Timelessly - Building Professional Firms Without Timesheets

Competing by raising prices

Good article in Monday's Wall Street Journal about pricing strategy, something most lawyers never think about. The main premise is that most businesses shouldn't be competing on price — that is, by lowering prices. Instead, if you turn out a high-performance product or service, you should be able to charge a premium for that. The article is called, aptly, "Raise Your Prices!" and is written by Harvard Business School professors Frank Cespedes and Benson Shapiro and by consultant Elliot Ross. And despite my natural aversion to Harvard and to titles with exclamation points, it's a good article and one that all lawyers should read. Strangely, it is not (currently) hidden behind Rupert Murdoch's paywall, so you don't need a subscription to read it. (Maybe the Journal failed to take the article's advice.)

There's also an excellent sidebar piece, "Seven Mistakes of Poor Pricers," which briefly describes many of the same objections lawyers give me when I talk about Open Pricing. Read it, and see if any of it sounds familiar to you (such as "Cost-based pricing is easier to explain" and "Everyone else prices it that way").

Here's one of the money quotes (ignore my pun) from the main article on the benefits or pricing based on performance:

By competing on performance instead of price, you shift the battle to where your company's strengths lie—in the ability to deliver unique benefits. So-called performance pricers are adept at three core activities: identifying where they can do a superior job of meeting customers' needs and preferences; shaping their products and their business to dominate these segments; and managing cost and price in those areas to maximize profits.

But wait, you say. I thought all your talk about Open Pricing or fixed fees or value pricing was about saving the clients money? Why now all the talk about raising prices? My clients aren't going to tolerate that!

It's oversimplifying things to say that value pricing is about saving clients money. Instead, and much more importantly, it's about aligning your prices with the value the clients place on your services. Without that alignment, there is enormous waste and client frustration. Plus, the perverse incentives and unintended consequences of hourly billing artificially inflate client costs. So yes, you can raise prices for premium service and still save clients money.

Bottom line: clients will pay for value. If you're constantly discounting your fees, what does that say about the value you provide?

Private-practice lawyers: What do you think? Is there something you're so good at that you can command a premium? And in-house counsel: Are you willing to pay a premium for higher-quality service? Sound off in the comments.

In-house help: How to save 20% on your outside-counsel spend

Listen up, in-house lawyers: There are three — and only three — ways to lower your spending on outside counsel:

1. Use less outside counsel.
2. Use lesser outside counsel.
3. Use open-price outside counsel.

I covered these in more detail in a post last year: "The only three ways to lower outside legal spending." And if you're a new reader, open-price lawyering is how I describe fixed fees — that is, the opposite of hourly billing's hidden prices. (See "An alternative to "alternative billing.")

Basically, if you want to save 20% on your outside-counsel spending, you can try to decrease your usage of outside counsel by 20%. But this usually means increasing your in-house-counsel work, which doesn't make your life any easier. Or instead of less outside counsel, you can use lesser outside counsel — discount shops who can't charge as much as the elite firms. But you usually get what you pay for.

Or you can save 20% (or even 30%) by going with a firm that uses open pricing. By basing their prices on the client's value on solving a problem and by setting those prices up front, open-price firms work more effectively without all the waste caused by hourly billing and its related systemic problems.

How much savings are we talking about here? Well, according to Hildebrandt's 2009 Law Department Survey of 231 companies, spending on outside counsel averaged 0.22% of total revenue. But that survey is heavily weighted toward Fortune 500 companies, where legal expenses are a much smaller percentage of revenue. A more realistic calculation for "normal"-sized companies is total legal expenses averages about 1.2% of revenue, and outside-counsel expenses make up 60% of that number.

How does that work out for your company? Figure it out for yourself. Embedded below is a minispreadsheet from the geniuses at InstaCalc. Just type in your company's revenue in the first cell. Feel free to abbreviate with m (million) or b (billion) or even k (thousand). You'll get an instant answer for the amount of savings — both 20% and 30% ("even better"). You'll quickly see that we're talking about real money.

[Note to email and feed readers: I don't know if this thingy will work for you. If it doesn't, go to the original post online here.]

Play around with it a bit, and see how much you can save with open pricing. Then call an open-pricing firm and start enjoying that savings. Having trouble finding one? Call me, and I'll help you find one.

• • •

A note on the title of this post: spend is a verb, not a noun. But current corporate jargon often involves nominalizing verbs, like using invite instead of invitation. ("Thanks for the invite.") We end up talking this way because it becomes kind of an insider's code. (See "Abandoning jargon 'at a high rate of speed'" over at Gruntled Employees.) Outside of corporatespeak, people would call it "spending." We should too.

Just saying.

Blawg Review #246

The best way to predict the future is to invent it.

— Alan Kay, computer scientist, 1971

The future is already here — it's just not evenly distributed.

— William Gibson, author, 2003

In gathering the best and the brightest from the blawgosphere for this first full week of the 2010s, I thought I'd look at them through the lens of a crystal ball. Many of us are wondering what this new decade will be like, especially in the world of the law. First, though, let's talk about what this decade will be called.

