Timelessly - Building Professional Firms Without Timesheets

One word that will reinvent how you serve clients

Want to know what that one word is? Here are two easy ways to find out:

1. Go grab your nearest unabridged dictionary. Turn to page one. Start going through each defined word one at a time. You'll get to it eventually. (OK, maybe that’s not so easy.)

2. Go to the LexThink.1 site and vote for my proposed talk, “One Word That Will Reinvent How You Serve Clients.” Just click on the handy "vote" icon (see image).

Voting ends February 24. There are 23 other proposals from a rogue’s gallery of big legal thinkers, and only the top 12 will be selected. Your vote will make a difference.

Then come to the ABA TechShow in Chicago starting March 28. The LexThink.1 program is Wednesday night at 6:30 CDT. You can sign up for free tickets here.

So what is LexThink.1? Well, it’s an evening of very short presentations with a challenging constraint: 20 slides, 18 seconds a slide (equaling six minutes exactly, or 0.1 to you lawyers who still use timesheets). The speaker has no control over the slides, which keep advancing like sands in the hourglass (or something) every 18 seconds. It forces the speakers to keep it brief and pithy, and to leave home all the boring bits. It’s inspired by Japan’s Pecha Kucha Nights, which allows a luxurious 20 seconds for each of the twenty slides. This is its third year; it was previously called "IgniteLaw."

To see an example, here is my talk from last year: "Quantum Leap: How You Will Practice Law in 2019."

No matter which proposals get chosen, it promises to be an amazing event. Hope to see you there. And thanks for the vote!

The Client Revolution is over

Well, not really. In fact, it has a long way to go. Over the past three years, since this blog started, the conversation about replacing the 1919 time-based billing model has snowballed. In many ways, the revolution's initial campaign to discredit the billable hour has been successful. There are now very few people defending hourly billing as an effective and useful practice.

But still, the vast majority of professional-service firms continue to track their time and bill their hours. While many firms pay lip service to so-called alternative billing or alternative fee arrangements, almost none of them have taken a critical step of trashing their timesheets. And until professionals learn to stop keeping track of their time, they will remain trapped inside the burdensome century-old business model.

The very act of keeping track of your time demeans the work that you do. Stopping your clocks and throwing away your timesheets will make your life better.

Until now, The Client Revolution has been geared toward the client-facing issues that go along with billing by the hour. But professionals who already put their clients' interests first justify using the old model by talking about how their clients trust them to bill them fairly and not run up the clock.

But it's not about trust. It's about having a failed business model. And quite frankly, it's about leaving money on the table. Limiting your fees to the number of hours you have available means placing a cap on your income. If you're good at what you do, you'll generally be able to make more money if you price your knowledge instead of billing your hours. Only if you're mediocre does it make sense for you to keep filling in all those point-ones.

So from now on, instead of focusing on the clients and their interests — which most professionals already do — we're going to talk how to improve the business models of professional-knowledge firms. Instead of talking about the Client Revolution, we're going to talk about creating timeless firms.

Welcome to Timelessly.

Timekeeping and fearmongering

Most lawyers agree that timesheets and billable hours are terrible ways to measure value, but they don't know how to do it any other way. But amazingly, even as 2012 approaches, there are still some who actually believe that timesheets are necessary.

Jerry Kowalski, a former big-firm lawyer who now runs a merger-and-acquisition consulting firm, has been beating this drum for quite some time. His latest post of gloom and doom, called "I Know You Hate Keeping Time Sheets, but Even in the New Era You Must Still Do So and Here’s Why," is filled with canards like this:

The simple point is not simply that keeping accurate, detailed and timely time records is not simply the gold standard, it remains the only standard.  Yes, virtually every lawyer abhors the notion of justifying his or her daily existence in twelve minute increments, and, yes, we all now know we sell valuable services not hours, time accurate, detailed and timely record keeping still remains with us.

Nonsense. Keeping "accurate, detailed and timely time records" isn't the only standard for measuring the value that the client places on your services. In fact, it doesn't measure client value at all. All it measures is a tiny portion of the time spent by lawyers solving their clients' problems. I say tiny because it only accounts for the hours spent applying the lawyers' knowledge; it completely ignores the years of study and experience that the lawyers accumulated to garner that knowledge.

For example, according to Kowalski's bio, he practiced law full-time from the late seventies until 1992. I'm sure that near the end of his career, his clients benefited much more from his 15 years of knowledge and experience than from a few hours of casework. But none of his knowledge and experience was reflected on his timesheets. (And don't tell me it was reflected in his billing rate. That's not how BigLaw rates work. They're based on geography, firm size, and years since graduation — not knowledge or experience or skill. Jerry's value to his clients was probably underrepresented.)

