Let's Assume Everyone Here's an Adult...

One of the topics most regularly (should I say, "compulsively?") bruited about, with far and away the least actual impact on anything to show for it, is "alternative billing," also known as anything but the billable hour.

I have my own theories as to why the billable hour endures despite condemnation from high and low—for example, the ABA's famous 2001-2002 "Billable Hours Report" opens with "It has become increasingly clear that many of the legal profession’s contemporary woes intersect at the billable hour," and continues more or less in that vein for 90 pages.   Primary among the life-support mechanisms for the billable hour (duly noted in the ABA Report) are that it lets law firms make a lot of money, and that it's well-suited to lawyers' inherent risk-averse nature.

But my favorite theory is actually a bit different:  We all know the political folk wisdom that "you can't beat somebody with nobody," and I believe that pretty much all of the commonly proposed alternatives to the almighty billable hour amount to "nobody."

There has not, in other words, been a logically persuasive, economically sustainable, mutually-agreeable (between client and law firm) alternative.

I'd now like to float one, which I'll call the McKinsey Billing Model because—you guessed it—it's patterned on how McKinsey bills.

First, I'll describe the essential elements, or components, and then I'll walk through how it works in practice.

Components:

• No one at McKinsey has an hourly billable rate.
• Everyone does have a "per diem" rate, but it's not disclosed outside the firm or to clients, even upon request.
• Projects are generally assessed in terms of how many months they will take, and whether they're appropriate for a "small team," a "medium team," or a "big team."
• A "small team" might typically consist of, say, 20% of a senior partner, 50% of a junior partner, 100% of an associate, and 100% of two analysts.
• Virtually without regard to the scope or substance of a project, McKinsey assumes that the team will call on colleagues who are not team members for an additional 20% of what they need (based on specific industry, substantive, or client knowledge, of course).
• Teams are assigned monthly price tags:  A "medium team," e.g., might cost $350,000 per month.

How it actually does (should) work:

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?"

Under all these scenarios, McKinsey comes away fine (as they deserve to), assuming only that they can price their services rationally—and since they've been doing this for over 75 years, I think that's a safe assumption.

Likewise, I believe the client comes away fine.  In scenario #1, they get exactly what they bargained for; in scenario #2, they get "more" than what they bargained for (and are likely to be an even more loyal McKinsey client given McKinsey's non-self-interested candor); in scenario #3, they learn something about the complexity of their issues and, whether they stop or whether they proceed, they have the satisfaction and confidence of knowing they posed a non-trivial question.

What courageous law firm might adopt this billing model?  The obvious answer is:    No one, not any time soon.  Why not?  It is eminently sane and reasonable; it presumes only that your client has an appreciation for, and can rationally assess for themselves, what is value for money, and it treats all concerned as adults.   But no law firm of any size (that I'm aware of—please pipe up if you know something) is doing it.  And since a lawyer's response to a novel proposal is, "Who else is doing it?," it may take another generation or so.

Unless:   Unless lawyers want to change.

Why would they?  Only because, of course, it might be in their interest to do so.  And I predict that the billable hour gravy train may be running out of running room.  After all, you cannot increase forever:

• total annual billable hour expectations
• hourly rates
• leverage ratios of associates to partners, or
• hours consumed by projects, cases, and transactions your firm has done before many many times.

If, then, firms cannot forever play the game of increasing revenue through increasing all the metrics orbiting around the billable-hour model, they may have to find another way.  

You could always hire McKinsey to figure out what that other way might look like.