Author: RWS_01

Over 20 years’ experience developing and implementing effective business development strategies in law firms across Australia and Asia.

Report: Billable hour remains the pricing method of choice for Australian law firms

[This post first appeared on my LinkedIn page on Tuesday 14 November 2017]

Despite the rhetoric we read each and every day around NewLaw, law firm innovation, value-based pricing, fixed fees and alternative fee arrangements, Macquarie Bank’s recently published ‘2017 Legal Benchmarking Results – An industry in transition’ report confirms that the crusty old ‘billable hour’ remains the pricing method of choice for the majority of Australian law firms.

While the report evidences a ‘gradual transition’ away from the billable hour – with 33% of law firms stating that they planned to use a method other than billable hours as their primary pricing method going forward, the term ‘gradual’ here would probably be better described as ‘glacial’ – as this figure is up a mere 2% since 2013.

fees

Interestingly, the report breaks down the preferred pricing method of choice by State (see image above), with Victoria and Queensland leading the way on ‘value-based billing’ (15% and 14% respectively) and NSW smashing it on ‘fixed fees’ (at 26% – which looks to be mostly property related matters) [Anyone else out there as surprised as me with the QLD result?].

Disappointedly, ‘value-based pricing’ is not the term used in the report (and thus I have to assume not asked) as ‘billing’ implies an after the fact approach which almost certainly means there has been no upfront discussion around needs, process maps, project management, white-boarding or any of the other methods of communicating a mutual understand of ‘value’ before a task is undertaken.

At the end of the day though, this report seems to show/indicate that roughly 2 out of every 3 matters undertaken in Australian law firms is being done ‘on the clock’ (i.e. billable hour). And while it doesn’t show what the realisation rates are around this method of pricing, it does provide evidence that law remains a highly profitable business – thus, by extension this method of pricing.

Overall though I found reading the results in this report depressing.

Why?

Because I actually enjoy reading all that rhetoric every morning about how law is changing and becoming more innovative – and to be confronted with evidence this may not actually be the case is, well, depressing.

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[ps, if you haven’t downloaded and read the report – do!]

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Would your clients agree to pay you for ‘computer time’?

An old friend of mine, Alex Hayden-Gilbert (aka @thaipirate on Twitter), recently kindly shared with me a costing proposal from March 1994 that included a line item for ‘computer time’ – something we may consider outrageous today.

Screen Shot 2017-10-16 at 8.00.02 pm

But, giving this some more thought, I wonder:-

is charging clients for ‘computer time’ such an outrageous concept today?

To answer this, let’s break this down:-

  • you work for a law firm that charges by the hour,
  • you are of an age where typing with one finger is acceptable (Baby Boomer or Gen X), and
  • you work for a law firm who has cut costs to increase profit per partner and part of that cost cutting includes a reduction in WP and secretarial services – resulting in you needing to do more typing yourself.

Get where I’m going with this?

Yep, from where I’m sitting unless your client has made you pass a typing competency test (say 80 words a minute), then the reality is they are still – some 23 years later – paying for ‘computer time‘.

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Does competitive tendering deliver best value for money outcomes?

“Efficiency isn’t just about doing more for less. It is about finding the right balance between money, time and quality.”

– [UK] Network Rail Infrastructure General Counsel of routes, Dan Kayle

One of the biggest challenges a General Counsel faces these days is finding a way for his/her company to procure legal services in a way that:

  • ensures a quality service, at
  • a price that is fair to the company, while
  • ensuring that the service provider remains a viable and ongoing business.

For a number of years in Australia the primary mechanism for achieving this has been ‘competitive tendering’. But evidence is now coming to light that competitive tendering may not actually be delivering  the best value for money outcomes that clients had hoped for. Which raises the question:

Is competitive tendering the best way to procure legal services? And if not, what, if any, are the alternatives?

For those (living under a rock) who may not be aware, ‘competitive tendering’ in Australia comes in many guises: panel, project, parcel and combinations of all of these.

For the purposes of this post however, I’m going to state that ‘competitive tendering’ happens whenever a company ‘pitches’ its service needs among one or more of its providers. I’m also going to extend this by saying that the evaluation weighting of the winner of this process favours ‘price’ (read lower) over ‘outcomes’ (read performance).

And herein lies the flaw with competitive tendering that has prompt this post: because in deciding to go with one service provider over another based on an evaluation criteria of price, it is arguable that such a decision comes at the cost of quality.

To be clear, I am not suggesting that legal service providers purposely undermine the quality of the advice they give. Nor am I saying that there is a lack of understanding that there is a trade-off between cost and quality – after all, you don’t get a Rolls Royce at the price of a Mazda and most lawyers today know that.

