Gruntled Employees

Gruntled at Solo Practice University

One of my big goals for 2010 was to adjust my role as a commentator (mainly over at The Client Revolution) on the state of the practice of law and become more of a change agent dedicated to helping fix it. Today I'm taking a first step in that direction by joining the faculty of the pioneering Solo Practice University. If you're not familiar with SPU you should head on over and check it out. Under the leadership of legal-education trailblazer Susan Cartier Liebel (who also blogs at the ABA Blawg 100 site Build A Solo Practice @ SPU), Solo Practice University picks up where law school left off. One of the most common complaints about legal education is its weakness in providing practical education about how to actually be a lawyer. SPU's got it covered.

What really convinced me to join the faculty was ... well ... the faculty itself. Check them out here. This is a phenomenal collection of big thinkers in the world of legal practice. Students (both active practitioners and current law-school students) have access to these big minds and can start learning how to improve their own practices right away.

I'm teaching a course called "Fixing Your Fees, Fixing Your Practice." In it, I'll be doling out practical advice on how to abandon the billable hour and replace it with open prices. The context for this advice will be real-world examples from our employment-law firm, Shepherd Law Group. If the change away from hourly billing is going to happen, it's going to happen first with the solo and small-firm lawyers. And in my new role as an SPU faculty member, I'm going to help make that happen. So check out all the things you can be learning. Then enroll and start getting the real-world secrets about running your practice that you never got in law school.

Here's a short video (2:38) on the real reasons I've joined this great faculty:

Five Steps to Killing the Billable Hour

The American Bar Association's ABA Journal once again adds to the conversation about the battle against the billable hour. The always-excellent David Gialanella examines "The Skinny on Flat Fees" in the July issue of the magazine. David identifies five steps for law firms looking to drop hourly billing in favor of value pricing:

1. Do your homework.
2. Find a new measure for performance.
3. Stick to your guns.
4. Be a business geek.
5. Don't secretly keep track of time.

He also uncovers the secret of abandoning hourly billing: "The move from billables to flat fees is not just a practical change; it’s a different way of thinking." That's certainly true. It's not about the accounting — it's about delivering value to the client.

While he was researching the issue, Dave and I discussed whether value pricing would be just another also-ran to hourly billing:

The term alternative billing might seem innocent enough, but those two words make Jay Shepherd’s skin crawl. As CEO of Shepherd Law Group in Boston, the enterprising attorney thinks his firm’s flat-fee business model is not simply an alternative to the billable-hour standard: It eventually will become the commonplace way to run a law practice.

He's right: alternative billing is not my term of choice. A year-and-a-half ago in "No-alternative billing," talking about law firms' resistance to offering value pricing, I admitted:

I hate the term "alternative billing." It has that sneering, look-down-your-nose quality to it, like "alternative lifestyle."

And many law firms still think of it that way.

BTW, Dave had another nice piece in the February issue of the ABA Journal: "Taming the Billable Beast."

Of sticker shock and empathy

I'll never forget the stickers from the night before my wedding. On the other hand, my brother Bill probably can't remember them.

Because of the fumes.

Let me explain:

Just before the wedding, my bride-to-be had everything under control. The flowers were set, the caterer was prepared, the ceremony site was ready. She was as calm as a bride can be. But then a friend of my parents asked what should have been an innocuous question:

"What are you doing for wedding favors?"

Wedding favors? Now to me, "wedding favors" was as foreign a concept as "centerpieces" and, well, "marriage." Turns out "wedding favors" are defined (by Wikipedia) as "small gifts given as a gesture of appreciation or gratitude to guests from the bride and groom during a wedding ceremony or a wedding reception." Who knew?

Alarm bells replaced wedding bells! This was a crisis of the first degree! Fortunately, the inquiring family friend was quick to provide a suggestion: small silver picture frames in which we could place cards telling each guest where they'd sit at the reception. Then they could take their frames home and toss the seat cards and replace them with pictures of their cats, or whatever. (This was 12 years ago, before there were blogs.) Brilliant!

My fiancée sped to the local Christmas Tree Shops, a New England bargain store that specializes in little knickknacks. Amazingly, Heidi found a bunch of little frames similar to the one in the cheesy picture above. She immediately bought 150 of them and brought them back to me. My job was to do the desktop publishing: make nice calligraphic seat cards with each guest's name and table number. That job was hard enough. My brother's job was much worse.

