When Will the Billable Hour Die?

JD Supra Perspective – Lance Goddard*

I recently talked to John Chisolm, a former practicing lawyer and law firm CEO who works with firms around the globe to help them evolve from traditional billing – by the hour – to what has become known without irony as non-traditional: pricing services based on their value.

This is the second part of our conversation, in which we talk about the role of the client in bringing about new ways of pricing legal services, challenges that law firm leaders encounter when they try to implement change, and the future of value pricing, among other things. [If you haven’t yet read it, follow this link to read Part One.]

GODARD: What role does the client play in all of this? Do firms find that convincing the clients to change can be the biggest challenge of all? What can a firm say to a client who hesitates to adapt to a new method of paying for their legal services?

CHISHOLM: Interestingly enough – with one caveat – I will say that clients are the least of any firm’s problems when embarking on such a move. Sure, you have to communicate with clients, to explain why you are doing this and what the benefits are (to them), but in my experience clients love having more certainty and predictability around the price of their legal fees. The trust and relationship with clients of law firms that have ditched the hourly rate and timesheets have increased immeasurably.

…clients are the least of any firm’s problems when embarking on such a move.

The one caveat – and to some degree I am ashamed to say this – is when the client is another lawyer, i.e, in-house counsel. When an in-house counsel is not involved, adoption of non-time-based pricing has been more successful in my experience and that of firms who have adopted it.

Clearly there are some really innovative in-house counsel when it comes to non-time-based fee arrangements, although I have to say overall that I believe most lawyers inside the client – even those that complain about time-based billing, about fee estimates continually being exceeded, etc. – are not really prepared yet to move away from buying their legal services by time.

I think there are a number of reasons for the slow adoption by in-house lawyers of genuine alternatives to time-based billing, but mostly I think it is because they know how the time-based system works – after all, most of them came from external law firms and were taught well by their former employers. Lawyers selling and buying from each other does not always make for innovative solutions.

GODARD: You practiced in Australia, but now you work with firms from around the world. What regional differences do you see in the way firms approach billing in general, and value pricing in particular?

CHISHOLM: I don’t believe the regional differences are as stark as what is often made out. For many years I used to be told “well, that might work in Australia, but won’t work in the U.S.” or “that might work in real estate but won’t work in M&A” or “that might work with the firms’ other clients but not with mine,” etc. I was also told that local bar regulations and other rules made it mandatory that firms had to record time, if not bill by time. Of course, when I asked to see a copy of those regulations I usually got blank stares. In fact, I am still waiting for the regs to come to me.

I know time-based billing is accepted practice for most western lawyers and their clients, but again there is ample empirical evidence to show that there are successful and profitable law firms now operating all over the world without billing by time nor keeping timesheets.

GODARD: What advice do you have for a managing partner who sees the future, wants to change her firm, but knows that the partners are going to push back against doing things differently?

CHISHOLM: Start her own firm with a bunch of believers? I am only half kidding. I understand from personal experience just how hard it can be to get any sort of meaningful change in many law firms, especially with a partnership structure that often allows the lowest common denominator to predominate when trying to get universal acceptance of an idea. This is especially so when you are seeking to change a long-established and successful (to date) business and billing model. Unless a managing partner can positively respond to “can you guarantee this is going to work (i.e., make me more money)?” little is likely to happen.

A lot of this gets back to a firm’s culture and their purpose and why they exist in the first place. If there is no common understanding and agreement of a firm’s why or if the why is really to make money in the short term, then good luck is all I can say to any managing partner who runs such a firm.

What I can say, though, is that successful change to value-based pricing – indeed, successful change, period – will never ever be sustainable unless there is an internal champion or champions. I don’t care how good your consultant or strategic advisor might be. Good leaders, if they believe in something, will make things happen. Maybe not for everyone but for the people that matter most.

GODARD: Finally, where do you think this is all going to go? Is value pricing merely another point on the swinging pendulum, and that at some future date firms will be struggling to implement what we now view as more traditional billing methods? What does your future look like?

CHISHOLM: I don’t pretend I am a futurist, Lance, by any means. I continue to be surprised how some things in the legal profession get traction and others don’t. I do, however, subscribe to Bill Gates’ view of the world when he said, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”

While I wish the pace of change to move away from time-based billing was quicker – and I do think the legal profession is lagging behind most other professions in this regard – I am an optimist and believe that we will see the day when the billable hour is the alternative fee arrangement and in the minority. It is just a sub-optimal business model and, when you think about it, it places a ceiling on any law firm’s potential earnings. I have seen many, many pricing mistakes lawyers make over the years. And guess what: For good lawyers in particular, their pricing mistakes are underpricing their services. They leave value on the table because they both don’t appreciate nor do they properly communicate the value they are providing to their clients.

I think the pressure from clients for more price certainty, coupled with technology advances (why invest in technology to make things happen quicker if you continue to bill by time) and competition from an increasing number of agile and innovative providers in the legal space, will hasten the change. I wish it were lawyers making the change themselves for the right reasons. After all, we adopted time-based billing ourselves – it was not forced on us by clients – so we could change our pricing model again. The innovators and early adopters will do that, whereas the early majority and late adopters will do when everyone else is. Again, the majority of the legal profession is too reactionary – there are still first mover advantages to be had, but this too will change.

Adopting value-based pricing per se is not a panacea for all the challenges the profession still has to face in the future – far from it – but I believe adopting mindset change will and has opened up smart, courageous, and innovative lawyers to be much better prepared for whatever the future holds.

As Gen Shenski said, “You might not like change, but you will like irrelevance even less.”

GODARD: Thank you, again, for this interview, John. Before we end it, tell us about your path from practicing lawyer to consultant. How did you become an advocate for a different kind of fee structure and, equally important, why do you think that the way lawyers charge for their services is the problem to fix, the thing that will make them more successful and their clients happier?

CHISHOLM: I was a practicing lawyer, managing partner, and CEO of law firms in Australia. From about the early 1970’s, Australian firms ran on the Biglaw model – what I prefer to call the Oldlaw business model – which essentially leveraged people X time X hourly rate. It was how 95 percent of firms ran their practices. It was profitable and it was financially successful for the firms, provided three things: you could increase your hourly rates annually more than you increased your expenses, your clients remained happy with both the hourly rate you demanded and the time it took us to undertake work, and finally that there was always enough work around to make sure our lawyers worked to capacity.

In the main our clients accepted this billing model – after all, there were not too many alternatives out there. But as hourly rates crept higher and higher, “estimates” of fees were invariably exceeded, clients themselves came under increasing cost pressures and demanded lower fees or more predictability, and the glory days of the billable hour began to fade.

It wasn’t until I left mainstream law and started up my consultancy practice that I seriously looked at real alternatives to the billable hour, however. In late 2005 I heard Paul O’Byrne (RIP) speak at a conference in Sydney about “value-based pricing.” I had never even heard of the term but for me this was my “aha” moment. The rest, as one might say, is history: I was hooked. It is no lie to say that discovering value-based pricing transformed my life – as it has transformed the lives of many of my clients and colleagues who practice it daily in their professional firms.

Author –

Lance Godard has spent three decades within the legal profession, in-house and as a consultant, helping lawyers and practice groups grow their book of business.

Comments

mood_bad
  • No comments yet.
  • chat
    Add a comment