Overwhelmingly most commentators, and lawyers themselves agree that whilst billable hours are bad, “rewards inefficiency” (among other evils) firms are slow to move away from billable hours because “…at the moment, there is a distinct lack of a suitable alternative”.
With respect, I believe there is a suitable alternative and most law firms know that, it is just that for a myriad of reasons most law firms choose to deliberately ignore the alternative – even though the alternative would be infinitely better for the law firm and their clients.
That alternative is value pricing meaning law firms agree on the price with their clients for the work they are going to do commensurate with the value they create for their client and they price the work before they do the work. The value is determined by the client.
It was Henry Ford nearly a century ago talking about his T-Model who said “give them any colour they like so long as it is black”. A century later it is lawyers who say “give them any advice they want so long as they pay $400 per hour”.
Pricing legal services solely according to time is not only an outdated business model but it is detrimental to the interests of both a law firm and their clients.
I apologise if I sound like a reformed smoker but as a former partner, managing partner and CEO of 2 reasonably large law firms I have experienced at first hand both the benefits but also the deleterious effects time based billing has had and continues to have on law firms, individuals within the firms (whether they be partners, lawyers or support staff), our clients and the general reputation of our profession in the eyes of many.
I am not going to list in detail here why billing solely according to time is one of the most old fashioned, unsophisticated and sub-optimal business models ever invented, why the majority of the rest of the business world does not use it and why it is despised by most lawyers and their clients, yet nevertheless accepted almost as a necessary evil as a cost of doing business with or within a law firm.
No law firm leader will publicly support time based billing but privately most concede that if they could run their businesses successfully and profitably without having to record hours or fill out timesheets (or make others fill out timesheets) they would!
I am the first to admit that I was spectacularly unsuccessful (and largely ignorant) in changing the time based costing mindset of the law firms I ran – even though on many occasions I thought there just had to be a better way! It was not until I left mainstream law firms and commenced my own business in 2005 that I began to really understand that the rest of the business world does not havefees or costs or rates but operates on price – and price is set by the seller according to the value perceived by the buyer.
There is a better way – even the large law firms know that but for a number of reasons they are going to be among the last ones to change their current leveraged based business models.
There is no doubt that the majority of legal firms in Australia and especially at the mid to large firm level still price their legal services, measure and compensate their partners and their lawyers based on time. But that does not make it right!
Slowly but surely there is a movement away from time based billing in law firms (as there has been in accounting firms) around the world especially in the UK, USA and Australia. In some instances this is a result of law firms or individual lawyers being innovative and proactive and looking for some competitive advantage and a far better business model for running their legal practices. But in most cases regrettably it is a result of clients putting pressure on law firms to change their billing practices. Whilst I know it is often good to be flexible enough to respond to our clients demands not always do clients have their law firm’s best interests at heart particularly when it comes to paying legal fees!
There is absolutely no correlation between how long it takes to do something and the value you might provide. We all know that.
Time is but only one factor that should be taken into account when agreeing to fix prices up front with clients – even in litigation. Other factors that might be taken into account include: the complexity and difficulty of the matter, who the client is, what the matter is worth to the client (reputation, risk, cost, advantages, etc, etc) whether the client is a right fit for the firms practice, the clients ability and willingness to pay, how easy or hard the client will be during the transaction, who might be on the other side of the transaction, the potential risk to the law firm and its practice, the number of people required to properly undertake the work, the firms experience and reputation, how much the firm wants the work, etc.
Lawyers don’t just sell their time. Lawyers provide much more don’t we? It is absolutely demeaning to most good lawyers to try and distil all their skills, expertise and experience down to a 6 minute unit of time.
I can assure you from visiting and working with firms that no longer price solely according to time that the relationship such firms tend to have with their clients is far better (clients not worried about whether the clock is turned on or not) than with those firms that charge solely by time. Many of those firms have annual fixed price retainers with their clients with many of them being paid monthly. Clients love the certainty of the fees as of course do the firms themselves love the regular cash flow. There is often a different internal environment within those firms as there is not the continued pressure nor the huge wasted administrative cost of recording time to achieve those 6, 7 or 8 billable hours per day.
Even in this market clients will often pay a premium for certainty.
Fixed prices means no surprises and if you look at for example Victoria’s Legal Profession Act (and similar Acts in other States) it is mainly about proper communication and trying to eliminate surprises to clients. Fixing prices up front would eliminate many of the lawyers current costs disputes in my view as how can you have a costs dispute with someone if you have agreed the price up front with them? There may of course potentially be a debate about the quality of work or whether a lawyer actually performed what they said they were going to do, but there cannot be an argument about price (and even the “performance” disputes that can be largely eliminated if firms only work with clients who they trust and who appreciate the value they provide to them).
The viable alternative is there and has been for some time – it will take some training, some trial and errors and it is not perfect. Never will be. But it is far far better alternative to how most law firms currently price their services.
The search for perfection in pricing is simply a vote for the status quo.