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'Economic Hell' and the Billable Hour

Big firm economic hell is upon us, do not pass purgatory, do not collect $200. According to legal marketer Larry Bodine:

Two leading advisors to major law firms predicted a declining demand for legal services, a 15% drop in net income from 2008, the inability to raise rates, additional layoffs, salary freezes and cost cutting, heavier fee discounting, expenses rising faster than revenues -- and a long wait for better times.

News of big firm layoffs have gone from a few early drips and drabs just months ago to a daily torrent, with firms cutting staff and attorneys by the dozens. The cuts are affecting legal services providers too, like electronic discovery companies. What is to be done? A fundamental restructuring of the big law billing structure seems to be the most talked about measure, with the New York Times today picking up on the perennial law firm debate:

"This is the time to get rid of the billable hour," said Evan R. Chesler, presiding partner at Cravath, Swaine & Moore in New York, one of a number of large firms whose most senior lawyers bill more than $800 an hour.

"Clients are concerned about the budgets, more so than perhaps a year or two ago," he added, with a lawyer's gift for understatement.

Chesler has been on an anti-billable-hour crusade of late, including a Forbes op-ed earlier this month (see American Lawyer editor-in-chief Aric Press' response, and our previous coverage of his comments in Business Week). While many small firm lawyers scoff at Chesler's recent advocacy of a policy they've used for years, the dire economic situation we're in right now might finally be the act of creative destruction big firms need to reform. Bodine cites Hildebrandt International managing director James Jones:

2009 will be an extraordinarily bleak year because of one key factor, according to Jones: "The single factor that worked consistently to drive profitability in the past was the ability to drive up rates 6% to 8% per year, regardless of what else was happening. As we are entering a period of extended softness in demand, corporate clients are going to be more resistant to the overall cost of legal services. You are looking at a fundamental shift in the law firm economic model we've lived with for many years.

The big firms themselves have mostly been tight-lipped about their billing structures, with even Chesler himself denying the Times any details on Cravath's rates. But more importantly, there's scant evidence that a billing revolution can stem the tide of law firm layoffs, at least not until the economy begins to rebound. At that point, perhaps new fee structures can help law firms learn how to staff up at a sustainable level. Wall Street might have gotten drunk, as former President Bush explained the economic crisis last year, but will its law firms sober up when they hit rock bottom?

Posted by Laurel Newby on January 30, 2009 at 05:50 PM | Permalink | Comments (1)

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