Who will ever forget Monty Python’s Dead Parrot skit?
But if you thought that was funny below is a transcript of a conversation between an Oldlaw partner Michael and his client John:
“John:Michael how are you? Thanks for eventually getting back to me. I left a few messages for you about that last invoice you sent us. Sorry I have been sitting on it for some time now but I really need to discuss it with you.
Michael: Sure John sorry you know how it is, meant to ring you back but been soooo busy (on other clients work). So what seems to be the problem?
John:You know how we agreed on a fixed fee for that work you were doing for us?
Michael: Yep sure do.
John: Well Michael its just I got your invoice and its not a fixed fee.
Michael. Yes it is.
John.No it isn’t Michael. The invoice is higher-substantially higher as a matter of fact- than the fee we agreed.
Michael: Oh yeah sorry about that but well that is because some of work took longer than anticipated and we did some other work that wasn’t planned for. But our invoice is still fixed.
Joe: But Barry its fixed at a higher fee arbitrarily set by you. I never agreed to that fee.
Barry: No Joe its not an arbitrary figure, its not as though we just picked that fee in the invoice out of thin air. No way. I have the timesheets to prove it.
John: Michael you may well have some timesheets but they are quite frankly irrelevant to me as we agreed on a fixed fee in advance for this work.I don’t care if it took you a longer time or even a shorter time to complete that work than you had anticipated.We had a deal.
Michael: Oh come on John, be fair, I can assure you all the work was necessary to get the deal done, and it has cost my firm more to get you the result you wanted.
John: Michael we had a deal on the fee and with respect its up to you to manage what time and resources you put into getting this work done and it is not my fault if it has taken longer than you anticipated.And anyway just what additional cost is it to the firm because it took longer than you thought?
Michael:well you know John as your lawyers we sell our time to you and if we are giving you time for free its costing us big time.
John: Michael I am not buying you or your law firms time, I am buying your skills, experience and expertise to get me the outcome and results we agreed upon. Again explain to me what additional cost your firm is incurring on this “additional”time? Do you pay your lawyers by time?
Michael: No we agree an annual remuneration with our lawyers, but we charge them out by the hour to our clients as you know.
John: So there is absolutely no additional cost to the firm?
Michael:Oh there is John as the hourly rate each lawyer has is not all profit for the firm. The hourly rate meticulously includes a whole range of actual costs we need to recover before the firm even starts making a profit.
John: Michael I don’t know where you pulled all that from but I don’t believe- and I know you don’t really believe- that there are any additional costs whatsoever to the firm so don’t try that on me. But even if I was to humour you and agree there were some additional costs I don’t care two hoots about your costs Michael just as you shouldn’t care about mine. The fact is we had an agreement on our fees and that is that.
Michael: John but what if I can prove to you that the extra time we put in was worth it and necessary will you pay the invoice then?
John: Michael if all this additional work was necessary and unforeseen what didn’t you just ring me before you did all this other work and we might-I say we might- have been able to come to some agreement on any change in scope and maybe I might have agreed to a change in the price. But you never rang me Michael.
Michael: John how could I ring you as it was not until the end of the month when I looked at the timesheets of everyone who worked on your matter that I even knew there was additional time and work involved.
John. Michael you are not serious?
Michael:Look John because you are such a good client lets not let this little hiccup come between us, so lets see if we can come to some arrangement on fees.What about if we split the difference.That seems more than fair to me. What say you?
Michael: John? John? You there John? Damn I just wanted to remind him our hourly rates are fixed too.”
@ChisConsult Influencing motivated professionals to make a difference.
While Ist July marked the start of a new financial year here in Australia, most Law firms had the weekend off so it was Monday 3rd July when it all really began again.
3rd July might have appeared on the surface to be just like any other day but rest assured it was not.
Armed with information and “surveys” from the industry, the legal press, the benchmarkers, HR consultants and the like, and following remuneration and career discussions with staff, 3rd July represented the culmination of months/weeks/days of seemingly endless meetings at executive/management/partner level involving any number of revised spreadsheets and arithmetical exercises, negotiations and compromises.
What the new financial year means for Oldlaw* lawyers
So what did most lawyers who work in Oldlaw find when they turned up and turned on their screens Monday morning?