He had to do the stickers.

You see, every single one of these little silver frames had a silver UPC sticker on it. Not so much on the frame, though. On the glass! And the glue on these stickers must have been that kind of glue they use for keeping those tiles from falling off the Space Shuttle. The stickers themselves fell apart if you tried to scrape or pick them off.

Since he was best man, Bill's job was to remove the stickers. The only hope was to use some high-powered chemical solvent and a razor blade, which is what Bill did for hours in the underventilated living room of my apartment. Twelve years later, he's still not the same. (Actually, he's fine, though he lives in Oklahoma, which is odd.) (His living there; not the state itself.)

Anyway, this brings me to my point: the frame-maker forgot about empathy. Someone at Cheapo Frames Unlimited or whatever made a decision to put bar-code stickers on the glass part of the frame. Maybe he or she did it because the store would need to scan the stickers at the cash register. Maybe it helped with inventory control. But I guarantee you that the sticker decision-maker lacked the critical character trait of empathy — namely, empathy with the customer who was going to be using the cheapo frame. He or she never stopped to think how the customer would feel when confronted with the unremovable sticker. He or she never wondered how the customer would be able to see the wedding guest's table number (or how the guest would later see the cat picture) through the permanent label that obscured the frame's transparent glass face. The frame-company decision maker had no empathy for the customer.

And neither did his or her supervisors. Neither did the owner of Cheapo Frames Unlimited. Neither did the buyer at Christmas Tree Shops.

Having empathy for the customer — or the end user of a product or service — is an undervalued, underpromoted, and undertrained quality in today's business world. Here are some examples where empathy for the customer or end user is missing:

• The people who package children's toys. In their quest to thwart the one or two percent of toy-store customers who would steal accessories out of a Dora the Explorer package, or whatever, they tie everything down with wire, then tape it to the inside of the box. It takes twenty minutes to free your kid's toy from its package. The manufacturer didn't think about how unhappy that delay would make the child, or her dad.
• Customer support lines that play recorded advertisements for the product you're having trouble with while you wait 31 minutes for a live human being. My particular favorite is when you call your internet provider because you can't connect, and the recording tells you that you can get answers to your questions at www.whatever.com. Uh, no I can't ... The company never thought about how that would sound to a frustrated customer.
• Billboards that have the same tiny little text at the bottom that a print ad has. I'm driving 60 miles an hour past your billboard; how am I supposed to read the little text? Obviously, the art designer didn't think about the driver's ability to actually read it (or didn't care if it was read).
• Lawyers who fill their letters, contracts, and briefs with pompous and stuffy legalese. Don't they want the reader to actually be able to read it?
• For that matter, lawyers who bill by the hour. Don't they wonder how the client is going to feel when she gets a bill showing that it cost her more money because it took longer for her to get what she wanted?

Managers need to make sure that everyone in the workplace thinks about what the customer is going to do with the product or service, and how the customer is going to feel about it. That's empathy, and it's critical to a company's success.

Seth Godin has written about this before in his excellent blog. See his post from three years ago called, simply, "Care." And Becky Carroll at Customers Rock! blog has a nice post on empathy called "Empathy Matters."

As for the wedding favors, they were a hit at the reception, Heidi and I are still married 12 years later, and Bill's only a little woozy from the solvent fumes.

Hourly billing across the pond

The war on hourly billing is being waged worldwide. Last week we talked about the battle in this country ("The billable beast of burden" and "The fool or the fool who follows him") and in Canada ("No hourly billing, eh?"). Yesterday, London's Financial Times had an article by legal correspondent Michael Peel saying that hourly billing may be on the outs in the UK as well. The article, with the promising title "UK law firms to reform hourly fee system," says that top London law firms are facing increased pressure from clients unhappy with large bills. Peel writes:

Top firms told the Financial Times that they were increasingly offering alternatives to hourly rates and making more use of cost-cutting business practices, such as putting services offshore. Tim Jones, head of the London office of Freshfields Bruckhaus Deringer, said that, although hourly billing still had a “fairly central role in most people’s thinking”, firms were increasingly offering clients deals such as fixed fees or rates tied to the success of transactions.

