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Must Law Firms Know the Cost of Each Matter They Take On?

There has been plenty of talk over the past year or so about how the billable hour at law firms is under attack, and how changes may be in store. Of course, most of it is just talk so far, and precious little action, as law firms cling to their traditional ways.

One firm that claims to have completely done away with the billable hour, however, is the Shepherd Law Group, which states that it hasn't billed or even tracked a single hour since 2006. SLG, an employment law firm, uses an "Up-Front Pricing" model whereby clients know the fee they will pay in advance. On its Web site, SLG explains that if the scope of the agreed upon job changes, it will send the client a change order setting out the new scope and the price for that change.

SLG's CEO, Jay Shepherd, writes a blog called The Client Revolution that is heavily focused on the potential death of the billable hour. In an interesting post yesterday, Shepherd wrote that lawyers remain obsessed with how much their services cost, and continue to claim that they cannot move away from the billable hour to offer fixed prices because of their inability to figure out what a particular case or matter costs.

Examining a recent article by Saul Hansell on cellphone carriers, Shepherd writes that these carriers, like airlines, also have no idea what their services cost. As Hansell explains:

In many ways, however, the least important factor in setting prices is the actual cost of providing cellular service. Cellphone companies resemble airlines, that other industry whose oblique prices exasperate consumers. Think of a cellphone network as one giant airplane that costs tens of billions of dollars to build. The cellphone companies don’t really know how much it costs to handle a call to Aunt Suzy in Syracuse, any more than an airline can calculate a specific cost for Seat 12B.

As a result, Hansell argues, the cellphone carriers simply try to get as much money as possible each month from their customers, and then hope that this total is more than their costs.

Similarly, Shepherd writes, lawyers do not need to know if they are making money on a particular case. "I don't need to know that," he argues. "I only need to know if I'm making a profit on my law firm, not on a particular case or client. Profit equals revenue minus expenses, and there's no earthly way to determine the real expenses for a particular case or client. Even if you bill by the hour."

In another post on The Client Revolution from a few months ago, Shepherd takes aim at a related, perceived fallacy embraced by law firms billing by the hour: that legal work that takes more time costs more. He argues that associates are typically paid an annual salary, not by the hour,

so the firm's "costs" do not rise when a motion takes six hours to write instead of three. Yes, yes. I know. "It's the opportunity cost. The extra three hours means that lawyer can't be working on something else, and that adds up over time." Sorry — I'm not buying that. If you have more work than you have lawyers available to do it, then congratulations — and hire more lawyers.

To the thousands of lawyers out there billing by the hour, I ask you: Does Shepherd have a point here? Could his model work in BigLaw? Is it still critical to estimate costs for each matter by capturing time spent on the matter?

Posted by Bruce Carton on November 17, 2009 at 02:50 PM | Permalink | Comments (5)


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