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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 | Comments (0) | TrackBack (0)

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