Behind Microsoft’s Attack on the Billable Hour

Microsoft recently announced it plans to reduce the amount of outside legal work it pays for on an hourly basis down to just 10 percent in the next two years.

That means it plans to move 90 percent of its legal spend into alternative fee arrangements — up from around 55 to 60 percent today, according to David Howard, a deputy general counsel spearheading the change.

Howard said that Brad Smith, the company’s president and chief legal officer, asked him to rethink how Microsoft could gain the best value from its law firms, and he spent the past year studying the topic.

As part of a broad shift in the way it uses outside law firms, Howard said Microsoft will hire more law firms under monthly retainer agreements, which will help integrate the law firms, as the company’s lawyers will be able to pick up the phone without thinking about the cost.

I don’t know that we’re witnessing the death of billable hour,” he said, “but I do know from conversations that we’ve had with firms and other companies, that there’s much more work being done on the basis of something other than the billable hour.”

Howard gave some context for the changes in an interview with Big Law Business, a transcript of which has been edited for clarity and flow below.

Big Law Business: How much of your outside legal spend is currently paid on an “alternative fee” basis, i.e. not an hourly rate?

Howard: We’re already somewhere between 55 and 60 percent and if you included other types of AFAs, like hourly rates up to a cap, then we would actually be significantly higher than that. But we want to try and move away from hourly rates altogether.

Obviously one of the things we’ve done is gotten buy-in from the law firms with whom we’re going to be partnering. So our firms are really going to be very much our partners on this project, and not only willing but encouraging of these efforts. And we do believe with a little bit more effort and thought we can relatively quickly substantially increase that 55 to 60 percent to something much higher. Having said that, there is some work that is going to be more difficult to make the shift on and will require more time.

 

Big Law Business: What work will stay on an hourly rate?

Howard: There’s a couple categories that immediately come to mind. I’m not sure it will ever make sense to move the really small engagements … unless we can fold it into one of these retainers that we’re talking about.

For those of us in litigation, the hardest nut to crack has been the kind of one-off case where we don’t have a lot of experience, one where the overall direction of the litigation and how much effort is going to be required is difficult to predict. It’s the big cases where it involves something we don’t have a lot of experience in. It’s the case that comes in and it looks like, ‘wow, this could be some sprawling thing’ and we have very little data on it.

 

Big Law Business: What types of AFAs will you be using?

Howard: The key for us is getting away from the billable hour. Two types of matters that we’re fond of: One is fixed fees, and the other is fixed fees with some sort of upside based on some metric or that could be premised on a result.

 

Big Law Business: What’s behind the move toward more retainer agreements?

Howard: We are really interested in experimenting with the use of more retainers. Our vision is, in certain areas, it’s particularly helpful to have one law firm that is deeply embedded with us doing work across our practice groups in a manner that allows them to work not just on a transactional basis but to offer value added services that enhance the relationship. Frankly, given how big our firm is, we think that model will allow us to stitch things together internally and get more value from a law firm.

So pick a particular area, area x, where we have work that might get done in one of our regulatory practice groups, but also our engineering groups. You pick a firm that we’ll pay on a monthly basis that will do all of the predictable work, small and medium, for that entire year. Some work may be out of scope — you’ll have to deal with it. But that firm will provide consistency across the advice that’s being given, and also will give us some perspective on what’s going on outside Microsoft in that area.

And the other advantage is it encourages our lawyers to pick up the phone and call these people without having to figure out where the budget is going to come from.

 

Big Law Business: The death of the billable hour has long been predicted, but are we witnessing something along those lines?

Howard: I don’t know that we’re witnessing the death of billable hour, but I do know from conversations that we’ve had with firms and other companies that there’s much more work being done on the basis of something other than the billable hour. I think a few years ago, people saw it as a phase that companies were going through. I think folks now understand that it’s something that is here to stay and something that’s growing.

 

Big Law Business: Why so much momentum in this area now?

Howard: I think there’s a few things. I think frankly the downturn in the economy that hit law firms very hard a few years ago did change things permanently in a lot of ways. Secondly, you have many more companies that are committed to doing work on a different basis than ever before. Thirdly, I think law firms have come to recognize that doing work on something other than an hourly basis is not necessarily a bad thing, and not inconsistent with their business goals.

 

Big Law Business: You’re also forming affinity groups for lawyers from diverse backgrounds. Why?

Howard: It really is important to us, and we’ve been a leader in encouraging diversity for a while. We’re constantly looking for ways to do more with people from Microsoft and maybe some people outside Microsoft. We’re not the first company to do that. DuPont pioneered that several years ago, so we’re really stealing their idea there. That, plus using the competitive process to drive the engagement of diverse attorneys at a senior level in the matter ,are things that we think will hopefully allow us and our firms to move the ball forward.

 

Write to the reporter at gabefriedman@outlook.com.

Write to the editor at csullivan@bloomberglaw.com.