Most found an email from their Managing Partner/CEO/COO congratulating them on last financial year’s performance but reminding them today is a “new dawn” and that they can find attached their new hourly rate, expected recorded daily billable hours target and a new (increased) budget for 2017/18.
Most lawyers, simply because another 12 months had passed, received some increase in their hourly rate, while those who were fortunate enough to receive a promotion and a title change (and by the looks of social media last couple of days promotions were rife in most firms), they received a larger increase in their hourly rate and their budgeted fee targets, commensurate with their promotion and new status.
What the new financial year means for Oldlaw clients
Many clients might not notice much difference in their dealings with their Oldlaw firms at least in the first week of July, except they may open their (e)mails to read through Tax Invoice narrations that the firms would have been feverishly preparing on 29 and 30 June.
Some clients will be receiving emails or newsletters from their Oldlaw firms informing them of the various promotions made at the firm.
Some clients may also receive an email informing them that due to CPI and other cost increases and/or promotion of lawyers (impliedly indicating that with promotions comes higher salaries), and/or as hourly rates have not increased since ……..(fill in time period), the new hourly rates effective 1 July will be as follows……..(fill in reverse competition rates).
Some clients may not be informed of any such changes (even if changes were made) and may not notice any rate increases until they receive their first Tax Invoice for any work undertaken from 1 July.
So what’s the big deal you may well ask? Oldlaw firms have been doing this for eons (in Australia at least for the last 30 years) and everyone- clients included-understands that hourly rates cannot remain static when costs to run a firm are rising all round. Indeed that is the very basis of the principles of cost plus pricing-price your services or products you sell above the costs to produce them.
The hourly rate, so the Oldlaw mantra goes, is a mix of the cost to keep the doors of the firm open plus something added for profit.No one of course is quite sure what exactly is the cost component and what exactly is the profit component for 2 reasons.
Firstly the hourly rate is not a cost plus exercise for most firms but really an exercise in reverse competition ( what are our competitors rates? what are the market rates? where do we want to sit in the market place? what can we get away with? etc).
Secondly an hourly rate does not equate to any cost of production (even excluding some arbitrary profit component) because in Oldlaw firms, time is not a cost.Period. It is the B.S. of 20th century that this is still peddled and believed by Oldlaw and their consultant/advisers. It is simply untrue, has been proved to be untrue and has no justification whatsoever in economic theory.
It is another lie Oldlaw tells and one I used to tell myself (to be fair I didn’t understand it to be a lie 15 years ago- Oldlaw now know it is a lie but still tell it anyway).
So what about value to our clients?
So from the stroke of midnight 1 July each year a miracle occurs. Oldlaw has defied all economic theory and logic, such that magically the value being provided to Oldlaw clients increases proportionately to the increased cost and title being arbitrarily allocated to each lawyer.
Add to this that clients do not care one iota about your costs (they have their own costs to worry about) and that the amount of time a lawyer spends on anything for a client bears no resemblance to the value provided to the client, and you can see what a bind Oldlaw has got itself into.
As my friend Matthew Burgess co founder of Viewlegal so eloquently put in in this post “Tyre pumping, timesheets & The Force” when commenting upon the hourly rate increases in Oldlaw firms:
“Best wishes for the new financial year ahead, particularly if you have suddenly been asked to be somewhere between 5% and 23.6% (depending on your firms definition of current CPI rates**) more valuable to your customers …”
So who should care?
Thank goodness in Australia we work in a (largely) democratic society and legal environment where many choices are open to law firms and their clients as to how they both sell and purchase legal services. No longer it is a case “you can have any colour you like so long as it is black” (i.e. pay my hourly rates or else) which predominated for so long.
So these days, in response to market forces and to be perceived to be innovative like their competitors ( i.e the same as their competitors), most Oldlaw firms offer all sorts of billing options to clients-hourly rates, capped rates, blended rates, fixed fees, and some even offering value based fees.
Sounds great in theory for Oldlaw to be offering all these options but there is just one (big) problem Oldlaw has. Whatever Oldlaw may say about being innovative, overwhelming they would still prefer to bill- not price- their services ( billing occurs after the work is done whereas pricing occurs before the work is done).When they do (reluctantly) offer a price, for so long as they continue to measure and reward time, Oldlaw will always relate what they do back to time and their pricing will inevitably reflect little more than “billable hours in drag“.