The notion that timesheets are the gold standard of value is also belied by the fact that all timekeeping firms frequently write down their lawyers' time. At the end of each month, the billing partner reviews the other lawyers' timesheets in the context of the total job performed for the client. If the result seems high — especially if a junior lawyer spent "too long" on a research issue, or if the outcome was unfavorable for the client — the billing partner writes down the total to some arbitrary amount that feels "fair." But how can this be? Jerry says that the timesheet is the only standard of value for a lawyer's work? If that was true, law firms should never write down hours.

Finally, there's the tired, fearmongering refrain that legal pricing (what Jerry calls "alternative fee arrangements" or "value billing") is somehow illegal. As if. I challenge anyone to find me binding legal authority that mandates hourly billing or prohibits pricing. Kowalski and other critics of pricing often point to the rare case where a court has ruled unfavorably on fixed fees. But in the cases where courts have disallowed or reduced fees, the lawyers acted with questionable ethics and tried to defend unreasonable fees. The New York case Jerry cites actually involved made-up time records.

As for the massive fee award in the Southern Copper case, that fee wasn't based on the attorneys' hours; it was based on the result. The lawyers won a $1.9 billion award. They sought a fee of 22.5%; the court granted them 15%, or $285 million. Doing the math and calling it $35,000 an hour is silly. The plaintiffs didn't hire the lawyers for their time; they hired them for the $1.9 billion.

Clutching the Prohibition Era (1919, to be exact) talisman of the timesheet shows the world that you don't have any idea what your clients are buying. Clients don't buy hours; they buy your knowledge. Try measuring that instead.

And sowing fear about the risks of a timeless pricing model is reminiscent of the opposition to horseless carriages at the turn of the last century — not long before the birth of the billable hour.

(Image from "Vintage hate for automobiles" at 22 Words.)

Update Jerry responds in the comments below, which I greatly appreciate.

Modest billing-rate increases? As if

If you see lawyers with their arms in slings, it's probably from too much patting themselves on their backs. According to a recent survey in the National Law Journal (subscription required), law firms raised their rates in 2011 by "only" 4.4 percent. The story now is that this is the third year of "modest" increases.

From the National Law Journal:

For the third year in a row, law firms showed restraint with hourly rate increases, inching up at a rate only slightly higher than inflation in many cases. The average firmwide billing rate, which combines partner and associate rates, increased by 4.4 percent during 2011, according to The National Law Journal's annual Billing survey. That followed on the heels of a 2.7 percent increase in 2010 and a 2.5 percent increase in 2009 — all of which paled in comparison to the go-go, pre­recession days when firms could charge between 6 and 8 percent more each year.

via www.law.com

But if you get out the trusty slide rule, you'll see that rates have gone up fully 10 percent since the start of 2009. That's 10 percent during a massive recession. How many clients out there feel like their legal services are worth 10 percent more than they were three years ago?

Many firms had record revenues this year, all the while paying lip service to clients' "being in the driver's seat now." Let's not get ahead of ourselves. Just because firms aren't raising rates by 8 percent doesn't mean that clients are now thrilled.

11 innings vs. 11 years

Longtime readers know that I'm a big Boston Red Sox fan. So whenever I can use the Sox to make a point here, I will. Whatever works.

The Red Sox were supposed to be the team to beat this season. Almost all the pundits predicted them to win the American League pennant this year, given their impressive offseason performance in rebuilding the bullpen and acquiring superstars Adrian Gonzalez and Carl Crawford.

But things didn't start out so well. The team stumbled out of the gate, beginning the campaign 0–6 and 2–11. No team that has started out so poorly has ever even made the playoffs.

But over the past month, the Sox have turned it around. They've won 11 of their last 13, including the last two where they scored 14 runs in each game. They're now in a virtual tie for first place in the AL East (with the hated Yankees).

The Boston Globe's excellent beat reporter Peter Abraham called attention to starter Alfredo Aceves, who replaced injured Daisuke Matsuzaka in the rotation. In his last two games (11 innings), he's only given up two earned runs:

To some, Aceves may seem like an overnight sensation given that this is first season in Boston.

But Aceves, 28, has been around. He first signed with the Blue Jays when he was 19 then spent five seasons in the Mexican League before being signed by the Yankees. After three seasons in New York, he landed in Boston.