He said: “I think the big firms are very conscious that the efficiency of working practices is going to be absolutely fundamental in the coming years. We will have to look very carefully at how our terms are structured.”

The "efficiency of working practices," as Freshfields's Jones puts it, is the key point. Hourly billing, as we've said many times, discourages efficiency by rewarding inefficiency.

Peel reports that at Linklaters, another "Magic Circle" firm, a "significant amount" of the work is no longer billed by the hour. Peel does note that British firms have been somewhat slower than their American cousins in considering alternatives to the billable hour. But it's comforting to know that the opponents of hourly billing have allies overseas.

No hourly billing, eh?

The Great Billable Hour Debate of '08 is playing out north of the border, too. Maclean's magazine is the Canadian equivalent of TIME or Newsweek, with nearly three million readers every week. In the current issue, writer John Intini has a terrific article called "Time to stop the clock? A backlash against the billable hour has some firms charging flat fees." John covers the entire issue from the reasoning behind hourly billing to the problems it causes for clients and lawyers. His reporting also uncovered some great lines: When asked how fast law firms are shifting away from hourly billing, Vancouver consultant Richard Stock quips, "Global warming is faster."

I talked to John at length about the subject and whether we'd soon see a tipping point away from hourly billing. John writes:

Experts anticipate that the current economic downturn will lead to further belt-tightening and could force more companies to reassess deals with their lawyers. “The days of just writing cheques are coming to an end,” says Jay Shepherd, whose Boston firm, Shepherd Law Group, banned billable hours last year and doubled its 2006 revenue. “There is no other business that we don’t know the price of something before we buy it. Imagine getting on an airplane and being told they’re going to charge you by the minute. It’s crazy. Nobody would do it.”

Shepherd, who describes the billable hour as “anti-client,” says the savings his six-lawyer outfit provide is the result of team efficiencies, not cut rates. In addition to flat-fee pricing, his firm offers unlimited advice plans: for a fixed price a client can call the office as often as needed without worrying about a big surprise at month’s end. “It’s almost as if we’re in-house lawyers for them,” he says.

[Since I was speaking to a reporter for a Canadian magazine, I said "cheques" instead of "checks." Good of John to notice that over the phone.]

Our discussion turned to the question of timesheets — the same topic we were debating in yesterday's post ("The fool or the fool who follows him?"). To recap, Tom Kane over at Legal Marketing Blog.com called us "foolhardy" in his post "Has Your Firm Tamed That Damn Billable Hour Yet?" because we don't internally track lawyers' hours. Here's that topic covered in the Maclean's article:

Shepherd — who predicts the billable hour will last another decade — doesn’t even track his staff’s hours for internal purposes. This has prompted many competitors to ask how he knows if associates are doing their work? “I manage them,” he says. “That’s my job.” And late nights or weekends holed up at the office don’t impress him. “The firm,” he says, “doesn’t get anything more if it takes longer and the client wants the work done as fast as possible.”

Intini notes — correctly — that it's easier to change the firm culture at a boutique firm than it is at a megafirm. He again quotes Richard Stock, who says that at larger firms, "the business model is entrenched across hundreds, if not thousands of people in the corporation. It’s not an especially nimble ship.”

That's true, but you have to start somewhere. Great article, John!

As for the Tom Kane post, value-billing guru Ron Baker had this response on his VeraSage Institute site. And Columbus lawyer Mike Grodhaus's terrific new blawg, The Alternative Fee Lawyer, wades into the fray in his post, "Timesheets & Alternative Fees." After nicely summarizing the discussions, Mike gives his own take:

What's fascinating to me about this debate is that is not an "apples to apples" comparison. Tom Kane and Jay Shepherd aren't even really talking about the same thing. What Jay Shepherd is talking about is a complete paradigm shift in how lawyers (or any professionals, for that matter) should think about pricing their services.

Not that I'm discounting Tom Kane's mindset. To me, a law firm (like mine) that uses alternative fee arrangements but still uses timesheets internally is still much better than a law firm that bills all its clients by the hour. Indeed, if we ever move the profession to that brave new world without the billable hour, doing it this way will probably be the transitional phase to Shepherd's wholly value-driven approach. But it certainly makes you want to learn more about Shepherd's way of pricing his law firm's services.