A decade with no name

Look, we just went through a decade that had no name, let alone a cool one. No Roaring Twenties, no Gay Nineties (the 1890s). Even the decades that lacked ready-made adjectives could easily summon up images and memories: the eighties (bad hair), the sixties (bad hair, but in a different way), the seventies (bad lapels), or the nineties (the 1990s; nothing but irony). And don't talk to me about calling it the "Aughts" — what are we, soccer fans now? No, we're stuck with calling them "the two thousands," which stinks because you can't tell if you're referring to the decade or the century. (Kind of like my problem with calling law blogs blawgs, because you can't tell the difference when you're saying blog or blawg aloud. But for today, "Blawg Review" it is.)

First prediction: this decade will be called the "twenty tens" (or the "tens," for short).

Not "teens," not "tweens," not "tennies," or anything silly like that. And for Pete's sake, quit with the "two thousand and ..." business. People, especially lawyers (who generally are people, though some would argue), tend to clutter their speech with extra words. Don't. This year is "twenty ten," not "two thousand and ten." Check out this website devoted to this cause: twentynot2000.com. Also see this discussion at Wikipedia, and this article at TechCrunch.

OK. Now that we've got that settled, what's the law going to look like in the tens?

Killable hours

Second prediction, and this one's a bit of a layup for me, and will come as a surprise to no one, given the source: The billable hour will die die die. If it survives in any form at all by the end of the tens, it will be at the kind of fringe firms that will cause you to sadly shake your head and maybe cross to the other side of the street.

But don't just take my word on it. Over the past year, the blawgosphere and oldstyle-media traffic on the topic has taken on the shape of a hockey-stick graph, without all those embarrassing Climategate emails and tree-ring proxies. For example, legal-marketing guru Larry Bodine's Law Marketing Blog covers Comcast's recent insistence that its lawyers stop billing them hourly; Ashby Jones at The Wall Street Journal Law Blog also has the story.

Even more novel, Matt Homann recommends that we let our clients set their own price. Matt, whose name is synonymous with innovation, writes at the [non]billable hour that if lawyers focus on value to their clients, rather than their costs (their time), their clients will reward them. Across the pond, Michael Scutt at Jobsworth asks "Is it all about price?" He answers his own question, writing that lawyers need to be salespeople and recognize and apply his "single sales principle": your client's compelling need plus your credible solution plus your perceived value equals a sale.

Speaking of value, Ed Kless of the visionary Verasage Institute deftly shows how price has nothing to do with cost. His post has a graph showing that HP black ink is far more expensive than bottled water, which is in turn far more expensive than crude oil.

Jason Mendelson's Musings discusses what the failed hourly billing system has wrought — namely, clients who demand ever-increasing discounts and clients who don't pay. These are just symptoms of the problem, of course. Another symptom is that the billable-hour system pays lawyers more if they do more work, rather than enough work. Ron Friedmann discusses "good enough" at Strategic Legal Technology. But let's not get too focused on counting and measuring and reporting hours and documents and other output. The Wall Street Journal this week wrote approvingly about firms' having electronic dashboards to monitor their hours. The article's behind a paywall, but we discussed it here — disapprovingly.

Lawyer wannabes

In Ron's post, he mentions a New York Times piece written by two states' chief justices (NH and CA) that calls for the "unbundling" of legal services — namely, more do-it-yourself work by would-be clients. Revolutionary legal-learning genius Susan Cartier Liebel covers this in more detail at her Build A Solo Practice @ SPU. It all comes down to what your clients need. Third prediction: this DIY lawyering will becoming a growing trend. Look at WebMD. Lawyers have to stop thinking of themselves as special, as members of a priestly caste.

As our clients dabble with being do-it-yourself lawyers, we need to become more entrepreneurial. Big-hearted and big-minded Tim Baran of uMCLE talks about this killer app of a personality trait. Over at Wired GC, John Wallbillich explains how law firms need to look at their business models right now, before it's too late.

Client says what?

You can tell from the title of this blog that it's supposed to be focused on clients. Similarly, Dan Hull's ecletic and passionate What About Clients? reminds us to always ask that question (except when it's called "What About Paris?"; I haven't figured that out). The current post (by Holden Oliver) admonishes lawyers to get over themselves and act like professionals ... focused on clients. Likewise, the always-inspiring Carolyn Elefant tells us at My Shingle to see our clients as our new partners, and she does it convincingly without irony or cliché.

Also sidestepping the dangers of an overused phrase, change agent and quixotic Toronto Blue Jays fan Jordan Furlong explains at Law 21 what it really means to be a "trusted advisor." Jordan makes the fourth prediction: that lawyers will be competing with other service providers for clients' dollars (even Canadian ones), and that our lawyerly sense of service and trustworthiness will be competitive advantages.

Over at Legal Ease Blog, Allison Shields warns lawyers to be specific, meaningful, and realistic in setting goals for the new year. Heather Milligan at Legal Watercooler advocates a daily resolution for marketing over a yearly one. And the musically clever Jared Correia over at Mass. LOMAP instructs lawyers to resolve to maintain client contact. It sounds so simple, and yet we all end up letting it slip.