What I will suggest however is that if law firms are being asked to go through a competitive tender process, which is often followed by a BAFO (Best And Final Offer) process, then in-house counsel have to accept that there will be a fall off in the quality of the service they receive.

Which leads me to this: Is there a better way of doing this?

Negotiated Contracts

I would argue that if you’re trying to achieve an outcome at a price that is agreeable to your company, then negotiated contracts far out-weigh competitive tenders.

To be clear, negotiated contacts can – and often are – competitive.

But the biggest difference between a competitive tender and a negotiated contracts is that the client has pre-selected a set of achievable outcomes – with a group of providers that they believe can deliver on those outcomes.

And we can all work towards that (i.e. it is not all price driven; so-called ‘race to the bottom’).

+-ve / -ve debate

  • Competitive tenders stimulate and promote competitive behaviours. Among a group of adversarial and highly competitive lawyers, will this provide the best results for your company?
  • Costs associated with competitive tenders can be  enormous: is this the best way to conduct a relationship?
  • Competitive tenders deliver the most competitive outcome, which is not the necessarily the best value and price to your business.
  • Negotiated contracts can be the first step in setting out your Legal Project Management (LPM) approach to the matter.
  • Negotiated contracts facilitate a discussion around the client’s different value points.
  • Negotiated contracts allow all sides to come to a clear understanding of what the various expectations are.

Now don’t get me wrong, despite evidence showing that competitive tendering isn’t working, and that we continue to reward poor performance – provide it is done at the right price, all I’m asking is this:

Isn’t there a better way of doing this?

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Do you know who your competitors are?

In a highly competitive market such as the legal industry, understanding and knowing who your major competitors are is crucial to the successful identification and implementation of your firm’s strategy.

When assessing this issue, most of us naturally look outward at our traditional, and even new, market competitors. In short, we try, as best as we can, to compare apples with apples.

That’s why the publication of results from a new survey in yesterday’s Legal Futures, one of the UK’s leading legal news websites, makes for an interesting read. Because, to my mind, understanding and deciphering who your firm’s principal competitor is would seem to  remain a misunderstood issue.

Why do I say this?

Well, in the article Legal Futures (quoting from a recently published market survey) states that:

“more than two-thirds [of London City firms] see other professional services firms as the overwhelming competitive threat among recent entrants to the profession.”

By “other professional services firms“, what they mean is the Big 4 accountants.

While the re-emergence of “other professional services firms” (and for that matter so-called “new law” firms) is concerning, they are currently a long way from being the “overwhelming competitive threat” to law firms.

No, that title belongs to another group much closer to home: your clients.

With the level of work that clients are now taking back in-house, or not bothering to do at all, they are without doubt the “overwhelming competitive threat” to the current law firm business model. And, this is not cyclical but structural.

Crucially, understanding this is of paramount importance if firms wish to survive the next 5, 10, 15 years. Because it reshapes everything we do. How we try and win work. The type of work we are trying to win. And even the nature of the relationship we have with our client.

In the long term it will determine the way we measure and reward. It will dictate how we charge, and it will determine whether we succeed or fail.

And for good measure, here is another thing that is rapidly changing: who the client is can no longer be taken for granted or assumed. Because more often than not, it’s no longer the person you have the working relationship with.

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Is anybody else getting tired of this NewLaw vs BigLaw debate?

Last week saw the latest publication of the Commonwealth Bank’s Legal Market Pulse Report. What was a quarterly report, became half yearly, and would now appear to be annual (a great shame if true as many of us saw this report as an important benchmark of how the industry was tracking).

Anyhow, leaving that aside – and despite some changes to the structure of the report (it seems to be missing growth practice and geographic areas for example – which I loved), it remains an important read for those of us in #Auslaw.

But now a brief rant:- as you would expect of a report researched/undertaken by Beaton (which I understand is the case), it’s almost zealous like in its consideration/debate of so-called ‘NewLaw’ versus ‘BigLaw’ (do a search of the term ‘NewLaw’ and see how many hits you get if you don’t believe me!).

And I don’t get this ongoing fixation.

And yes, I was part of the twitter conversation that saw the birth of the term NewLaw by Eric Chin (who was then at Beaton) and thought it to be an interesting term/concept at the time.

But I’m starting to seriously wonder if we haven’t moved on from all this? If, indeed, once again, we are having the wrong conversation.

So what I want to ask is this:

Shouldn’t we start to have a real discussion about whether or not your firm is ‘full service’ (BigLaw) or ‘specialised’ (NewLaw) – and what that actually means; rather than NewLaw versus BigLaw, with all the inferences that come with that around old ways of doing law versus new ways?