“It’s a lot of work, it’s not only two starts. I’ve been working in baseball for 11 years,” he said. “It’s not only two starts. You can see it like that; I don’t see it like that.”

Aceves makes an excellent point. He's saying that it's a mistake to just look at his last two outings and value him on the basis of those 11 innings, instead of on the 11 years of work that got him to this point.

And this is exactly the mistake that lawyers and other professionals make when they bill their work by the hour. In doing so, they're asking their clients to value you only them for the work they just did, rather than for the years of experience and knowledge that enabled them to do that work. If you're only charging for the past few hours, you're leaving money on the table because you can't charge for the value of your accumulated knowledge — your true value.

Quantum leap: How you will practice law in 2019

Here's the video from my IgniteLaw 2011 presentation at last month's ABA TechShow in Chicago. Thanks again to everyone who voted for the proposal.

The event was fantastic, with a terrific lineup of boldfaced names from the blawgosphere. The rules were simple: 20 slides, 18 seconds a slide, and no way to control their relentless advance. It was terrifying and exhilarating. As someone who does a lot of public speaking, I found it far more difficult than preparing for a 90-minute speech. Most of the other speakers had the same reaction.

Here's the summary:

In 2019, your law practice will use cloud computing, a paperless office, and the iPad 10. But those won't be the biggest changes to how you practice law. Instead, the biggest difference will be in the way you value and price what you sell. And before you can make that change, you have to understand what it is you sell. Spoiler alert: It ain't "legal services," and it sure as hell ain't "hours" or "time." Instead, lawyers sell knowledge. How you value and price that knowledge will be the greatest change in your 2019 practice (before you hop in your flying car and head to court).

Here's the video. It's just six minutes, although it felt like 60 seconds at the time. Enjoy!

The other 11 talks can be found here on YouTube.

Alternative fees kill major law firm. Or not

One of the largest firms in the country, Howrey LLP, voted to dissolve itself yesterday. In an interview with The Wall Street Journal yesterday, the firm’s final CEO Bob Ruyak blamed Howrey’s demise on “alternative fees.” (You know how I feel about that ridiculous term.) He also blamed discovery vendors (those vicious law-firm assassins), impatient partners, and, of course, The Economy. Funnily enough, he failed to blame a creaky, outdated business model or, you know, himself for the collapse of the firm. But trust me when I tell you that the story going forward will be how those dastardly alternative fees killed Howrey dead.

As if.

I mean, give me a break. It’s not as if Howrey was on the cutting of edge of trying to get rid of the billable hour. In a nationwide survey by the National Law Journal showing larger firms’ use of so-called alternative billing, Howrey declined to participate. (See “The numbers behind the lip service: Part One.”) In an article on their own website, their Northern California managing partner Henry Bunsow whinged about how hard it was to do litigation without the billable hour, and doubting whether clients really wanted it:

Howrey bills about a third of its work with alternative fees and is trying to grow that number. But he said it is a somewhat difficult task because “in the highly important types of cases, [clients] probably don’t want a fixed fee arrangement.”



Bunsow’s observation is one echoed by many: Nonbillable-hour fee arrangements often cease to be effective in major litigation, especially in matters that go to trial.

(My emphasis.) Not exactly a revolutionary.

In a November 2010 article in The American Lawyer, “The Story Behind Howrey's Very Bad Year,” writer Julie Triedman explained the problems Howrey had in pricing its services:

Over the past couple of years, notes Ruyak, clients have insisted on more alternative billing agreements, success fees, and extended payment plans, making cash flow lumpier, financial reports more confusing, and projections less accurate. In 2008, some $35 million in contingency fees helped drive profits to record highs, but last year, notes Ruyak, the firm had negligible contingency revenue and was plagued by “poor pricing.” Last year’s dip “was a big swing,” Ruyak says. “I understand many partners’ psychological anxiety. But I can’t really do a whole lot about that.”

(Wow, way to channel your inner Shackleton.) Triedman also says that when Howrey was trying to tweak its old business model, “some experienced and independent advisers would have come in handy.”

In a May 2010 American Lawyer article, which discussed how fluctuations in Howrey’s contingency fees affected its bottom line, Ruyak conceded that they didn’t really know what they were doing:

Ruyak says that even with limits in place and years of experience with these types of billing arrangements, the firm is still in the process of “figuring out how to do them well.”

So we’re starting to see the real problem here. It’s not that “alternative fees” killed Howrey; it’s that Howrey didn’t know how to change their business model and price the knowledge that was their stock-in-trade. And you really can’t blame them. The billable-hour model was invented in 1919, and big firms like Howrey have known nothing else. As Triedman pointed out, some experienced advisers would have come in handy.