Make sure you check out Mike's blog, which now adorns our Blogroll over on the right of your screen. While I still bristle at the term "alternative billing" (which smacks of the seamy, like "alternative lifestyle"; see last year's post, "No-alternative billing"), Mike brings a broad, balanced approach to the conversation. Welcome, Mike!

The fool or the fool who follows him?

In our last episode, "The billable beast of burden," I talked about the recent ABA Journal article that described Shepherd Law Group's successes in banishing the billable hour ("Taming the Billable Beast," February 2008). I also mentioned that there were naysayers about.

Tom Kane is one. He writes Legal Marketing Blog.com, a fine site with a surprisingly generic name for a marketing site. Perhaps "Raising Kane" was taken. (Actually, it turns out it was — see here — by a self-described "recovering lawyer." Huh.) Tom covers the ABA Journal article in his post "Has Your Firm Tamed That Damn Billable Hour Yet?" and commends us and the other two firms for addressing the billable hour problem. (Thanks, Tom.)

But he also takes a shot at something I said in the article, and I feel the need to respond. Here's Tom:

One troubling point mentioned in the article relating to the Shepherd firm. And that is the statement involving CEO Jay Shepherd that “he denies secretly keeping track of hours spent on each case.” If the firm doesn’t do so, IMHO, it is being foolhardy based on the following simple reasoning:

• You can’t make a profit on fixed fees unless you know what your costs are;
• You can’t know what your costs are unless you know how much time (and other dollars) are consumed by the matter; and
• There is no way to know how much time is being spent on matters if you don’t keep track of hours!

Duh!

So, either they are guessing which means they don’t have a clue what their profit margin is either, or the firm has some other means of determining costs that I am unaware of.

"Duh," indeed! Wow. We're being foolhardy to the point of being duhed. (New word; pronounce it "dud." Think of me when you use it. "Hey, Mom! In school today my teacher duhed me.") So I was all set to roll up my sleeves and explain how Tom's "simple reasoning" (IHHO — in his humble opinion) was flawed, when I learned that the Godfather of Value Pricing had already done so.

Ron Baker is the founder of VeraSage Institute, a think tank dedicated to helping professional-service firms rid themselves of archaic billing practices. He is the author of Professional's Guide to Value Pricing, which is the ultimate hornbook on the subject. Having Ron publicly defend your billing practices is like having Martha Stewart compliment your table setting (only without the whole jail thing). Here's Ron in his post "He Who Says 'A' Must Say 'B,'" responding to Tom's "duh":

No, not Duh. There are over 500+ firms worldwide, across all professional knowledge firm sectors, from advertising to CPA firms and law to IT consulting firms, that don’t do timesheets.

This doesn’t mean they don’t know their costs, it’s a question of WHEN do they know their costs. With timesheets, you only know them in arrears. With our methods, you know them BEFORE you do the work.

What good is it to know your costs if the client doesn’t like your price? This is known as price-led costing; Toyota has been using since it was founded in the 1880s, and Toyota does not have a standard cost accounting system (nor do they do timesheets).

In the real world, value drives price, not costs. Price actually drives costs, so it makes sense to know value and price before you spend a nickel on any costs....

I just wanted to set the record straight. If the Shepherd Law Group is smart — and they are  — they will trash timesheets. [Thanks, Ron. Already have. — JS] They are the cancer in the professions; it is just a matter time before they will be buried.

Ron also says that timesheets "keep professionals mired in the mentality they sell time." In another place, Ron has written one of the best arguments against timesheets ever:

So what good is measuring hours logged on a timesheet? Do you think you can measure the value of a Picasso, the deliciousness of a meal prepared by a five-star chef, the splendor of a building designed by an architect, or the acting ability of an actress, by looking at the hours they work? As they say, it’s easier to count the bottles than describe the wine. You remain mired in counting and costing the bottles, while we are interested in the quality, taste and subjective value of the wine.

Knowledge workers aren’t inspired to track every six minutes of their day. No one entered this profession with the objective of logging the most hours. Not only is it the wrong theory of value, it’s also demeaning, demonstrating a lack of trust, treating them like children.