You only have to have to read those Monday morning emails to know what I write is true.
Timesheets remain the elephant in the firm for Oldlaw.
* I define Oldlaw as any firm that leverages people x time x hourly rate
Influencing motivated professionals to make a difference.
Recently an Oldlaw partner told me that while a small minority of lawyers may have abused time based billing, overall hourly billing is “good” because it is “…accurate, transparent and ethical“.
This of course is not the first time I have heard (and read) similar comments as further justification for maintaining the billable hour model and indeed when I was still a practising lawyer I used similar terms myself.
While there are several purported justifications for the existence of the billable hour, including:
- it is easy to implement and understand,
- it records effort,
- professionals sell time,
- it is the norm as most of our competitors charge by time too,
- it is acceptable to most clients & some demand it,
- our practice management system is built around time,
- our firms measurement and rewards structure is built around time,
- it transfers all risk to our client.
I, like many, challenge the notions that the charging by time is “accurate, transparent and ethical”.
“The billable hour is accurate”
Accurate=to be correct, exact, without any mistakes.
Of course to charge by time you must keep a record of your time correct? And if your contractual engagement with your client is to charge by the hour or part thereof ( broken down into 6, 10 or 15 minute units or whatever other iteration the management consultants, most of whom do not charge by time themselves, dream up) it follows that your time recording must be, at the very least, reasonably accurate.
Ever since the introduction of time based billing, Oldlaw firms of all shapes and sizes have been drilling into their “fee earners”( an awful expression, only exceeded by the derogatory term “non fee earners”) the importance of accurately recording all billable time because that is what is primarily measured and rewarded.
Manual recording by time of course has moved to automated recording of time with a plethora of practice management vendors out there extolling the virtues of their systems which “capture time”.Alas! Even with all the help from technology we still cannot seem to get time recording accurate.
Why? Simply because time recording requires human input to either manually record time or to push a button to start/stop automated recording time.It is physically and psychologically impossible for human beings, no matter how good their intentions, their intelligence or their “time capture” software to accurately record time spent on anything. Law is not practiced in some kind of vacuum. Like most of us, lawyers are continually interrupted on whatever they are working on by emails, by colleagues (including those “non-fee earners”), by phone calls, etc-so unavoidably accurate time recording gets “overlooked” .
At best, professionals record the time we think we spent on something or what we think we should have spent on something.
At worst, we forget completely the time we spent on something maybe for always and sometimes for days or even weeks (often until the managing partner sends an all firm email on the second last day of the month reminding all that “chargeables are down and all fee earners must lodge their timesheets”),then we “guesstimate” or we simply make it up.
“The billable hour is transparent”
Transparent=easy to perceive or detect, open to public scrutiny
I confess to never being sure why this statement has any ring of truth to it. It just seems to be one of those sayings that rolls easily off the tongue and if you say it often enough people will believe it.
I suspect the “transparency” part stems more so from some notion that “you only pay for the time spent” rather than any real “openness” context. Of course there are times when a client knows or observes when their lawyer is physically doing something (such as attending the same meeting, speaking to them on the phone, etc much like watching your lawn mower man mow or your window cleaner clean).Theoretically it is even possible for someone-including a client-to personally watch their lawyer (or watch through technology) performing a task like drafting a document or dictating/typing an email etc.
However as we know (and as many lawyers are only too quick to tell me) the real value of a good lawyer is not so much in their physical competencies but more by their intellectual and social competencies (often called “thinking”). Until technology invents a chip that is inserted in our brain that is somehow linked to a client matter number to track when you are actually thinking about a client’s matter, genuine transparency has a long, long way to go.
“The billable hour is ethical”
ethical=morally good or correct, in accordance with the rules or standards for right conduct or practice.
Now here is where it gets really interesting. The ethical justification for the billable hour seems to be intrinsically tied to the rules or standards in the legal profession (originally set by the profession itself).It has been an accepted practice for so long to retrospectively bill for their services either by use of an agreed hourly rate or some sort of scale of fees that the legal profession has convinced itself at least that this billing model must be ethical.