Benched

This past year has been brutal on associates at firms big and small, with nearly 5,000 reported layoffs. Law Shucks has done an incredible job of basically becoming the National Bureau of Economic Research (in a good way) when it comes to law firms, who are usually stingy with their information. Fifth prediction: Law Shucks will become the new NALP (also in a good way). And here's what the incomparable Elie Mystal at Above the Law has to say about the old NALP:

I don’t know. Increasingly, I’m of the belief that the old system just needs to be blown up and a new one should be built from scratch. How can a firm make a realistic hiring decision nearly two years in advance based on one year of law school? How can a law student make an informed choice when firms straight-up lie to them?

Elie is a wise, funny man. And speaking of funny men and making realistic hiring decisions years in advance, how's NBC's 2004 decision to hire Conan O'Brien to host "The Tonight Show" in five years look now? Does the word "d'oh" mean anything to you? Here's some advice, for TV networks and law firms alike: hire people when you need them, not when you think you might need them in a few years.

All these layoffs have had many unforeseen consquences, such as diminishing participation in lawyers' sports leagues. The Am Law Daily reports that some basketball and softball leagues are down as much as 30 percent since last year. Sixth prediction: Participation in laid-off lawyers' leagues will continue to rise.

Don't weep too much for laid-off associates. As Larry Ribstein at Ideoblog writes, lawyers are paid too much. They're also paid too little.

Don't say "pursuant to"

If we're looking into reinventing the legal business, we should spend some time rethinking how we write. Lawyers use words like carpenters use hammers and nails. Except that they tend to use too many nails, and the nails are often fancy, overpriced, weak, feckless, and pompous (OK, maybe I went too far with the nail metaphor at "pompous"). Mister Thorne at Set in Style explains how lawyers are authors, and like all authors, need editors. If you care about writing, you should be reading Mister Thorne. (I swear he's the only person I call "Mister.") Over at Feminist Law Professors, Ann Bartow offers some hysterical media examples of why every writer needs a good editor. ("I never thought to look in the sandwich.") Meanwhile, The Namby-Pamby, Attorney at Law, shows that even potty-mouthed plain English is better and more readable than legalese. It's an important lesson, motherf@*&!%.

Social (media) security

It used to be that lawyers just had to write briefs, memos, and letters. Then in the nineties (the ironic ones, not the gay ones), lawyers started writing emails. Now, social media has opened up a whole new world of words for lawyers. And pictures and videos too. But lawyers are conservative, wedded to tradition and bound by precedent. Turns out that lawyers have been a little slow in embracing Web 2.0. Award-winning blogger Robert Ambrogi notes at Legal Blog Watch that only 29 of the Am Law 100 firms have vaguely active Twitter accounts, and only nine of them tweet regularly. Seventh prediction: Law firms will be dragged kicking and screaming into Twitterville. Not being on Twitter in the tens will be like not being in Martindale-Hubbell in the nineties (ironic ones). And still being in Martindale in the tens will be like being booked as a guest on "The Jay Leno Show" ... at ten o'clock. (Actually, the new Martindale is really LinkedIn, where you absolutely have to be, with a complete profile and headshot. Do it now. I'll wait. Mine's here.)

Molly DiBianca at Delaware Employment Law Blog lists her three principles for being a good social-media citizen: community, conversation, and transparency. Similarly, pioneering Twitter interviewer Lance Godard of 22 Tweets says that social media is all about connecting, contributing, and community. Check out his slideshow on social media here.

The brilliant Michelle Golden at Golden Practices wants to make sure that we're not turning people off with negative postings and status updates. Stephen Seckler at Counsel to Counsel advises that social media has to be a part of a firm's marketing plan. He's right. But Twittering lawyer extraordinaire Adrian Dayton at Marketing Strategy and the Law warns that Twitter is not a game to see who can get the most followers; they have no cash value. If they did, Adrian would be one of the wealthiest lawyers on Twitter.

The blawgerati

Lawyers have been somewhat more social-media savvy when it comes to blawgs, as you can see from all these excellent links. Besides Blawg Review, there are many other sources for aggregated links. The Brits are trying their own new version of Blawg Review with UK Lawyers Blog of Blogs, with the first edition hosted by Michael Scuff (see above). The ABA has a good collection (by Joshua Poje) with the Practice Management Advisors blog roundup. Blogging in-house lawyer Colin Samuels has what he calls "A Round Tuit" at Infamy or Praise. A terrific link collector, Colin is also a "sherpa" for Blawg Review. Walter Olson at Overlawyered, the original law blogger (since 1999, which makes him the Homer — as in Odyssey, not Simpson — of law blogging), always has a great roundup of legal news that will often make you spit-take your coffee.

Lawyers can provide a great clearinghouse for information. Conveniently named Ernie the Attorney (what would his parents have called him if he had been destined to be a plumber?) has a terrific post telling us his favorite sources for information.