Let me put it to you another way: When I first played golf, I sucked at it. But I didn’t blame golf. And over the years, if I tried a different approach to my swing and it didn’t work well right away, I didn’t decide that the new approach was bad. Just that I hadn’t figured it out yet. (And never actually did.)

When it came to alternative fees, Howrey was a duffer.

Changing a hundred-year-old business model isn’t easy, but done right, it can work. And I’m here to help.

I take no pleasure in yet another BigLaw firm shutting down. A lot of excellent lawyers are now out of work. And changing the way you've always practiced is scary. But just because the change is scary and difficult doesn't mean you shouldn't do it.

If Howrey had learned how to price, it would be atop the Am Law 100 list today, instead of being its latest casualty.

What do you think? Do you think “alternative fees” killed Howrey? Or that video killed the radio star? Share your thoughts in the comments.

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Ruyak’s finger-pointing interview is unfortunately behind Rupert Murdoch’s paywall, but the ever-awesome Ashby Jones has kindly pulled back the curtain to show some of the better bits on the WSJ Law Blog. (See “CEO Ruyak Partly Blames Contingency-Fees, Discovery Vendors, for Howrey’s Fall” and “What Else Happened to Howrey? Here’s More From CEO Ruyak.”) And see the excellent continuing Howrey coverage over at one of my many other jobs, Above the Law.

Efficiency, effectiveness, and baseball

Pitchers and catchers report tomorrow.

If there's anything that can get a New Englander through another brutal winter, it's the phrase "pitchers and catchers report." Even though the season doesn't start for another 48 days, the fact that baseball activities are beginning in Florida and Arizona tells us that we've almost made it.

While I'm here pondering baseball, the debate continues in legal circles (and other professional circles, too) about "alternative fees" versus hourly billing. And it's good to have the debate, since lawyers have quietly plodded along with this business model since it was invented in 1919. Debate clears the way for change. But with that said, many who claim to be advocating for change are actually riding off in the wrong direction. They may mean well, but they have overlooked the big-picture problems that are crippling the profession. You can spot them by some of their buzzwords.

• project management
• Six Sigma
• Lean Six Sigma
• Big-Boned Six Sigma (I may have made that up)
• fee caps
• hybrid fees
• risk collars
• blended rates
• timesheets (to see if their jobs are "profitable")
• realization rates

and my personal favorite:

• efficiency

Wait ... what? How can efficiency be a bad thing? Don't clients want their lawyers to be efficient?

Newsflash, people. Clients don't give a flying something through a rolling donut about whether their lawyers are efficient. (Unless they bill by the hour; then it's all about efficiency.) No: Clients want their lawyers to be effective. Am I quibbling about words here? Of course I am; I'm a lawyer. Words are my hammers and nails.

According to the New Oxford American Dictionary (the only US dictionary worth a damn), efficient means "achieving maximum productivity with minimum wasted effort or expense." Effective means "successful in producing a desired or intended result." Which do you think clients care more about?

Look a little deeper at NOAD's usage entry at effective, where it says that the words are not interchangeable:

Use effective when you want to describe something that produces a definite effect or result ….

When applied to people, efficient means capable or competent (: an efficient homemaker) and places less emphasis on the achievement of results and more on the skills involved.

What I am not saying is that lawyers and other professionals shouldn't try to work efficiently. Hell, if I could train a service monkey to type this for me instead of bashing it out with my two clumsy index fingers, my Blog-Writing Project-Management Efficiency Index would go up an entire Sigma. (Yeah, I have no idea what that sentence means either.) But that would have absolutely zero impact on whatever (questionable) value you the reader get from reading this post. The value is in the result, not the work. Not in how efficient I was, but how effective I was.

What does this have to do with baseball? Longtime readers know that I'm a big Red Sox fan. And they wouldn't be surprised to know that I'm very excited about the 2011 season. The Sox made a huge trade for Adrian Gonzalez, sending prospects to the San Diego Padres for the star first baseman with a swing built for Fenway. They also snagged the top free agent on the market, Carl Crawford. And they also rebuilt their bullpen, a major weakness last season. Because of all this spending, the Sox will sport one of the highest payrolls in baseball, and will be one of only a few teams subject to the league's payroll tax.

If I cared about efficiency, I'd be pretty upset about this profligate spending. But all I care about it is winning, and I know that the team has put itself in a strong position to do just that.

