Hourly billing – A dialogue with John Chisholm

In the concluding paragraph to a LinkedIn post he made Friday, 2 September – title ’10 rules about hourly billing for law firms’, in which he sets out the rules of US-based blogger Matthew Homann as they apply to hourly billing – my good friend, and sometime mentor, John Chisholm asks:

“Are we changing the “we sell time” mindset and business model of the legal profession? Are we changing it quick enough?”

I believe John’s questions to be important and worthy of a response. So here’s mine.

Are we changing the “we sell time” mindset of the legal profession?

“If aren’t selling time, what are we selling?”

Many would say that lawyers sell their expertise, knowledge, skill, and experience.

While I would have held that to be true pre-2008, in the new world order I no longer believe that to be the case and would hold that today this type of thinking makes it incredibly difficult for you to differentiate yourself from the pack. I’d go so far as to say that in today’s world expertise, knowledge, skill and experience are a given: they merely get you an invitation to the dance.

No, short of a nuclear event or a commoditised issue, what lawyers (and business development people on their behalf) sell today is access to the right expertise, knowledge, skill and experience. And we do this by fulfilling on all of the modern day clichés: – understanding our clients’ businesses, being client-focussed, always being available, always adding value to the relationship.

The problem though is that even if we know what we are selling, how we charge for it is a very different beast.

Are we changing the “we sell time” business model of the legal profession?

In the 2016 edition of ‘Law Firms in Transition’ by Altman Weil the researches asked:

“If your firm uses any non-hourly based billing, is your use of alternative fee arrangements primarily reactive (in response to client requests) or primarily proactive (arising from your belief in the competitive advantage of alternative fees)?”

72.2% of law firm leaders responded – “reactive“.

In an era where “Sixty-four percent of large firms have added a Pricing Director or staff equivalent” (see page (v) of the report), that’s pretty staggering. But it also goes to the heart of the problem: there clearly isn’t significant enough incentive to move away from what is in place (hourly billing) and towards something new – and the reality is we are only offering non-hourly fee arrangements under the very real threat of not being given the work at all!

And, to my mind at least, herein lies the crux of the issue John raises:- the problem is not that we sell time per se, but rather our business model rewards people for charging by it.

Indeed, if we truly want to know if the industry is changing from the “we sell time” reward model, then the Altman Weil report identifies all we need to know. In there it stipulates that law firm leaders clearly see:

“Efficiency and pricing [as] areas that firms can control to meet the changing marketplace and manage challenges and opportunities.”

And yet despite clearly seeing this:

“The one pricing tactic that has been adopted by a majority of large and small firms is developing data on the cost of services sold. Sixty-seven percent of all firms and 91% of large firms are doing this fundamental analysis, which should enable them to structure more customized fee proposals.”

And while I do commend law firms for trying to establish what a particular type of work might cost, this evidence clearly shows that firms remain stuck in a cost-plus method of charging for services rather than trying to determine what the value is to the client in doing the work – which actually would enable them to structure more customized fee proposals.

To close out this segment, I believe that the Altman Weil report touches on a central problem, and with it a possible solution, to the “we sell time” business model that currently exists in many law firms:

“…in too many firms personal, political and cultural obstacles are hindering pragmatic economic decisions.”

Are we changing it quick enough?

It should be obvious by now that my response here is going to be “no”.

But I wanted to finish by quoting a paragraph in the Altman Weil report that I believe sums up the profession’s glacial attitude to change far better than I can:

“If the strategy is simply to keep up with the pack, it misses the point that most of the pack is itself lagging and just a small increase in pace can distance a firm from its undifferentiated competitors. A firm can never get ahead by merely aspiring to keep pace with sluggish competitors. Vigorous pursuit of opportunities has always paved the way for competitive success.”

RWS_01

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