When an East Coast law firm ignored a client's suggestion and announced a nearly double-digit percentage billable hour rate hike for this year, the customer shifted some of its business elsewhere.
"The client, this firm did not hear," says Michael Rynowecer of Wellesley, Mass.-based BTI Consulting Group, a supplier of client research to law firms.
Most firms are hearing, loud and clear, from clients seeking a little billable-hour love during these harsh economic times. For two decades, substantial rate boosts were an annual rite, placing clients in a grin-and-bear-it posture.
No longer. Industry observers say clients are requesting -- even demanding -- by letter, fax, e-mail and Ma Bell a smaller tab to smooth their ride through the recession.
"By and large, there is significant increased pressure from the clients," says Joe Altonji, vice president in the Chicago office of the professional services consulting firm Hildebrandt International, whose study released last September projected a slowdown in law firm spending. "Unlike past years, when you have seen across-the-board billable rate increases, that clearly didn't happen this year."
Some firms have even touted their rate freeze, an unusual disclosure given that billing procedures often are guarded like state secrets.
"Pulling rates up is very difficult in this environment," says Chuck Trense, president and CEO of the attorney recruiting and placement firm Trense Group in Atlanta. "Most of my [law firm] clients are holding steady on rates. A few are raising them, but slightly."
A poll of 708 firms conducted in November by Altman Weil, a management consultant to legal organizations, concluded that about one-third would elevate rates at the usual pace, 4 percent would hold the line and the rest would adjust upward minimally or selectively.
"There will be decreases, but I'll be surprised to see many," says Peter Zeughauser, chairman of the California-based legal industry strategist Zeughauser Group, adding that he expects most to lift their rates by a modest 3 percent to 5 percent. "Firms have learned that if you miss a rate increase, that can have a deleterious effect on long-term profitability."
But the picture painted by the poll findings does not tell the full story. With the posted billable hour rate, a system with roots in the 1960s, what you see is not what firms get. Discounts always have been an integral part of the game, and experts predict they will go deeper than ever, especially for a firm's treasured clients.
To Altonji, setting one's rate is an art, combining facts and data with feel and intuition. Once that is done, deciding on individual discounts on a case-by-case basis complicates the challenge, since one-price-fits-all rarely is applied.
"It's not like going to a car dealer and seeing that the [entire inventory] is 20 percent off," Trense says of unlikely blanket rate adjustments.
As for the typical 6 percent to 8 percent boost of years past, "Nobody is that naive -- or dumb," says Tom Clay, principal at Altman Weil, who foresees rates remaining largely flat.
Rate bumps "are very minor, at best," Hildebrant's Altonji says. "More contained, not as widespread."
ALTERNATIVE BILLING -- FOR REAL THIS TIME?
The battered economy has forced firms to examine their overall rate structure beyond the billable hour concept. It's the auto industry's equivalent to special financing, rebates and employee pricing.
The idea of alternatives to billable hours is nothing new; Altonji says it predates his 20 years in the business. To paraphrase the old saying about the weather: Everybody talks about it, but nobody does anything about it.
"Billable rate [issues] are an oversimplification of what's going on," Trense says. Clients "are looking for value. At the end of the day, they don't care about the hourly rate. They are concerned about the total cost to get the job done -- and the quality."
Such thinking has jump-started all sorts of back-and-forth between law firms and clients. Altman Weil's Clay quotes one general counsel as saying, "If lawyers can't offer us alternative fees, we'll go find alternative lawyers."
Options to the billable hour "have been coming into play the last five years," Clay says. "The [weakened] economy has hugely accelerated it."
Altman Weil made a Webinar presentation on various billing choices to its own clients early this month that Clay said was heavily attended. "Our consulting on this has skyrocketed in the last 60 days."
The most commonly discussed option is a fixed fee for each legal task. After widely resisting for years, firms may be more amenable to locking in a compensation figure from the get-go, which eases budgetary concerns for clients.
It's a misconception, according to Altonji, that fixed fees have not caught on solely because of feet-dragging by law firms. Clients, too, have been hesitant. If both sides come to the fixed-fee table only to save money, he notes, chances are that one will push away from it with no deal.
Other substitute methods include a success fee (which amounts to a bonus for a positive outcome or for meeting certain benchmarks), a maximum and/or minimum fee and a retainer.
"It's all becoming client-specific," BTI's Rynowecer says. "Whatever meets the clients' needs."
No billing suggestion from either camp is out of bounds anymore. A firm might agree to a fee format or a rate that is advantageous to the client in exchange for a pledge of long-term loyalty.
"To the extent that they are important clients, [firms] cannot afford to ignore them," Altonji says.
Some analysts predict that the law industry will have to be hauled kicking and screaming into a new era of fee structure.
"Law firms are generally not risk-takers," says Clay, adding that some avoid even broaching the subject of rates and fees with clients. His company urges such firms to "take an aggressive approach with clients" in negotiating fresh ways to conduct business.
"Don't sit and wait. Don't let a client call and ask for it. Say, 'We know you're hurting. Let's talk about how we can have a win-win.'"
One foreseeable cost-saving trend is pushing some duties down the ladder from a senior-level associate to a less experienced one. Or, from the less experienced to a paralegal. The firms avoid an actual rate reduction but wind up charging less at the end.
Zeughauser suggests that law firms need not lose sleep over the specter of declining revenues.
"Despite a lot of clamoring, despite the downturn, despite the slackening of [work], we're talking about an industry where demand has grown consistently for a generation," he says. "There's not enough lawyers to satisfy the demand. That has caused a talent war [by firms in hiring lawyers], and I don't foresee that changing in the long term."
More immediately, though, clients might have the upper hand in give-and-take over fees. The observers say that bankruptcy work, which tends to pick up during recessions and offsets declines in other practices, has not been as lucrative this time around.
"Right now, employment and labor law is the only area that is robust," Trense says. "Most folks I've talked to seem to think '09 is going to be worse [overall] than '08."
Muddying the waters for some Atlanta branches of nationwide firms, Trense adds, is heat from the home offices to bring up their billable hour figures more in line with the going rates in places such as New York and Washington.
"Some of the [main offices] are putting on the pressure," Trense says. "It's creating tension in the Atlanta offices of some of these national firms."
On a nationwide scale, if law firms discover their bottom line benefits from innovative billing, they might warm to the notion. One welcome side effect of the recession is that it might accelerate movement toward alternative arrangements.
"I don't think billable hours are going away soon. I do think we're going to see some change," says Altonji. He suggests changes could occur perhaps even in the next 20 years of his career.
Still, it won't be easy for an industry steeped in the tradition of billable rates ascending year after year.
"Most firms are taking a wait-and-see attitude," Clay said. "They are hoping like hell they aren't asked to lower rates more."
GOING RATE DATABASE
Take a look at Fulton County Daily Report's "Going Rate" homepage. It includes a searchable database that provides billing rates by firm name, practice area, job title, city, state and country. (subscription required)