Managing Legal
I’ve said many times that the legal industry’s business model is based on the sale of attorneys’ hours: The value of lawyers’ work depends on how much time they take to perform a task. This model benefits law firms’ economics but it’s bad for the client. It results in unnecessarily high charges, overstaffing, and incentives to inefficiency (see here, here, and here — among other posts).
The client company has zero price visibility until the work has already been finished.
And — despite much happy-talk about the “death of the billable hour” and “widespread” adoption of alternative fee arrangements [i.e., some arrangement other than the billable hour] — the billable hour is the legal industry’s standard for pricing its work (see here and here).
So … is it practical for a corporate client to ditch this wasteful practice? If so, what does that look like from the client’s perspective?
Zach Abramowitz of the law company Axiom met with Matt Lepore — BASF Corporation’s general counsel — to talk about this.
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Zach Abramowitz
” … You’ve been very willing to talk openly about getting rid of the billable hour. That’s often easier said than done — what has been the key for BASF to successfully move away from billable hours?”
Matt Lepore
“I’m on a mission to change the model for outside legal spend. My [general counsel] when I was at Pfizer started me down this path, and today I firmly believe that the common billable hour model isn’t in the best interests of companies like BASF that purchase legal services. I am not suggesting that law firm attorneys behave improperly, but I am stating that the billable hour model lacks proper incentives for efficiency. Rather, most firms reward those who bill the most hours the greatest, so the incentives actually favor inefficiency in my opinion.
“I want to change this, and we at BASF have been driving towards value-based billing for the last few years. Every matter we have at BASF Corporation today must be on some sort of alternative billing model, and my preferred model is a fee arrangement based on value, not time.
“This isn’t always easy to define, and I realize that effort is a factor in the equation, but it’s not the only factor. So, we look at the value to the business of a variety of factors – the product or patent at issue, the general timeframe for the matter (i.e., effort), the complexity of the issues involved, the jurisdiction, etc. – and we try to value the matter in a way that doesn’t focus purely on someone’s made-up billable rate.
“I really like success fees as part of this model – paying a firm an amount on top of a fixed fee, if a certain result is achieved. To be clear, our fee structures can lead to situations where we pay law firms significantly more than their pure hourly rate would have allowed and, for sure, the reverse is true as well. But what is clear in all these instances is that I can give my business colleagues cost certainty well beyond what we can provide in purely hourly arrangements. And businesses like certainty, something a legal department likes to, but rarely, delivers.”
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The interview ends with this question: Is it only the largest companies that can rid themselves of the billable hour — or can smaller businesses use alternatives to this old and pernicious measure of value?
Matt Lepore
“Whether you are Fortune 100, or a small start-up, if you have a legal need that requires outside counsel expertise, and you have some budget assigned to your department, you can use alternative billing. Maybe you won’t define value the same way that BASF, Microsoft, or GSK would, but you certainly don’t need to value the services you need based purely on an attorney’s hourly rate. And, in my view, you will not be getting the most efficient work product if you do.”