minutes before departure. Clients won’t compare a fixed price to an hourly price since they don’t really care how many hours it takes to do something. Do you care how many hours it took Porsche to build your car? Do you even ask?
    We haven’t even begun to discuss the ethics of hourly billing, and the plethora of problems it has caused for the profession. Use Kant’s categorical imperative and ask yourself this question: If hourly billing is so great, would you want every single business to universally use it? To ask the question is to answer it.
    I agree with you about the interests of buyers and sellers being at odds, which is why fixed prices are a better deal for the buyer. As one attorney explained to me, “I’d never buy the way I sell.”
    How sad is that?
    By the way, the sound and fury from my think tank is not to sell consulting services. It is to enlighten professional knowledge firms that cost-plus pricing is a sub-optimal pricing strategy in an intellectual capital economy. We’ve watched (like Drucker, being a Bystander), thousands of firms move away from hourly billing. We will continue to do everything we can to bury this obsolete pricing strategy.
    Sincerely,
    Ron Baker, Founder
    VeraSage Institute