Of course, not all law blogs are created equal. Social-media-for-lawyers guru Kevin O'Keefe, who writes Real Lawyers Have Blogs, takes issue with the so-called blogs that West Publishing–owned FindLaw puts out. As Kevin shows, these are not real blogs posts, but rather search-engine-optimized ads for its lawyer-directory service posing as actual content. In an indirectly related story, knowledge-management expert Greg Lambert of 3 Geeks and a Law Blog reports on how West has laid off a third of its law-library-relations team. Eighth prediction: The traditional providers of legal information — now freely available on the Web — are headed the way of the billable hour: West, Lexis, Martindale-Hubbell, and others. Their time has passed. They could save themselves if they could get ahead of this wave, but like newspapers and video stores, they're showing no sign of doing so. Already, Google is starting to make free online legal research available. Rick Georges over at Futurelawyer argues that law-book publishers are in the same kind of danger from e-books. Bruce MacEwen, who writes the always-excellent Adam Smith, Esq., boldly predicts which industries will survive the digitalization of the tens before making his Cassandran warning for our little industry.

There's an app for that (of course)

Soon it won't be enough for lawyers and law firms to have a website, a blog, a Twitter presence, a LinkedIn listing, and maybe a Facebook fan page. You're also going to have your own iPhone app. Jeff Richardson at iPhone J.D. shows how a couple of firms are already doing it. At last week's Consumer Electronics Show, according to tech blog Cult of Mac, a panel said that businesses must have a mobile app or "they don't exist." As for the iPhone itself, Enrico Schaefer at The Greatest American Lawyer has just gotten his own, and is declaring the BlackBerry platform dead for lawyers.

Gerry Riskin at Amazing Firms, Amazing Practices wonders whether we'll soon be delivering our marketing materials on a slatelike device. The video, which is a prototype demonstration of a fake but awesome slate, is worth a look ... at least until two weeks from now, when Steve Jobs (as rumored) introduces the Apple slate. Ninth prediction: He will, and it will completely change the way we interact with media.

R-E-S-P-E- ... aw, you can spell it yourself

One final thought, and then a final prediction. There is a theme in many of these posts, and while it's not always explicit, it's found in the best advice of these wonderful blawgers. It's this: treat people with respect. Respect for a client that goes with giving them an agreed-upon price — not a rate — before the work is done. Respect for different types of clients and what their needs are. Respect for associates to whom you promised jobs. Respect for readers of your written words, who have limited time and attention to devote to what you have to say. Respect for members of the social-media community that we're increasingly becoming a part of. And respect for people who are adapting to the forces of change in the new decade.

My last link is to our sister blog, Gruntled Employees, which discusses an interview with an airline executive who understood about respect: "If you treat me with respect, I'll do more for you." Seems like a fair trade.

And our last prediction, giving us ten for the tens: The Red Sox will win the 2010 World Series. They might have gotten a little weaker offensively, but it's a cardinal law of baseball that pitching and defense win championships.

Enjoy all these posts. Shepherd out.

• • •

Blawg Review has information about next week's host, and instructions how to get your blawg posts reviewed in upcoming issues.

Why law firms should be treated like pizza joints

Less than a mile from my house, just over the town line, is the village of Wellesley Lower Falls. It's not quite as quaint as it sounds. Basically, it's a quarter-mile strip of fairly busy road (Route 16) right by the Charles River. There are maybe a dozen retail establishments on this quarter mile, and five of them are pizza joints.

Now despite what Mel Brooks has said about pizza, you might think that's a lot of pizza for a small space. And you're probably right. First there's Wellesley House of Pizza. Around the corner is Mark's Pizza and Subs. And just up the street half a block is Peter's Pizza. All of these are the quintessential New England–style Greek pizza that you would find at any one of hundreds of pizza shops in Massachusetts. Recently, a fourth store opened up, aspirationally named Wellesley North End Pizza. (The North End is Boston's Little Italy.) And across the street is Papa Razzi, which is a more-upscale sit-down Italian restaurant, but which also sells pizza that you can order out.

It's a safe bet that we have more than enough pizza choices in this quarter-mile strip, and it's a also a safe bet that one or more of these stores will not survive the Wellesley Lower Falls Pizza Wars. But in the meantime, all this pizza competition is great for the citizens of Wellesley and neighboring Newton Lower Falls. These pizza peddlers know that we have five choices of where to spend our pizza dollars. And they know they must compete for our business. And that's a good thing.

Some will open on Sundays, knowing that people actually eat on Sundays. (Actually, all of them do except Mark's. Which is right next to Taylor Rental Center, which is also closed on Sunday. Because no one does home projects on Sunday, right? Does the word "duh" mean anything to you, fellas?) Some of them will deliver. Some of them will offer breakfast foods (because that's what I think when I think about breakfast — let's go to the pizza place). And some may compete on price.

All this competition means more choices for my family, and a more-motivated group of pizzamakers to try to win and keep my business.

Why on earth would I want to limit this? Why would I want to discourage these pizzerias from working harder to get my business? I mean, other than having to keep five menus in my kitchen drawer and five speed dials on my iPhone, how does having choices and competition hurt me?