Oh, snap! I really couldn't have said it better myself.

No, we don't track hours spent at Shepherd Law Group, secretly or overtly. Other lawyers often shake their heads knowingly and then ask me how I know whether my associates are working. "Uh," I reply, "with this crazy new thing called management." (They usually shake their heads some more and wander off, muttering.) Our associates work hard because they want to help our clients and they want to do a good job. That's why we call them professionals. Professionals don't need an annual billables goal to make them work hard.

Now I don't want to dis Tom too much; he's written some good things against hourly billing. And he went to my dad's alma mater, the Cross, so he can't be all bad. Still, he may think I'm foolhardy for trashing timesheets, but there will soon be many other "fools" following our lead.

The billable beast of burden

Finally! The writers' strike is over and we can all get back to work. Thank goodness I can now live off my DVD residuals, or whatever. Ahh, the power of the Union. Nothing like sticking it to The Man ... and the makeup person, and the costume person, and the hair stylist, and the gaffer (whatever that is) and the best boy (just what makes him so good?). Shutting down an entire industry for a hundred days and billions of dollars is a small price to pay for a tiny-but-respectable percentage of the revenue generated by webisodes. Because everyone watches webisodes ... right? Ka-ching!

[End of management-biased sarcasm. Actually, I'm just a little cheesed off that "24" has been pushed back to January 2009 because of the writers' strike. For a Gruntled take on "24" from last year, please see "What would Jack Bauer do? Use plain English."]

Since we last spoke, the hourly billing debate has been going full throttle. The current issue of Crain's Chicago Business reports that "only 16% of in-house lawyers say hourly billing is their preferred arrangement." Yet hourly billing remains the dominant way that lawyers bill their corporate clients. Samantha Stainbaum's article, "The end of hourly fees?" quotes Northwestern Law dean David Van Zandt, who offers a possible explanation: "It's difficult for companies to evaluate what they're getting, so they fall back to hourly billing."

That's possible. Still, if five out of six in-house counsel would prefer something other than hourly billing, don't we outside counsel have an obligation to provide it? The February issue of the ABA Journal has a story by David Gialanella called "Taming the Billable Beast." In it, he talks about three law firms who he says are "changing the billable equation last year in hopes of reducing associate and client dissatisfaction."

Two of the firms focused on first-year associates' billing requirements: Dallas's Strasburger & Price, who cut first-year billing requirements from 1,920 hours a year to 1,600; and Atlanta-based Ford & Harrison, who got rid of first-year requirements altogether.

The third firm went even further. (This may sound familiar.) David writes:

Shepherd Law Group in Boston has thrown out the billable hour altogether in favor of flat fees and fixed prices, and it could not have asked for a better result.

In 2007, says CEO Jay Shepherd, the firm “billed exactly 0.0 hours [yet] more than doubled our revenue for all of 2006.” He adds, “It sounds too good to be true. It’s not.”

Now there’s no looking back for Shepherd, whose firm handles labor and employment law. He recently added a sixth attorney, and he denies secretly keeping track of the hours spent on each case.

In their new billing model, Shepherd and the other partners can get together to brainstorm strategies—something that would have required billing for several different attorneys. Most clients would never stand for those sessions if charged by the hour.

It’s easier for a boutique firm to institute a change, but Shepherd cannot argue with results: Research becomes more focused; soon, efficiency improves. For the Shepherd Law Group, at least, eye-popping numbers are to follow.

(Thanks, David.) The point here isn't to trumpet our firm's successes (at least that's not the main point). The point is that clients want a better system, one that puts their interests in line with their lawyers' interests — rather than in conflict with them. And it can be done successfully.

But there are plenty of naysayers.

Next post: The naysayers say "nay." Stay tuned ... (unless there's another writers' strike).

"Beat the clock": The Boston Globe on hourly billing

Busy, busy, busy. I know. I hate it when bloggers make excuses about why they haven't posted in a while. But we've been very busy at my firm lately. (So busy that I missed noting Gruntled Employee's first anniversary, September 28.) Why so busy?

Because we abandoned hourly billing.

