The 2017 Report on the State of the Legal Market — colloquially known as the Georgetown Report — was released late last week by The Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Legal Executive Institute and has already been grabbing attention and headlines.
Not surprisingly, one of the most attention-grabbing portions of the report centers around the impact that changing market forces have had on the traditional billable hour model, discussed in the report under the heading, Death of Traditional Billable Hour Pricing. I’ve seen many people attempting to take issue with the report, suggesting that “The billable hour isn’t dead — most of my work is still billed hourly.”
This idea — although likely true — misses a key portion of the discussion. The report does not claim that the billable hour is dead (we all know that it’s not, and may never be); but rather that the billing model is dead.
Indeed, this traditional hourly model under which many firms operated for decades is certainly gone and unlikely to return. Let me explain the difference.
For a great many years, firms could work as many hours as they needed (or wanted) on a particular matter, and there would be little if any pushback on either the attorneys’ rates or the hours spent. Looking back even a decade ago, the average gap between a firm’s standard or “rack” rates and its worked or negotiated rates was only about 2.5%. Firms enjoyed about a 93% realization rate against their standard charges.
Fast forward to today and the gap between standard and worked rates has more than tripled. At the same time, realizations against standard rates have plunged to an average of around 83%, with some firms posting realizations closer to 81% of their standard rates.
In this environment, discounts off of standard rates have become not only common, but almost expected by clients as a concession needed for a firm to win the business. Not only that, but it is becoming increasingly common for clients to place a cap on a matter’s budget, putting the firm into an uncomfortable box where they must earn their way up to the full fee, but cannot reasonably expect to earn any more without having an uncomfortable conversation with the client.
Just within the past few days, I was chatting with a partner at a firm who was working on a matter for which the client had agreed to pay $7,500. It’s a small matter, so the small fee wasn’t too much of a concern, until it became clear that the question the client wanted answered was much more involved than was originally expected. Because this is only one small portion of the total scope of work being done for the client, the partner was willing to consider this matter a loss for the firm, get it done, and move on. He decided to not go back to the client to have the budget reexamined, even though the firm stood to lose money.
I’m sure many reading this have similar stories.
But how many of those stories are more than five or six years old?
That’s exactly the point in the report. The idea of clients exercising the kind of budget control they do today would have been unheard of even 10 years ago. Yet today it’s common, if not the norm.
The billable hour as a key metric is not going away. Even at firms where all matters are done with flat or contingent fees, the amount of time spent must be (or should be) tracked in order to accurately gauge profitability and productivity.
But if we’re being honest about today’s legal market, the statement that “the traditional concept hourly billing is gone forever” really should not be a controversial one.