"The paradigm has changed" for the billable hour

As a follow up to my previous post about how the economic environment is affecting law firm economic models, and the Wall Street Journal brings one more example:  companies the likes of Pfizer, Cisco, and American Express are demanding that law firms ditch the billable hour structure in favor of flat-fee contracts.

Companies have long complained that legal fees are inflated by a business model in which law firms have high-priced junior lawyers who must be kept busy billing for work that could be handled more efficiently. With the recession, companies have the leverage to force changes, say some lawyers at both client companies and law firms.

And while this shift is welcomed by the companies, the law firms are facing new challenges:

The shift could further squeeze earnings at top law firms. The past 18 months have been brutal for some big law firms as work that hinges on vibrant credit markets, such as deal making, has flat-lined.

In fact, as reported on Above the Law, some law firms, in addition to the seemingly endless list that have laid off attorneys over the past year, are now turning to pay cuts for associates that are still employed.  One law firm in Boston is cutting associate salaries by as much as 35%.

It certainly gives some business owners new leverage in the relationship with their lawyers.  But is this new power reserved only for the biggest companies?  How has the economy affected the way you work with your lawyer?

Not too big to fail: the end of BigLaw?

Recessions typically force businesses to tighten their belts and make some temporary changes as they wait out the storm.  But doesn't this one seem different?   Doesn't it feel as though it is reaching formerly untouchable sectors of the economy and encouraging a willingness to completely rethink the way things have always been done? One such example is big law firms.  Check out Douglas McCollam tearing down the current big law firm model in the WSJ:

At bottom, what’s in question is the whole economic edifice of the modern American law firm. Like the pharaohs of old, big firms are enamored of constructing pyramids with an ever-widening base of associates and nonequity partners toiling on behalf of a narrowing band of equity partners at the top. Increasing a firm’s “leverage”—as expressed through the billable hour, one of the most pernicious creations in the annals of commerce—has been the key metric driving profitability at big law firms over the last generation.

Along with the growth and "hubris" that has created international legal institutions that rival the size of some of their larger clients came excess:  now junior associates in Boston and other major cities are making $160k to start, plus bonus, and are often billed out at $300 - $500 per hour -- rates which used to be reserved for partners -- making million dollar partner salaries commonplace.

I am certainly not suggesting that the big law firms are going away.  However, businesses are rethinking the model in light of this deep recession and what they want out of their relationships with their lawyers.  There will certainly be some changes going forward.

This is particularly pertinent to startups and small businesses.  Jason Mendelson, co-founder and Managing Director of Foundry Group, has written extensively and convincingly of the effect on startup companies from a venture capitalist's perspective in an entire series of blog posts called Law Firm 2.0.  These are definitely worth a read; there are a lot of lawyers out there - myself included - who are seeking new ways to accomplish our clients's goals from their perspective, not the lawyers's.

What do you think?  What would you most like to see from your lawyer?

UPDATE:  It seems McCollam's Op-Ed and the discussion about Law Firm 2.0 has struck a nerve.  Is there actually a big difference of opinion here?  Having worked at big law firms, I have seen a variety of views.  Few were in favor of maintaining the status quo, but each had a different perspective for "fixing" things depending on where they sat on the pyramid.

What do you see as the real debate, and where do you see the fault line?

Top Signs the Economy is Rebounding?

Reading the headlines this morning gives signs of hope that the economy is on the rebound.  Here are some examples:

1. Stocks Recapture 9000 on Profit Surprise (WSJ).   S&P 500 Erases Half Its Loss Since Lehman's Failure on Outlook for Profits (Bloomberg).  The stocks markets are in the midst of a rally that is showing signs that the bottom may be behind us.  However, the threats of a coming commercial real estate bust loom.  Can the upturn in the business sector overpower the coming losses?
2. Housing Starts Increase to Seven-Month High (Bloomberg).  U.S. Mortgage Rates Up, But Housing Optimism Surfaces (CNBC).  Economists React:  Housing No Longer 'Weakest Link'? (WSJ)  The mortgage crisis (among other things) got us into this mess.  Foreclosures are still high and prices are still declining, but three months of increases in housing starts is giving some optimism that we are starting to see a rebound.
3. Samsung, Hynix Rally as Intel Results Boost Hopes (CNBC).  With the semiconductor chip and flat panel business returning to the black, discretionary spending could be returning to people's budgets.  Positive results from the two top chip makers are a hopeful sign that the industry is bouncing back, but it hit the bottom so hard that it has no where else to go at this point.
4. Ford Reports Surprise Second Quarter Profit (MSNBC).  Ford Expects Profitability in 2011 Without Government Loans (BusinessWeek).  The automakers defined the American economy for a generation.  With its recent struggles the automakers are just hoping to survive.  Now with Ford showing promise and a svelter GM out of bankruptcy, could the American auto industry actually recover?

All of this is of course balanced with a heavy dose of continuing negativity.  And we will know more on July 31st when the Bureau of Economic Analysis releases its first estimate of second-quarter GDP, which is expected to provide some good news:

The report is expected to offer evidence that the worst recession since the 1930s is very nearly over, and that a return to growth in the current quarter is very likely.

A report that GDP increased in the second quarter could provide a good stimulus for the rally to continue.  Perhaps we can look forward to good days ahead.