Because I genuinely believe that in a market that is increasingly hard to differentiate in, this is a far more important question.

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In response to Patrick Lamb

Overnight Australian time, Patrick Lamb wrote a post (‘The importance of understanding context.‘) in which he makes several comments on a recent post by me.

I will start by saying that I know Mr Lamb, by reputation at least, and I have very high regard for him. I was thinking about it when deciding whether to write this post this morning and I believe I have been a follower of his blog for about 10 years (could be slightly less, maybe longer).

The following are three brief responding comments I would make to Mr. Lamb’s post:

  1. I strongly believe that any discussion that includes a component that AFAs are cheaper than hourly rates is the wrong discussion. Data-driven or otherwise. Do I want to see data showing me that AFAs are cheaper than hourly rates? Probably not. Why – because it would assume like for like, and the fact is behaviours of lawyers differ under the two structures. And, the only way I can see of getting close to like for like comparables is by asking fee earners under a fixed fee structure to track time – and my own view is even then the statistical data that falls out of that will be tainted and virtually useless for any meaniful discussion. So I’m not really interested as I believe it will lead me – and many others – down a conversation path that I fundamentally believe is the wrong one to be on: which is that AFAs are not a comparable to hourly billing. [as an aside: any conversation I have been involved in which starts with “data suggests AFAs are cheaper than hourly billing” typically ends up being a race to the bottom and rapidly results in a commoditised product.]
  2. I believe a “value equation” is precisely that: value must be experienced by all parties. If the value discussion results in the client believing they are getting great value but the lawyer feeling they are being cheated, then you are going to have a problem. So my own view is that any “value conversation” is not a one-way street and, as with the case with any pricing discussion, lawyers need to know when to walk away from the discussion.
  3. My comment on “if you cannot do AFAs, stick to hourly billing” is somewhat tounge-in-cheek, but has a serious undertone. Value pricing/AFAs are not easy. It takes a particular skill. It needs to be learnt. So if you wake-up one morning and decide you want to do value pricing/AFAs, by all means get help. But, whatever you do, don’t set out on that road without some guidance because it will be a road to ruin – stick to hourly billing (if your clients are letting you) until you have learnt how to price otherwise. And it is also my view that too many lawyers in Australia are failing to understand this and are implementing AFAs that are fundamentally “hourly rates in drag” as Mr John Chisholm has been known to say.

I want to finish this post on what I consider a positive. I wholly agree with the following comment by Mr Lamb – and comments like this are largely why I read his blog:

AFAs can provide great value to lawyers, but only if they change the way they do their work.  The old way is burdened with fat and excess, and it is why clients grew so frustrated with the billable hour.  Second, firms need to decide if customer service is a core value of the firm.  If it is, you find out what is of value to your clients and you figure out how to provide it.  It is an exceptionally rare matter in which, over the duration of a matter, an AFA cannot be used.  The challenge must be to carefully and precisely identify the client’s objectives. Once that is done, a fee to incentivize the accomplishment of those objectives is possible.

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‘Do fixed fees need to be cheaper than hourly rates?’

Earlier this week Corporate Counsel published an article (“What GC Thought Leaders Experiment Is About (Hint: Not Cost)“) by Firoz Dattu and Dan Currell of AdvanceLaw in which they comment on a recent open-letter by 25 GCs [‘GC Thought Leaders Experiment’], which rightly has received a certain amount of industry attention.

Despite indicating that cost is not the primary issue in the project, Data and Currell stated:

“Here are three of the questions we are excited about—and these are just the beginning:

[First]…

[Second]…

Third, flat fees. A natural question about flat fees or other alternatives to the billable hour is whether they are cheaper. You now know that we think this is a half-question (and not the interesting half). The whole question is: do alternative fees work better, all things considered?”

Let’s look at that third question again with highlights by me:

“A natural question about flat fees or other alternatives to the billable hour is whether they are cheaper.”

Actually, that’s a very, very long way from the natural question.

But then we get…:

“The whole question is: do alternative fees work better, all things considered?”

And while that question may seem a lot closer to the answer we seek, it is still – well – the wrong question.

Flat fees, or other alternatives to the billable hour, should not be about whether they are cheaper. In many cases they are more expensive.

Nor, per se, are they about whether they work better (and by that i am unfairly reading “easier”). In some cases they are far more complicated and getting them to work is a real art of communication (that is, if you have scoped the matter and given appropriate thought to LPM, etc).

But, crucially, what alternatives to the billable hour should be about is simple: ‘Do they offer better value?’; To the client? And to the lawyer?

And if they don’t, the simple truth is this: maybe you shouldn’t be using them.

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