Does the road from hourly billing to commodity legal work run straight and true? Or is there a turnout that will help preserve the profitability of (US) law firms… a turnout that firms are unknowingly bypassing?

My colleague John Wallbillich (a/k/a The Wired GC) has more thoughts on “value billing” vs. hourly billing. It fits in with conversations I had with both senior firm people and in-house GCs at the Alternative Fee Arrangements (AFA) Forum at which I spoke last week in New York, and over lunch with Bruce MacEwen (Adam Smith, Esq.) the following day.

From Hourly to Commodity

John’s thesis is that there is a straight line leading from today’s increasing resistance to hourly billing — directly toward commodity work. Today’s firms won’t make anything near today’s profits — let alone yesterday’s — from commodity work. Indeed, much of that work could wind up offshore — either in places like Bengaloora (Bangalore) or in not-on-the-US-shores places such as Bozeman, MT. He suggests that maybe 10% of the work will be high-end and high-profit work; the remaining 90% will be bid largely on the basis of price.

That doesn’t bode well for the AmLaw 100.

I think there’s another route. It’s a path that would help firms remain highly profitable, albeit under a different model, one that doesn’t rely on or use the high-leverage lots-of-associates-scurrying-around structure.

That alternative model requires firms to move to value billing/AFAs — and to do so rather expeditiously. Once a stampede to commodity pricing begins, it will be like most stampedes, destroying whatever and whoever gets in its way.

Make no mistake, the herd is getting jumpy. For example, just a few weeks ago, Microsoft, which has been a big supporter of high-end law firms, announced that a significant chunk of work will be going offshore. They’ve also significantly revamped the way they source e-discovery, pulling much of it back from firms. And of course there were the shock waves generated when they dropped from their preferred list long-time partner K&L Gates (nee Preston Gates & Ellis). Gates… as in the father of Microsoft’s co-founder.

Transparency

Hourly billing is transparent… and clients don’t like what they see. They never have loved it, but suddenly they’re seeing alternatives in commoditization, legal-process outsourcing/offshoring, and knowledge stores such as Legal OnRamp.

Hourly billing is transparent in the wrong thing, and it is opaque, or at least smokily translucent, where it matters to firms: the value received. The discussion over hours obscures the discussion over value.

And value, not hours, is what clients want to purchase.

Fixed- and flat-fee arrangements, on the other hand, are transparent as to value while remaining opaque to how the sausage is actually made.

If you can ramp up the efficiency of sausage-making, you boost profits by using AFAs. And with increased efficiency comes a competitive advantage against the AmLaw 99 (a/k/a all the other guys).

That’s where Legal Project Management comes in, along with folks who (ahem) are committed to helping the legal world use LPM to boost efficiency, value, and profits for firms or cost efficacy in-house.

The Runaway Truck Ramp

On highways descending steep grades, there are often runaway truck ramps. If your brakes are failing — it’s a lot of work to slow an 80,000 truck — you steer onto the slightly uphill runaway truck ramp. You, your load, and other motorists are saved.

If John Wallbillich, Bruce MacEwen, and others are correct, BigLaw is barreling downhill. They’re speeding down the blacktop from a peak of high-profit hourly billing to the low-water mark of commodity work. Only a few will be able to remain at the crest of the hill because of their extreme expertise in a particular area. (Is that a few firms or a few attorneys in some semi-boutique arrangements? The jury is still out.)

Alternative Fee Arrangements offer a runaway truck ramp partway down the hill. If the industry maneuvers onto that ramp, perhaps they arrest the headlong descent while they’re still at a reasonable altitude.

I can’t guarantee it will happen this way, of course. But I think the headlong descent is a reasonable scenario, and AFAs (and Legal Project Management) offer a way to arrest it.

By the way, Bruce MacEwen posits an alternative way out of the dilemma — based on that same lunch conversation I noted above (though it was my colleague and not I who made the comment to which he refers). I think Bruce’s path and the one noted here are complementary rather than mutually exclusive.