Last season, the most efficient team in baseball — in terms of payroll dollars per win — was the San Diego Padres. They led the league in efficiency, paying a mere $419,000 per win. (Compare that to the Yankees, who shelled out $2.17 million for each W.) The Padres finished in second place in the NL West, outside of the playoffs. Think their fans are happy with the team's efficiency title? Think again.

People who worship at the altar of efficiency, who prostrate themselves before the idols of project management and Six Sigma Yellow Belts, who speak volumes on efficiency and nothing on effectiveness — they're focusing on the wrong things. They're looking at the work, not the result. They're paying attention to the lawyers, not the clients.

Unlike baseball fans, they're not focused on the wins.

There are only 2 types of law-firm fees

If I read another article about "alternative fee arrangements" or hear of another two-day seminar explaining all the various and complicated AFAs out there, I'm going to try to swallow my tongue. (Disclaimer: This is of course hyperbole. I'm not going to do that. And don't you try it either, just to see if you can do it. You can't. End of disclaimer.)

Lawyers beholden to the Prohibition Era model of billing and the consultants who court them are desperately trying to show how complex and scary AFAs are. The clients and other lawyers who read these articles and go to these seminars walk away shaking their heads and surrender to sticking with the old billable-hour model. Maybe with a discounted rate, please.

But I'm here to tell you that it is not at all complicated. In fact, if you have seven seconds, I can tell you about all the different types of law-firm fees. Ready?

There are two:

1. Time-based pricing
2. Solution-based pricing

That is all.

No, really. It's no more complicated than that. Time-based pricing is what nearly every law firm does, where the price of the legal services depends on the time spent doing the work and the rate of the "timekeeper."

(In truth, I'm being generous here, because it's not really "pricing" at all. Pricing is when you tell the client what something will cost them before they buy it; time-based law firms don't do that at all.)

Under the time-based-pricing model, invented in 1919, every activity is worth the same amount on a minute-by-minute (or really, six-minute-by-six-minute) basis, regardless of how important the task is. With few exceptions, every client is charged the same per hour, regardless of their differing needs. The only measurement of value is the amount of sand that has dropped in the hourglass.

Solution-based pricing is when a law firm sets a price based on the value of the solution to the client. It's that simple. I'm not saying it's easy, because it's not. It takes a lot of thought and preparation and understanding and empathy and experience to figure out how much this particular client values this particular solution at this particular moment. But that's OK because we're professional knowledge workers, not pieceworkers in a pin factory.

Clients — simple question: Do you want the price of your legal work to be based on the time lawyers spent, or on the value you place on the solution? It's one or the other.

(See, I just spared you that two-day seminar on AFAs. You're welcome.)

What do you think? Can you come up with any other methods? Bet you can't. But give it a shot in the comments. (I particularly look forward to time-based lawyers protesting about how hourly billing is a kind of solution-based pricing. Good luck with that.)

Hourly billing is dead. Ish.

It just doesn't know it yet. Turns out, a lot of lawyers don't know it yet, either.

New Year's Day marked the second anniversary of The Client Revolution. During the past two years, we've written and read many, many words about the death of the billable hour. And yet, despite the countless posts and articles on blogs and in magazines and newspapers, despite the many seminars and conferences and panel discussions, despite all the talk of the end of hourly billing, it's not dead yet. Not quite.

So what's keeping it alive?

Fear.

Lawyers and law firms fear that if they stop keeping timesheets and stop tracking hours, they will make less money than they do billing hourly. And clients, especially in-house lawyers at larger companies, fear that without reviewing detailed time entries in stupefying legal invoices, they won't know if they're getting ripped off.

Despite this fear, both groups continue to express interest in so-called alternative billing. (See why I hate "alternative billing" — the term, not the concept.) Organizations are holding two-day seminars on all the different types of "alternative fee arrangements" (the faddish term of the moment). The problem is that people leave those seminars shaking their heads and muttering how complicated it all is. And then they go back to billing or being billed by the hour.

What The Client Revolution is all about is that pricing legal services is not at all complicated. It's simple. It can be difficult, I'll give you that. But it is simple. Here is the secret to pricing in a single sentence:

Figure out the value to your client of solving their problem, then set the price as close to that value as you can without going over.

Simple. But hard.

In 2011, the third year of the Client Revolution, I'm going try to make it less hard for lawyers and clients.

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P.S. Over the past two years, we've had over 50,000 pageviews. My sincere thanks to all of you: readers, subscribers, commenters, and supporters. If you don't yet subscribe to The Client Revolution, please sign up now. I've set the price to, uh, free.