Now it's certainly true that people develop favorites. Maybe your daughters don't like the sauce at one place, and only like the crust at another. Maybe you are devoted fans of Mark's (unless you really need a pie on a Sunday). You might go there all the time.

But you would never formally limit yourself to one pizza joint. Or even a couple.

You would never make an official list of your Preferred Pizza Providers.

And yet.

And yet corporate law departments do this all the time. They set up preferred-provider lists of outside law firms. Especially at huge companies. They set up lists of preferred providers and then they make a PowerPoint chart that shows how they've cut the number of outside law firms they use from 325 to 115. Nice big downward-sloping line. Mmmmm ... efficiency. And the bean counters hear the magic word — cutting — and they think that's a good thing. You know, like cutting the number of lifeboats on White Star cruises.

Last spring, Microsoft made news by revealing that it had dropped K&L Gates from its preferred-provider list. (Why is this news? Because the eponymous Gates in the firm name is Bill's dad, Bill Gates Sr.) Here's what Microsoft had to say about its PPL, as reported by The AmLaw Daily:

"We have had a preferred provider program in place for several years to consolidate a portion of our legal work and manage our legal costs efficiently," Microsoft spokesman David Bowermaster said in a statement. "We recently decided to refresh the program. We solicited competitive bids from a number of firms and conducted an extensive review. That led to a selection of ten firms across the country."

Maybe having a PPL allows a law department to "manage its legal costs efficiently." But it also ensures that it has fewer options to choose from. It means that the anointed PPL firms don't have to try as hard to keep the company's business. Sure, you can get kicked off a PPL, like Bill's dad's firm was. But since it takes a pretty involved process to create the list, as the Microsoft flack said, once you're on the list you're more likely to stay on.

For me, I don't see any reason to tell one or two of the local pizzerias that they are on my preferred-pizza-provider list. I'd rather have them continue to compete for my business and strive to improve their offerings. Maybe it's less efficient to deal with five menus and five speed dials, but I'll make that sacrifice in favor of having more choices for quality pizza.

Whose price is it anyway?

Think about it: Have you ever gone into a shopping mall and found a storekeeper asking you what something was worth?

"I'll take this one," you say. "What do I owe you?"

"I don't really know, sir. There are a lot of variables. What do you think? How do you think we should price this?"

Absurd, right?

Yet in my many conversations about fixed-price lawyering and law-firm value, one question keeps coming up: Who should lead the way to fixing the broken system?

Law-firm lawyers say that change has to be initiated by the clients themselves, by in-house counsel. Tell us what you want, the firms plead. Tell us how you want us to bill you, and then we'll do it look into it. If you don't give us guidance, we'll just have to stick with hourly billing. It's what we're all used to anyway.

And these comments are usually met with bemused silence from the in-house counsel.

On the other hand, the clients are looking for the law firms to lead. We're not here to tell you how to run your business, they say. Make us an offer, and we'll consider it. But you need to go first.

And these comments are usually met with bemused silence from the outside lawyers.

The 25,000-member-strong Association of Corporate Counsel has taken a leadership role in the discussion, issuing its ambitious "Value Challenge" to the law firms who serve its in-house members. It's a good start, and they're doing a terrific job educating their members about what they can do to increase the value of their outside legal work.

But in the end, it has to be the law firms who must lead the change away from the legacy systems and guild mentality to a partnership based on trust and effectiveness.

I want to hear from you, law-firm lawyers and law-firm clients: Who do you think needs to make the first move? Who should propose a new model? Leave your thoughts in the comments, or send me an @message or direct message on Twitter: @jayshep. (Make sure you tell me which side you work on, firms or clients.)

And while you're at it, take this quick, single-question poll.

The only three ways to lower outside legal spending

There are three ways — and only three — to reduce your company's spending on outside law firms. Two will seem fairly obvious, and they are the most common methods used today by far. They are also fraught with problems: some obvious, some less so. The third way avoids these problems, but it is hard to find law firms who will offer it.

Here they are:

1. Use less. This might sound flippant at first, but it's not meant to be (for once). A company can reduce its spending on outside law firms by choosing to use them less. For some matters, this is doable. For example, certain tasks usually handled by outside counsel can be reassigned to in-house lawyers. But many matters require the specialization that is easier to get from outside law firms. Unless a company has a large law department, it's hard to have the handful of in-house counsel specialize in the many areas that a company might need help in. And oftentimes, especially with litigation, using outside counsel just can't be helped.

   Now think about this for a moment: Why does in-house counsel tend to cost less? Because in-house lawyers aren't paid hourly — they're paid an annual salary. They have no financial incentive to take longer to complete a job; instead, they have a built-in incentive to be efficient. Fixed costs lead to efficiency, and efficiency saves money. If you don't believe it, answer one question: Do you track your inside lawyers' hours? I didn't think so.

2. Use lower-quality counsel. Once again, sounds flippant; isn't meant to be. Just as you can spend less money on a car by buying a Dodge Avenger instead of a Lexus ES 350, so too a company can spend less by hiring lesser outside law firms. Both the Dodge and the Lexus will get you where you need to go. Do you really need the best law firm for every matter?

