The Future of the Billable Hour

There was something even darker than the sea of navy and black business suits packed into this morning’s Bisnow-hosted symposium about law firms: The future of the billable hour.

Anyone who’s had to hire one knows that lawyers usually charge by the hour. Or, more precisely, by the tenth of an hour. In this economy, that means law-firm clients are growing grumpier with each six-minute phone call to their outside counsel.

Michael Helfer, general counsel of CitiGroup and a panelist at the Bisnow event, put it bluntly when he said CitiGroup’s inhouse legal department has been reduced during the past few years by nearly 300 employees, many of whom were laid off. The lawyers who are left have had their compensation slashed by as much as 60 percent. Helfer says he’s consequently lost his patience for paying his company’s outside lawyers premium fees. “The amount of sympathy I have for the argument that $1,000 an hour is a reasonable rate . . . is nil.”

It’s this kind of reaction from clients that’s causing law-firm chairmen across Washington to look toward other billing options, such as flat rates or success fees, in which the amount a client pays depends on the outcome of the case. Marc Fleischaker, chairman of Arent Fox, said this morning that about 10 percent of his firm’s revenue now comes from alternative billing arrangements. Bruce McLean, chairman of Akin Gump, said 15 to 20 percent of Akin’s revenue comes from alternative billing, and Skadden, Arps executive partner Eric Friedman said 5 to 10 percent of revenue at his firm comes from something other than hourly billing. And in today’s Wall Street Journal, the chairman of K&L Gates said 30 percent of his firm’s revenue this year will be generated by alternative fee arrangements.

It’s been a tough year for law firms, too. This week, Arent Fox rescinded offers to a dozen incoming associates, and Skadden’s Friedman said 230 associates at his firm took a furlough this year.

Still, partners at all four of the firms represented on this morning’s panel aren’t exactly paupers. At Arent Fox, the average partner took home $800,000 last year, according to the American Lawyer. Skadden’s average partner made more than $2 million as did the average partner at Kirkland & Ellis, whose chairman also participated in the discussion. At Akin Gump, the average partner made $1.405 million.

But how do major law firms maintain those kind of profits without charging clients by the hour? There’s the rub. “It’s a big challenge,” said McLean. “We’re not so good at that yet.”

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