Of course both these retrospective billing practices meant that, essentially, clients and their lawyer had no way of knowing what the fees were in advance because the task, activity or time has not yet been undertaken.
Regrettably, as is the case in any industry or profession, there are a minority of providers of legal services who chose to take advantage of these accepted retrospective billing practices.Even though an argument could be mounted that retrospective billing is pretty much the perfect crime, the profession (and in many jurisdictions, the appropriate regulators where the profession failed to or was slow to respond) introduced codes of conduct /rules/regulations to try to ensure clients were protected as best they could be whereby anyone aggrieved by the fees charged by their lawyer could purportedly have those fees assessed, determined or “taxed” (another quaint legal term) to see that they were in essence “fair and reasonable”.
One of the inherent problems with even an independent third party assessing a lawyers fee as “fair and reasonable” is that it too is an after the event determination and often is of little comfort to a client if the client was not expecting the quantum of such fees in the first place
For so long as the legal profession enjoyed a monopoly on the provision of legal services and for so long as clients were prepared to accept these billing models such practices were deemed “ethical”(note however that neither of these are pricing models they are merely billing models as billing takes place after the work is done whereas pricing takes place before the work is done).
As we know perceptions and acceptance of what constitutes ethical and unethical conduct of course change in accordance with the times particularly as our knowledge increases and community and business norms evolve. The medical profession is a prime example where doctors who once undertook and prescribed cures and remedies in the past based on accepted medical and scientific knowledge at the time, would be judged professionally incompetent and negligent if they applied such remedies today.
And guess what, even in the legal profession the world changed. For starters lawyers no longer had a monopoly on the provision of many of their traditional legal services (our “Grand Bargain” as coined by Richard and Daniel Susskind in The Future of the Professions-How Technology Will Transform the Work of Human Experts was coming to an end), the profession became more deregulated and more and more clients wanted and insisted upon greater certainty and predictability in legal fees.
For many years there have been any number of articles, posts, surveys, and research undertaken by many commentators, observers and participants in the legal profession, including members of the judiciary, bringing into question the ethics of the billable hour and what perverse behaviours it encourages and entrenches into firm cultures.
“there are no business, practical, or ethical excuses to avoid learning about, understanding, and adopting technology. Yet, at the same time, we must recognize that there are perverse incentives that encourage lawyers to refuse to learn technology—the main one is the billable hour. Increased financial rewards for increased hours encourage lawyers to bill as much as possible for every matter. It’s an incentive structure where lawyers are working in opposition to their clients’ interests.
The seemingly-innocuous decision to skip technology training can lead to overbilling. And if you are deliberately avoiding technology because it means that you can bill more, then you are definitely overbilling. Do not confuse this with a clever billing scheme. This is not “just business”—this behavior is an ethical breach.”
Also well worth listening to is Jonathan Stark the founder of the Ditching Hourly podcast and my friend and colleague Ron Baker founder of the VeraSage Institute having a great discussion on the ethics of time based billing.
The late Dr Michael Hammer once said:
“a professional is someone who is responsible for achieving a result rather than performing a task”
The Oldlaw business model reduces everything any lawyer does to a series of tasks and I ask how much longer can Oldlaw get away with claiming it is ethical to ask clients to pay for an activity or a task when clients do not even know what the task will be? After all every law firm-I repeat every law firm-could agree its price(s) upfront-they simply choose not to.
If none of the above convinces you about the ethical challenges of the billable hour perhaps have a go at applying The Golden Rule:
If hourly billing were so ethical, would we want it to be universal?
I have never hidden my distaste, my biases and my prejudices of the the billable hour and the “we sell time” culture that has permeated most professional firms, but especially law firms, over the last few decades and the deleterious effects this has had, and continues to have, on the reputation and values of the legal profession, those that work within it and with it. It is truly hard to believe that there are some out there still claiming its virtues but they have their own vested interests in ensuring this model survives long after its “use by” date.