In fact, during 2007, Shepherd Law Group has billed exactly 0.0 hours. And in doing so, we've more than doubled our revenue compared to last year. Clients don't really want to hear about our revenue, but if they think we're doing something to make less money, they immediately get suspicious. (Fear not, good clients. We're still capitalists.)

Our revenue growth comes from two sources: new clients fed up with the value-insensitive system of hourly billing, and increased efficiency driven by our flat-fee system. Our up-front pricing places our interests squarely aligned with our clients' interests, which makes them happy and forces us to be more efficient.

But don't take my word about it — I've already written many posts on the subject of hourly billing.

Instead, check out this article from today's Boston Globe. Sacha Pfeiffer, the Globe's world-class legal-business reporter, profiled our firm and its campaign to kill the billable hour. Whatever I could tell you, she says it better. And the article has kicked off a huge discussion. As of day's end, the story had been emailed via the Globe's site, Boston.com, 674 times (surprisingly, only once by me). That was more than four times more than the story of the Red Sox sweeping the Angels in the ALDS, and third-most for the past week.

In the blogosphere, people are discussing the article and the model. Here's a sample:

• Ron Baker's Verasage Institute, "Another Trailblazer: Shepherd Law Group"
• Susan Cartier Liebel's Build a Solo Practice, LLC, "The Billable Hour "Cockroach" is Being Snuffed Out....One Law Firm At a Time"
• Law School Dilettante, "I really shouldn't be thinking about jobs yet"
• Andrew Perlman, Legal Ethics Forum, "Billable Hours — A story and a question"
• Marie S. Newman, Out of the Jungle, "A trend in billing?"
• and, more acridly, Drew Curtis's news aggregator Fark.com with 122 comments and 10,135 clicks as of midnight.

Legal advice: 30% off! (Why discounts don't always save you money)

It seems like more clients are complaining about their legal bills. With hourly rates rising into record-setting territory (see "Cheaper than A-Rod: Some lawyers getting $1,000 an hour"), there's plenty to complain about. Many  sophisticated clients are questioning whether the problem is hourly billing itself. (See "No-alternative billing" and "Outside counsel ignoring GCs on hourly billing.")

And how are many law firms responding?

Discounts.

Taking a page from the mattress sellers' handbook, some law firms are offering discounts for certain services. Employment law is a common example, since it's often seen as less critical than securities law or mergers-and-acquisitions work. (Of course, without talented employees, your securities and your acquisitions aren't worth a heck of a lot, but that's a fight for a different post.) "Six hundred bucks an hour for defending a discrimination charge? You're right, client. Tell you what I'm gonna do ...."

Thinking that they're mollifying the cost-sensitive client, the lawyer offers a discount in the form of a lower rate, written-off time, or a change in the staffing of a project. But these discounts can actually increase your legal costs. Here are five reasons why:

1. Lawyers are rational, and will work harder on more-profitable matters.
Now most lawyers are ethical, but they are not selfless saints. Instead, most lawyers are rational human beings. (Yes, believe it or not, lawyers are human beings, no matter what you've heard.) Human beings tend to respond to incentives. They tend to prioritize their actions based on the expected rewards.

Let's say a lawyer has two otherwise identical projects to work on: same level of difficulty, same amount of intellectual interestingness. The project for Client A is billed at the lawyer's usual rate of $400 an hour. The project for Client B is billed at a discounted rate of $215 an hour. If the lawyer has an hour to bill before a meeting and wants to add as much as possible to the firm's bottom line, the lawyer — a rational human being — will usually choose Client A's project.

Knowing that the undiscounted project is more rewarding, the rational human lawyer will tend to give his or her best efforts to that project. Now some lawyers will tell you that they put the same amount of effort into each project, regardless of the reward. But they're either lying to you, or they're lying to themselves. Or maybe they're just not rational human beings.

2. Lawyers are rational, and will work less hard when they know their time is worth nothing.
Sometimes it makes sense to have two (or more) lawyers working on the same task at the same time. Multiple lawyers can brainstorm together to come up with the best ideas about how to proceed on a case. Bringing another lawyer to a client meeting can help make sure that nothing gets missed.

