Anyone who knows me or has read anything I have written would know that for the last 15 years or so I, along with many others including my colleagues from The VeraSage Institute, have been imploring professionals especially lawyers to transform their business model and not only ditch the billable hour but also to burn their timesheets.
I didn’t always hold this view though. I am old enough to remember time before the billable hour. As a newbie partner in an Australian law firm in the early 80’s (1980’s not 1880’s), I was swayed to introduce timesheets into our firm followed by time-based billing, not because clients demanded them but because other law firms were doing it and we wanted to copy them and look the same as them (the safety of the herd).
As a partner, Managing Partner and CEO of two reasonably large Australian law firms for over 20 years, I am not suggesting billing by time didn’t have its advantages for law firms. It was profitable and a pretty lazy billing model. You just had to educate/remind/cajole/threaten lawyers to fill in their timesheet -no matter how inaccurate and non transparent they were. And provided you adhered to a leverage model, for so long as you could increase your hourly rates year on year higher than what your (mainly fixed) costs were and clients were prepared to pay your hourly rates, it wasn’t all that difficult to be profitable.
It was also a pretty easy pitch to clients too - “You only pay for our time spent, nothing more - and we will show you our time sheets too.”
Sure, there were some downsides. It didn’t take long to foster a production mentality in many firms. It meant the slowest horse could win the race as every lawyer at whatever level was measured solely by time. It also caused some problems with clients too, at times. Lack of certainty and predictability around fees and the inevitable Bill Shock was a source of irritation to clients (and continues to be) and often resulted in trust with clients taking a hit, not to mention some “write offs”.
Also, as the time billing pressures increased over time (excuse the pun), this started causing dissatisfaction, stress-related and wellness issues for an increasing number of lawyers, many of whom were leaving the private profession. Often, this was to get away from the seemingly relentless pressure of time-based billing and filling out timesheets in 6-minute increments.
It always astounded me that as a profession, we would proudly claim to attract the best, the brightest and the most creative from law schools - and then make them account for every 6 minutes of their day?
Most of you know the deleterious effects of time billing and its partner in crime, the timesheet, so I won’t labour them here. Time recording, I believe, is the real cancer in the professions but especially in the legal profession. It severely limits a good firm’s real potential.
In addition to being inaccurate and non-transparent, timesheets are huge barriers to innovation and genuine internal collaboration and “sadly”, tempt otherwise ethical professionals to sometimes do unethical things. It also means that everything a lawyer does would default back to time. It is especially demeaning to good, specialist, experienced lawyers that their worth and their value has been reduced to units of time. As to why timesheets should be replaced and by what, have a read of this post by Tim Williams.
If you measure and reward time, that is what you will get - and you will get it in spadefuls! As Matthew Burgess, ex BigLaw partner and now owner of specialist estate planning firm View Legal says,
“With timesheets you think what is billable. Without timesheets you think what is valuable”.
But all this was seen and regrettably, is still seen, by many in our profession as simply a cost of doing business.
And anyway, there was no viable alternative to the billable hour, or so we were told.
Well, there are alternatives and there always have been. Unfortunately, I didn’t really find out about these alternatives until after I left mainstream law in 2005.
There is now irrefutable evidence that professional firms, including law firms, can ditch timesheets and the billable hour and still be viable and profitable. Moreover, the ones that have taken that step and instead price their services and products upfront like most businesses the world over, report the following benefits:
- substantially improved cash flow;
- reduction and often complete elimination of cost disputes with clients;
- improved value creation for their clients;
- enhanced relationships of trust with their clients;
- and a genuinely collaborative internal culture.
While that is easy for most businesses, I am the first to admit it is not easy for lawyers who, for two generations or more, have been used to relating everything they do back to time and little else. As mentioned previously, in many firms the whole firm is structured, measured and rewarded around time.
The late Dr Michael Hammer said:
“A professional is someone who is responsible for achieving a result rather than performing a task.”
The billable hour model focuses us on tasks, activities and inputs instead of what really matters to clients - outputs, outcomes and results.
I believe every law firm, no matter what its speciality, can price its services upfront if it wants to.
I know “anecdotally" it is the unlearning, not the learning that is the hardest. To price upfront requires a mindset and business model change. It is not a billing model change.
I am a strong advocate of value-based pricing, which means you price your services based on the perceived value you are going to provide to your clients. To do this properly, you need to first have a value conversation with your client to understand what is important to them, what they value, what they want and importantly what they need. You need to scope the value and the work you are going to do for them and after you agree on the scope, you agree on the price with your client upfront before the work is done.
“Value based pricing” is sometimes referred to by other names by different authors and different firms. For instance, some firms use “up front pricing”, “Progressive Pricing”, “Agreed Pricing”. Moores, a Melbourne based law firm that went timeless in 2013, call their pricing model “MAP - Moores Agreed Pricing”. At the Innovim Group, we call it “Aligned Pricing”.
The price is based on outcomes, results and outputs all of which are important to our clients, not retrospective fees based on inputs and activities or our own costs, none of which are important to our clients. If the scope changes, so might the price but you will always agree change of scope and change of price upfront.
Four of the great misunderstandings in our profession which hold many lawyers back from moving away from time-based billing are:
1. That time is a cost
Time is not a cost. It is a constraint that every business, every human being faces. There is no additional cost to a firm because I spend an extra 6 minutes on the phone to a client. Paper clips, rent, wages, computers, etc are costs. Time is not. Get over it.
2. That there are only 2 ways to price a matter
That being either retrospectively by time (which btw is not pricing) or with a fixed fee. Nothing could be further from the truth. You can have a fixed fee for some/many things (and sadly I see many fixed fees that are merely time-based billing in disguise) but sometimes, you cannot price something out to the end of the matter because either you don’t know the scope or the scope changes. I work with several timeless law firms who price for value. They might do fixed fees, phased or stage fees, milestone fees, subscription model fees, success fees, contingency fees and many other pricing models.
3. Clients are happy with hourly billing
I hear that all the time from firms who really don’t want to change, want to keep hourly rates as an option (the primary option) and want to keep measuring and re- warding themselves by time. Overwhelmingly, the firms I have worked with have had little pushback from clients when upfront pricing is properly explained to them. I am not saying that these firms have not encountered clients or prospects that insist on an hourly rate and time-based billing but these firms have learned to say “no” to such prospects. And it is a powerful thing to say “no” to some prospects and clients if they are not the right for your firm.
4. Pricing for value is difficult
Are we really saying as professionals that it is too difficult to:
- know what we are really good at;
- listen carefully to a client;
- ask some good questions to identify our client’s objectives;
- make a judgement about whether we have the talent to improve our client’s position; and
- if we do, propose a scope of work and price to deliver our client’s objectives?
The builder who built my house could do it. The painter who painted my house can do it. Surely good professionals can?!
Put simply, pricing for value and getting rid of your timesheets is a much better, more fulfilling way for lawyers to practise our craft. It benefits not just ourselves, but also our clients. It is of course not the panacea for all the ills and challenges our profession still faces such as mental health and team member wellbeing, customer service deficiencies, toxic cultures, eat what you kill silo mentalities, lack of genuine collaboration, lack of diversity and in-equality just to name a few. Anecdotally though, I have found that those firms that have embraced a business model change have been able to more successfully overcome many of these challenges.
After all, it's partly why they had the courage to choose to make the transition in the first place.
This article was first published on 24 June 2021, by Legal Business World.