The tide has turned I am pleased to say but there is still a long way to go before we eradicate the billable hour and its partner in crime the timesheet, together with any form of retrospective billing, from the legal profession. We may never and I accept that buggy whip manufacturers will still exist. While an ever increasing number are experiencing a better way of practicing their craft for the benefit of not just themselves but for their clients, the majority of lawyers, instead of being proactive and changing their business and pricing model for the better, will wait until market forces imposes change upon them.
In the meantime Oldlaw however you care to justify the continuance of time based billing if you use terms like “accuracy”, “transparency” and “ethical” you must accept that increasingly your customers, and indeed your “fee earners”, see these justifications as self serving rhetoric.And a rhetoric that simply does not stand up to any objective and reasonable examination.
We were taught (by our parents) at an early age that ignorance of the law is no excuse. Feigning ignorance of better business and pricing models is no longer an excuse for Oldlaw either. Oldlaw in search of alternatives to the billable hour
@ChisConsult Influencing motivated professionals to make a difference.
A few weeks ago I was privileged to speak at leading solvency & forensic accounting experts Worrells 2017 VIC State Conference.(great event Worrells put on by the way)
If being given the graveyard shift (immediately after lunch) and also being last presenter for the day (standing between professionals and the bar/18 holes of golf) was not bad enough but a baby boomer like me was also following the amazing millennial that is Holly Ransom.
Now I don’t know how many of you know of Holly-I had certainly heard of her ( hard not to notice a 20 something with a CV that includes the youngest person to be named Australia’s 100 Most Influential Women, Chair of the 2014 G20 Youth Summit and the world’s youngest-ever Rotary President) but had never met her nor heard her present.
Wow! Holly’s keynote about our changing world and in particular the role millennials now, and increasingly in the future will, play was at the same time inspirational, exciting, challenging and scary. As Holly pointed out and challenged the audience in her keynote:
“50% of the world’s population is under 30, and within the next decade this millennial cohort will grow to comprise 75% of our workforce. Mix in that 42% of jobs are due to be automated within the decade and suffice to say that the nature of work and leadership is changing on us- will you be leading or bleeding?”
Looking around the room full of mainly middle aged, predominantly male accountants and lawyers, as expert and skilled in their crafts as they are, I couldn’t help but sense that many were feeling decidedly uneasy or unsure about whether they will in fact be leading or bleeding in the not too distant future.
At least, as they say, forewarned is forearmed and Holly made sure the audience understood the future is going to look very different from the present and bear no resemblance whatsoever to the past.
I was fortunate enough to speak with Holly briefly before her keynote and was surprised to find out she actually studied law-but not surprised to discover she never actually practiced.As she was speaking I kept wondering to myself what if Holly Ransom had have joined a law firm-would she have enjoyed her experience? Would she have been satisfied to be part of the Oldlaw business model (which leverages people x time x hourly rate)? Would she have been able to change some of the things she might not have liked about practising law? Would she have been content? Would she have been able to make an impact anywhere like she has done with her own business?
It also got me thinking as to where are all the Holly Ransoms’ in the professions? Why can’t we attract them and then the few we do attract, why is it we can’t we retain them? Why predominantly in the professions, instead of breeding our own innovators, change agents and disruptors do we buy in or rent the Holly Ransoms‘ of the world externally?
Why can’t, as Steven Johnson so persuasively points out in his masterful book “Where Good Ideas Come From?” and expertly summarised in this video clip, the professions breed a culture of innovation from within instead of going external.
As Steven Johnson says “chance favours the collective mind” and after all professional firms are built around smart, intelligent, social people working together many hours per day, so surely they can all get together and maximise the sum of their individual parts to come up with some amazing innovative thoughts and ideas?
But we know that is not how it works in most professional firms don’t we? As I (and many others) have written about before the structure, the measurements and the rewards in most professional firms do not engender a culture of collaboration, trust and connectivity necessary for innovation to even get a foothold-let alone survive & thrive.
But back to Worrells 2017 VIC State Conference. I challenged the audience and asked them
“where are the Holly Ransoms’ in your firms?And if not, why not?
If you are in a professional firm I ask you the same questions.
Handy Hint: If you don’t have any Holly Ransoms’ in your firm do the next best thing-get her in to speak to your people-she may actually help you uncover your hidden Hollys’.
@ChisConsult Influencing motivated professionals to make a difference.