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Fw: Law.com blog: One Way to Get Rid of the Billable Hour

----- Original Message -----
Sent: Friday, April 28, 2006 9:05 PM
Subject: Law.com blog: One Way to Get Rid of the Billable Hour

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More Well-Funded Plaintiffs' Actions, Coming Soon to ...
In this post, Billions from corporations to tort lawyers, fueled by victories with contingency, Rees Morrison reports on a recent law review article that estimates that "contingent fees in tort cases are generating upwards of $22 billion in annual income and are increasing at a substantial rate." Even more interesting, Morrison notes that "the average effective hourly rate of the contingent fee bar has increased by 1,000 percent to 1,400 percent.  And much of this money is flowing from corporate defendants.  Plaintiffs firms then  invest those billions in more lawsuits, with the end result being more suits against companies and more work for their in-house and outside defense attorneys.  Morrison concludes that "Lucre like that will draw in talent and encourage investments, all to the detriment of law departments."

Posted by Carolyn Elefant on April 28, 2006 at 04:15 AM | Permalink

One Way to Get Rid of the Billable Hour
In Bruce MacEwan's post, Let's Assume Everyone Here's An Adult, he floats one suggestion -- which he calls the McKinsey Billing Model -- that law firms could use to replace the billable hour. 
Under the McKinsey model (so named after  McKinsey, a management consulting firm, which may be famous in some circles, but not even well-known to me; I had to look it up), no one at the firm has an hourly billable rate.  Consultants have a "per diem" rate but it is not disclosed outside the firm or even to clients.  Instead, McKinsey has three sizes of project teams, each of which have different monthly costs.  When a project comes in, it's assigned to the appropriately sized team, which will then given an estimate of project cost based on the predicted length of time that the assignment will require.  Bruce gives this as a hypothetical example of how the system works:

"When a client asks McKinsey for help on something, McKinsey assesses the challenge and responds (hypothetically):  'Great; that will take a small team four months, so expect it to cost $880,000.'  The client decides whether that's a valuable economic proposition, and assuming they give the green light, McKinsey goes to work.

"One of three things now happens:

    * It indeed takes a small team four months, and the analysis/report/recommendation is delivered as promised.

    * It turns out to be simpler than McKinsey thought, so they report after two months, 'We think we're done; we'd like to show you what we have, and if you agree, we've stopped the clock.'

    * It turns out to be more complex than McKinsey thought, so they report after (say) two months, 'There's more to this than first appeared (if we're to deal with it in a fashion commensurate with our standards), and we now think it will take the team eight months.  Would you like us to proceed, or to call it off?'"

As Bruce explains, the McKinsey model presumes that everyone involved being "an adult," that is, has an appreciation for, and can rationally assess for themselves, what is value for money.   Bruce believes that most large firm clients have this capability, but that law firms haven't tried the McKinsey model because no other firms are doing it and no one wants to be first. 

While the McKinsey model has appeal, I'm not certain that it would work for all legal matters.  For litigation matters, I'm not sure that firms can predict the duration of litigation at the outset.  And once a client is stuck in litigation, the cost of stopping or switching to another firm could be exorbitant.   Put another way, the longer you're embroiled in litigation, the greater the value of sticking with a firm would be.  It seems like the McKinsey model would actually push upward rate pressure on clients to finish those jobs that can't simply be terminated mid-stream.  At least with the billable hour and forcing firms to give estimates, clients get some protection, as they do with "incentive" systems, where a firm, for example, charges a lower hourly rate up front and agrees to take a bonus for success.  But what protection do clients have in the McKinsey model?

I'm also not sure how the McKinsey model helps firms increase revenues off tasks that firms perform repetitively as Bruce suggests.   True, where firms have done a particular transaction many times, they don't require as many billable hours for Transaction 25 as they did for Transaction 1.  But wouldn't the same hold true under the McKinsey model?  Wouldn't the firm give a lower estimate or assign Transaction 25 to a smaller or lower-priced team because its expertise would reduce the time involved. 

Still, with so much time wasted on billable hours and the lack of incentives for efficiency inherent in the billable hour, I'd be curious to see what might happen if an alternative, even one like the McKinsey model, were implemented for large firm practice.

Posted by Carolyn Elefant on April 28, 2006 at 04:10 AM | Permalink

How Much Protection Do Employers Owe to the Public
Are employers obligated to protect the general public from off-the-job activity by their employees?   That's the question that Mike Fox tackles in this post, Mr. Employer -- You Should Have Protected Me.   For example, if an employer is aware that an employee has a drinking problem, is the employer liable when its employee leaves work drunk and injures or kills someone in a car accident?   Or what about an actual case in New Jersey, where an employer has been sued by the mother, whose husband molested her child  (his step-child).  The mother argued that if the husband's employer had policed  his Internet use and turned him in for viewing sties with child pornography, the husband might not have photographed the daughter and posted her photos on the Internet.  The connection sounds far-fetched, but the court refused to dismiss the case.

Fox summarizes:

The basic concept -- negligence on the part of the employer in selecting or retaining an employee -- has a long history in American common law, but extending that responsibility to conduct not related to work is a dangerous precedent. The more extenuated the connection to the workplace the worst policy it becomes.  Carried too far, it could at some point completely shift the risk of harm to third parties for all but the unemployed.

The other adverse policy that I see coming out of holding employers liable is that it gives employers incentive to ignore their employees' personal problems like drinking, drugs or pornography addiction or simply terminate employees for those issues instead of trying to work with them.  For example, in the drunk driving case, an employer would be better off simply ignoring an employee's drinking problem or firing him for showing up drunk, rather than directing him to counseling programs.  I don't think employers should be penalized for showing compassion towards employees with various problems and yet, that's the direction in which we're heading as we try to hold employers liable for employee conduct that takes place after working hours.

Posted by Carolyn Elefant on April 28, 2006 at 03:50 AM | Permalink

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