   Granted, your overall cost of ownership might actually end up being higher with the cheaper car. Lower fuel efficiency, less reliability, more time in the shop. Usually, whether it's cars or lawyers, you get what you pay for.

3. Used fixed-price lawyers. This is the much-less-common option. But it has the benefit of lowering your costs without lowering the quality or forcing you to make do with less than you need. Why? Because fixed-price lawyers have a financial incentive to be efficient. Unlike hourly billing lawyers, they don't get paid more money for taking longer to solve your problems. What is more, fixed-price law firms can staff your cases without regard to billing requirements and billing-rate structures. If having four lawyers working on your case at a crucial point will lead to a better, faster result, then the fixed-price law firm will do that. At a fixed-price law firm, the "cost" of the extra lawyers is irrelevant.

   "Wait!" you cry. "What about forcing our law firms to give us discounts?"

   Discounts, schmiscounts. See "Legal advice: 30% off! (Why discounts don't always save you money)" for an explanation on why discounts are just a whitewashed version of Door No. 2.

   To be sure, a law firm only gets the true efficiency bump from fixed pricing when its entire business model is based on fixed pricing. An hourly billing firm can always give you a fixed price for a particular job, but if they still pay their associates and staff their cases based on billable hours, the economic efficiencies of fixed pricing won't come into play.

Now I'm not claiming that all fixed-price lawyers are high quality. There are better fixed-price lawyers and worse fixed-price lawyers, just as there are better hourly lawyers and worse hourly lawyers. The pricing structure alone is not a measure of quality. But what I am saying is that a high-quality fixed-price lawyer will save you money over a high-quality billable-hour lawyer. Often between 20 and 30 percent.

So if you want to lower your outside-counsel spending, you have three choices, and only three choices: lower usage, lower quality, or fixed pricing.

Choose wisely.

If the phone doesn't ring, it's your outside lawyer

(It's a safe bet that this will be my only post paraphrasing a Jimmy Buffett tune.)

I was out to dinner with a client the other night. He shared with me an anecdote whose lesson is crucial for every outside lawyer.

First, a little about this guy. Most recently, he was both general counsel and chief financial officer of a publicly traded company. He is a classic connector straight out of Malcolm Gladwell's The Tipping Point. He makes friends incredibly naturally, he's not easily offended, and he doesn't particularly hold grudges.

And yet.

And yet we were talking about another law firm, a competitor of mine with a nationwide platform. Turns out a lawyer at this firm had worked with the person who preceded my friend as general counsel. But when my guy assumed the GC post, this firm lawyer never bothered to call him. Didn't call to congratulate him. Didn't call to talk about doing work together going forward. Didn't call at all.

That was years ago. And my friend hasn't forgotten it. Nor will he the next time his firm wants to try and get my friend's business.

The point is that law-firm lawyers fool themselves into thinking that clients will hire them based on their experience, their expertise, their skills, their national presence, and so forth. What they forget is that more often than not, clients will choose not to hire them based on something as simple as a missed phone call.

Memo to outside lawyers: pick up the phone.

Five steps to killing the billable hour

[Originally posted at Gruntled Employees on 24 June 2008]

The American Bar Association's ABA Journal once again adds to the conversation about the battle against the billable hour. The always-excellent David Gialanella examines "The Skinny on Flat Fees" in the July issue of the magazine. David identifies five steps for law firms looking to drop hourly billing in favor of value pricing:

1. Do your homework.
2. Find a new measure for performance.
3. Stick to your guns.
4. Be a business geek.
5. Don't secretly keep track of time.

He also uncovers the secret of abandoning hourly billing: "The move from billables to flat fees is not just a practical change; it’s a different way of thinking." That's certainly true. It's not about the accounting — it's about delivering value to the client.

While he was researching the issue, Dave and I discussed whether value pricing would be just another also-ran to hourly billing:

The term alternative billing might seem innocent enough, but those two words make Jay Shepherd’s skin crawl. As CEO of Shepherd Law Group in Boston, the enterprising attorney thinks his firm’s flat-fee business model is not simply an alternative to the billable-hour standard: It eventually will become the commonplace way to run a law practice.

He's right: alternative billing is not my term of choice. A year-and-a-half ago in "No-alternative billing," talking about law firms' resistance to offering value pricing, I admitted:

I hate the term "alternative billing." It has that sneering, look-down-your-nose quality to it, like "alternative lifestyle."

And many law firms still think of it that way.

BTW, Dave had another nice piece in the February issue of the ABA Journal: "Taming the Billable Beast."

