The death of the billable hour?

Larry Ribstein —  26 April 2011

Jay Shepherd writing on ATL thinks the billable hour is “a dying business model. . . because it focuses on selling the wrong thing. * * * [N]o client in the history of the planet has ever wanted to buy time. * * * It’s what you can do for them during that time.”

Shepherd says lawyers sell knowledge of the law and judgment.  The latter, he says, “will keep us from being replaced by Watson the computer.”  The price of that knowledge depends on its value in solving the client’s problem. He concludes that if small firms can figure out how to value their knowledge they can “get a jump on their BigLaw counterparts,” and “we will be practicing law differently in the future.”

I think Shepherd isn’t looking far enough into his looking glass.  He’s seeing a future for law practice that continues the centuries-old model based exclusively on services that are customized to individual clients.  My own view is that much of law’s future isn’t in how to price one-to-one customized legal services, but in the development of legal information products.  Computers like Watson will help create this industry, beginning by displacing a lot of what lawyers do now — whether it’s sold by the hour, foot or pound.  

But computers and legal information products will not completely displace traditional law practice.  Clients will still need customized services to work on complex, difficult open-ended problems.  Ironically, these are the services that likely will continue to be priced by the hour.  As I discuss in my Death of Big Law (at 769):

One promising explanation is that the hourly fee is a function of the law firm’s reputational capital.66 [66 Janet Kiholm Smith & Steven R. Cox, The Pricing of Legal Services: A Contractual Solution to the Problem of Bilateral Opportunism, 14 J. LEGAL STUD. 167, 169 (1985).] Specifically, given the risk of law firm cheating from over-billing hours, only firms with substantial reputations can get away with charging by the hour. At the same time, these firms attract more complex work for which the number of hours required may be substantial and uncertain. Indeed, there is survey evidence associating hourly billing (as well as high flat fees) with higher law firm reputation.

In other words, instead of going away, the billable hour may end up being what’s left for traditional lawyers when much of the rest of the industry becomes commoditized.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

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