Microsoft announced this summer that it wants 90% of its outside counsel work to be paid for through alternative fee arrangements.1 Microsoft intends to utilize large retainer fees to encourage more collaboration between the company and its outside counsel.2 One could be forgiven for assuming that Microsoft believes shifting away from billable hours will cut costs. Publicly, Microsoft seems to be agnostic about the cost aspect of this policy, and is instead focused on the narrative that alternative fee arrangements will foster deeper relationships with outside counsel.3
As one of the biggest corporations in the world, Microsoft’s shift away from the billable hours model is important news. At the same time, people who follow this company closely are probably not surprised by the decision. David Howard, Corporate Vice President and Deputy General Counsel, discussed the change in a LinkedIn article, indicating that fostering close relationships with outside counsel has been a priority for Microsoft.4 The shift away from billable hours to large retainer fees is just another symptom of this priority.5
This begs the question of whether large retainer fees, in comparison to billable hours, will actually foster deeper relationships with law firms. Microsoft develops complex products for consumers and businesses. Common sense tells us that the advice outside counsel provides Microsoft will improve if outside counsel deeply understands the product at issue. Conceivably, under the billable hour model, outside counsel may have been hesitant to utilize their time learning about Microsoft’s products.
Another possible scenario is one in which, under the billable hour model when new issues arose that required outside counsel, in-house Microsoft attorneys may have been hesitant to call up outside counsel for fear of racking up large hourly bills. While this explanation seems far-fetched at first, it makes more sense upon realizing that Microsoft’s in-house attorney department is massive. Each sub-unit is allocated its own budget, so while Microsoft as an entity can easily pay large billable hourly fees, each sub-unit may have faced strict budget requirements that made them hesitant to include outside counsel in routine matters. The retainer fee eliminates this concern.
Will Microsoft’s new billing model create deeper relationships? Normally, up-front fees about specific legal issues incentivize outside counsel to minimize the time devoted to those specific legal issues.6 In contrast, in-house counsel has an incentive to make the up-front fee large enough to ensure outside counsel produces the best possible result.7 Microsoft is a large repeat customer, so, conceivably, large law firms will be incentivized to avoid cutting corners to ensure they continue receiving their business.
At this early stage, is premature to determine whether other corporations will follow Microsoft’s lead. Objectively, it will be hard for outside observers to judge whether Microsoft’s experiment is a success. By its very nature, attaining deeper relationships with outside counsel is highly subjective. Microsoft’s policy does open the door for other companies to try this less traditional payment model. Perhaps, years from now, the industry will look back at Microsoft’s announcement and see it as the first salvo against the billable hours model.
David Howard, Microsoft’s New Strategic Partner Program, LinkedIn (Jul. 27, 2017), https://www.linkedin.com/pulse/microsofts-new-strategic-partner-program-david-howard. ↩
Elizabeth Olson, Microsoft Shifts From Paying Outside Lawyers By The Hour, N.Y. Times (Aug. 3, 2017), https://www.nytimes.com/2017/08/03/business/dealbook/paying-lawyers-by-hour-microsoft.html. ↩
Howard, supra note 1. ↩
See Herbert M. Kritzer, Lawyer Fees and Lawyer Behavior in Litigation: What Does the Empirical Literature Really Say, 80 Tex. L. Rev. 1943, 1966 (2002). ↩
See id. ↩
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- Microsoft is Moving Away from Billable Hours. Will Others Follow their Lead? - January 11, 2018