Hourly billing across the pond

[Originally posted at Gruntled Employees on 25 February 2008]

The war on hourly billing is being waged worldwide. Last week we talked about the battle in this country ("The billable beast of burden" and "The fool or the fool who follows him") and in Canada ("No hourly billing, eh?"). Yesterday, London's Financial Times had an article by legal correspondent Michael Peel saying that hourly billing may be on the outs in the UK as well. The article, with the promising title "UK law firms to reform hourly fee system," says that top London law firms are facing increased pressure from clients unhappy with large bills. Peel writes:

Top firms told the Financial Times that they were increasingly offering alternatives to hourly rates and making more use of cost-cutting business practices, such as putting services offshore. Tim Jones, head of the London office of Freshfields Bruckhaus Deringer, said that, although hourly billing still had a “fairly central role in most people’s thinking”, firms were increasingly offering clients deals such as fixed fees or rates tied to the success of transactions.

He said: “I think the big firms are very conscious that the efficiency of working practices is going to be absolutely fundamental in the coming years. We will have to look very carefully at how our terms are structured.”

The "efficiency of working practices," as Freshfields's Jones puts it, is the key point. Hourly billing, as we've said many times, discourages efficiency by rewarding inefficiency.

Peel reports that at Linklaters, another "Magic Circle" firm, a "significant amount" of the work is no longer billed by the hour. Peel does note that British firms have been somewhat slower than their American cousins in considering alternatives to the billable hour. But it's comforting to know that the opponents of hourly billing have allies overseas.

No hourly billing, eh?

[Originally posted at Gruntled Employees on 20 February 2008]

The Great Billable Hour Debate of '08 is playing out north of the border, too. Maclean's magazine is the Canadian equivalent of TIME or Newsweek, with nearly three million readers every week. In the current issue, writer John Intini has a terrific article called "Time to stop the clock? A backlash against the billable hour has some firms charging flat fees." John covers the entire issue from the reasoning behind hourly billing to the problems it causes for clients and lawyers. His reporting also uncovered some great lines: When asked how fast law firms are shifting away from hourly billing, Vancouver consultant Richard Stock quips, "Global warming is faster."

I talked to John at length about the subject and whether we'd soon see a tipping point away from hourly billing. John writes:

Experts anticipate that the current economic downturn will lead to further belt-tightening and could force more companies to reassess deals with their lawyers. “The days of just writing cheques are coming to an end,” says Jay Shepherd, whose Boston firm, Shepherd Law Group, banned billable hours last year and doubled its 2006 revenue. “There is no other business that we don’t know the price of something before we buy it. Imagine getting on an airplane and being told they’re going to charge you by the minute. It’s crazy. Nobody would do it.”

Shepherd, who describes the billable hour as “anti-client,” says the savings his six-lawyer outfit provide is the result of team efficiencies, not cut rates. In addition to flat-fee pricing, his firm offers unlimited advice plans: for a fixed price a client can call the office as often as needed without worrying about a big surprise at month’s end. “It’s almost as if we’re in-house lawyers for them,” he says.

[Since I was speaking to a reporter for a Canadian magazine, I said "cheques" instead of "checks." Good of John to notice that over the phone.]

Our discussion turned to the question of timesheets — the same topic we were debating in yesterday's post ("The fool or the fool who follows him?"). To recap, Tom Kane over at Legal Marketing Blog.com called us "foolhardy" in his post "Has Your Firm Tamed That Damn Billable Hour Yet?" because we don't internally track lawyers' hours. Here's that topic covered in the Maclean's article:

Shepherd — who predicts the billable hour will last another decade — doesn’t even track his staff’s hours for internal purposes. This has prompted many competitors to ask how he knows if associates are doing their work? “I manage them,” he says. “That’s my job.” And late nights or weekends holed up at the office don’t impress him. “The firm,” he says, “doesn’t get anything more if it takes longer and the client wants the work done as fast as possible.”

Intini notes — correctly — that it's easier to change the firm culture at a boutique firm than it is at a megafirm. He again quotes Richard Stock, who says that at larger firms, "the business model is entrenched across hundreds, if not thousands of people in the corporation. It’s not an especially nimble ship.”

That's true, but you have to start somewhere. Great article, John!

As for the Tom Kane post, value-billing guru Ron Baker had this response on his VeraSage Institute site. And Columbus lawyer Mike Grodhaus's terrific new blawg, The Alternative Fee Lawyer, wades into the fray in his post, "Timesheets & Alternative Fees." After nicely summarizing the discussions, Mike gives his own take:

What's fascinating to me about this debate is that is not an "apples to apples" comparison. Tom Kane and Jay Shepherd aren't even really talking about the same thing. What Jay Shepherd is talking about is a complete paradigm shift in how lawyers (or any professionals, for that matter) should think about pricing their services.

Not that I'm discounting Tom Kane's mindset. To me, a law firm (like mine) that uses alternative fee arrangements but still uses timesheets internally is still much better than a law firm that bills all its clients by the hour. Indeed, if we ever move the profession to that brave new world without the billable hour, doing it this way will probably be the transitional phase to Shepherd's wholly value-driven approach. But it certainly makes you want to learn more about Shepherd's way of pricing his law firm's services.

Make sure you check out Mike's blog, which now adorns our Blogroll over on the right of your screen. While I still bristle at the term "alternative billing" (which smacks of the seamy, like "alternative lifestyle"; see last year's post, "No-alternative billing"), Mike brings a broad, balanced approach to the conversation. Welcome, Mike!

