Internalization is the key to sustainable, high-value fee arrangements
The hourly rate does not create any incentive for the billing professional to perform the legal service efficiently. Indeed, the natural effect yields the opposite result, since the lawyer who takes more time to complete a task or assignment will bill more time, yielding more revenue.
In light of that dynamic of the hourly rate, to ensure that the value of the legal service is sufficient, in-house counsel typically review counsel’s invoices closely. The reviewer hopes thereby to identify questionable time entries (e.g., too much time for a task, duplicative entries, arithmetic errors, etc.). Unfortunately, such a post hoc review may fail to achieve high accuracy (i.e., failing to identify problematic fee-causing entries) and it diverts the reviewer from more-forward-looking, beneficial activities.
Can fee arrangements based on something other than the amount of time expended by lawyers and their representatives replace the hourly rate? While the hourly rate probably will occupy a place in the firmament of fee arrangements for a long time (and a prominent one at that), that place could be much less significant than it is now. For that to occur, however, we must see fee arrangements that are self-actualizing. By that I mean that the fee arrangement must contain internal mechanisms that conduce toward greater value. For example, were a fee arrangement to reward outside counsel for being more efficient and completing work in less time, we would find work being completed more expeditiously. If lawyers were compensates more generously when they prepare and adhere to budgets more rigorously, budgets would more ably survive the vicissitudes of the matters entrusted to those lawyers. Reward behavior that you value (rather than behavior that you dislike) and that behavior will become more prevalent. Such fee arrangements would be self-supporting and internally consistent with the client’s objectives.