But clients hate being billed for this. When they see a bill entry that describes two lawyers having an office conversation about a case — whether it's called analysis or strategy session or whatever — they often see it as an attempt to jack up billable hours. Knowing this, the smart rational human lawyer will cut his or her time so as to not show the doubled-up billing. But being rational and human, and knowing that he or she can't bill for that time, there will be a tendency to mail it in. No one likes to work for free.

3. In the billable-hour paradigm, there is no incentive for efficiency.
Discounting doesn't solve the biggest problem with hourly billing, which is a built-in disincentive to efficiency. If I take longer to do a job, the client pays me more. Lowering the hourly rate doesn't change that reality.

4. When a firm lowers its rates, it must make up the difference some other way.
Discounting the hourly rate has no effect on the law firm's costs, like associates' salaries and rent. Assuming the firm desires to make a profit (and why shouldn't it?), it must make up the shortfall somewhere else. That somewhere else is more hours, not-entirely-necessary work, or the use of partners to do associates' work (getting the higher discounted rate instead of the lower one).

5. For a cost-sensitive client, a firm may push work down to a lower-level associate.
Instead of using a discounted rate, a firm might lower the client's costs by giving work to a junior associate that would have otherwise been done by a partner or senior associate. This artificial staffing imperative rarely helps the client. A junior associate might take longer to get the job done, and might miss something. Then the partner has to redo the work, and then cut his or her time (see number 2 above). Work should be done by the right-level lawyer, regardless of the rate.

*    *    *

These five reasons apply more to partners than to associates. At most firms, associates are more concerned with the total number of hours they bill than the rate at which they bill. (In fact, they often don't see the final bill.)

The bottom line for clients is to look at the bottom line — not just the discounted rate. You might just find that your law-firm discounts are actually costing you more.

[Note: I revised and reposted this piece on September 21 because I didn't think the original version was good enough.]

Cheaper than A-Rod: Some lawyers getting $1,000 an hour

Just as the debate on hourly billing is heating up (see "Hourly billing: Presumed Unethical"), here come some cream-of-the-crop New York lawyers jacking their fees up to $1,000 an hour. These grand attorneys have crossed a previously unthinkable threshold, kind of like the sound barrier used to be. Nathan Koppel writes a terrific article in yesterday's Wall Street Journal, "Lawyers Gear Up Grand New Fees." (Subscription may be required.) As is common in Journal stories, the article's lede showcases Nathan's top-notch writing:

The hourly rates of the country's top lawyers are increasingly coming with something new — a comma.

The article has a great quote from an unnamed New York partner (whose own rate isn't disclosed): "We have viewed $1,000 an hour as a possible vomit point for clients." (Call it the client's "emetic rate.") Even David Boies, arguably the nation's top litigator, has misgivings: "Frankly, it's a little hard to think about anyone who doesn't save lives being worth this much money." (Boies charges $880 an hour.)

Some of the Grover-getters sniff that they're not overcharging at all:

Still, some lawyers are confident they're worth $1,000 per hour, and that now's the time to break the barrier. "I haven't personally experienced resistance to my billing rates," [Simpson Thacher litigator Barry] Ostrager says. "The legal marketplace is very sophisticated."

According to the article, law firms blame the rate increases on rising costs, such as $160,000-a-year salaries for first-year associates. Ironically, when interviewed about associate-salary increases, these law firms often say that they don't intend to pass it along to clients by raising rates. See Delaware Law Weekly, Apr. 21, 2006; Law.com, Mar. 20, 2006; ABA Journal Report, Feb. 2, 2007. Is the legal marketplace so "sophisticated" that it will overlook these earlier protestations?

My favorite quote in Nathan's article comes not from a law firm but from a potential customer of these high-priced services:

Considering a major-league baseball player can make the equivalent of $15,000 per hour, "$1,000 for very seasoned lawyers who can solve complex problems doesn't seem to be inappropriate," says Mike Dillon, the general counsel of Sun Microsystems Inc.

Compared to Alex Rodriguez's $25-million-a-year deal, these lawyers are a bargain.

For more reactions, see The Journal's "Law Blog Thousand-Dollar Bar"; Law.com — Legal Blog Watch's "Billing Rates Hit the $1,000 Mark"; Legal Profession Blog's "$1,000/hour? Nero has become managing partner and is fiddling away...." and "$1,000 per hour"; and Blawgletter's "The Hourly Fee Must Die."