The fool or the fool who follows him?

[Originally posted at Gruntled Employees on 19 February 2008]

In our last episode, "The billable beast of burden," I talked about the recent ABA Journal article that described Shepherd Law Group's successes in banishing the billable hour ("Taming the Billable Beast," February 2008). I also mentioned that there were naysayers about.

Tom Kane is one. He writes Legal Marketing Blog.com, a fine site with a surprisingly generic name for a marketing site. Perhaps "Raising Kane" was taken. (Actually, it turns out it was — see here — by a self-described "recovering lawyer." Huh.) Tom covers the ABA Journal article in his post "Has Your Firm Tamed That Damn Billable Hour Yet?" and commends us and the other two firms for addressing the billable hour problem. (Thanks, Tom.)

But he also takes a shot at something I said in the article, and I feel the need to respond. Here's Tom:

One troubling point mentioned in the article relating to the Shepherd firm. And that is the statement involving CEO Jay Shepherd that “he denies secretly keeping track of hours spent on each case.” If the firm doesn’t do so, IMHO, it is being foolhardy based on the following simple reasoning:

• You can’t make a profit on fixed fees unless you know what your costs are;
• You can’t know what your costs are unless you know how much time (and other dollars) are consumed by the matter; and
• There is no way to know how much time is being spent on matters if you don’t keep track of hours!

Duh!

So, either they are guessing which means they don’t have a clue what their profit margin is either, or the firm has some other means of determining costs that I am unaware of.

"Duh," indeed! Wow. We're being foolhardy to the point of being duhed. (New word; pronounce it "dud." Think of me when you use it. "Hey, Mom! In school today my teacher duhed me.") So I was all set to roll up my sleeves and explain how Tom's "simple reasoning" (IHHO — in his humble opinion) was flawed, when I learned that the Godfather of Value Pricing had already done so.

Ron Baker is the founder of VeraSage Institute, a think tank dedicated to helping professional-service firms rid themselves of archaic billing practices. He is the author of Professional's Guide to Value Pricing, which is the ultimate hornbook on the subject. Having Ron publicly defend your billing practices is like having Martha Stewart compliment your table setting (only without the whole jail thing). Here's Ron in his post "He Who Says 'A' Must Say 'B,'" responding to Tom's "duh":

No, not Duh. There are over 500+ firms worldwide, across all professional knowledge firm sectors, from advertising to CPA firms and law to IT consulting firms, that don’t do timesheets.

This doesn’t mean they don’t know their costs, it’s a question of WHEN do they know their costs. With timesheets, you only know them in arrears. With our methods, you know them BEFORE you do the work.

What good is it to know your costs if the client doesn’t like your price? This is known as price-led costing; Toyota has been using since it was founded in the 1880s, and Toyota does not have a standard cost accounting system (nor do they do timesheets).

In the real world, value drives price, not costs. Price actually drives costs, so it makes sense to know value and price before you spend a nickel on any costs....

I just wanted to set the record straight. If the Shepherd Law Group is smart — and they are  — they will trash timesheets. [Thanks, Ron. Already have. — JS] They are the cancer in the professions; it is just a matter time before they will be buried.

Ron also says that timesheets "keep professionals mired in the mentality they sell time." In another place, Ron has written one of the best arguments against timesheets ever:

So what good is measuring hours logged on a timesheet? Do you think you can measure the value of a Picasso, the deliciousness of a meal prepared by a five-star chef, the splendor of a building designed by an architect, or the acting ability of an actress, by looking at the hours they work? As they say, it’s easier to count the bottles than describe the wine. You remain mired in counting and costing the bottles, while we are interested in the quality, taste and subjective value of the wine.

Knowledge workers aren’t inspired to track every six minutes of their day. No one entered this profession with the objective of logging the most hours. Not only is it the wrong theory of value, it’s also demeaning, demonstrating a lack of trust, treating them like children.

Oh, snap! I really couldn't have said it better myself.

No, we don't track hours spent at Shepherd Law Group, secretly or overtly. Other lawyers often shake their heads knowingly and then ask me how I know whether my associates are working. "Uh," I reply, "with this crazy new thing called management." (They usually shake their heads some more and wander off, muttering.) Our associates work hard because they want to help our clients and they want to do a good job. That's why we call them professionals. Professionals don't need an annual billables goal to make them work hard.

Now I don't want to dis Tom too much; he's written some good things against hourly billing. And he went to my dad's alma mater, the Cross, so he can't be all bad. Still, he may think I'm foolhardy for trashing timesheets, but there will soon be many other "fools" following our lead.

The billable beast of burden

[Originally posted at Gruntled Employees on 18 February 2008]

Finally! The writers' strike is over and we can all get back to work. Thank goodness I can now live off my DVD residuals, or whatever. Ahh, the power of the Union. Nothing like sticking it to The Man ... and the makeup person, and the costume person, and the hair stylist, and the gaffer (whatever that is) and the best boy (just what makes him so good?). Shutting down an entire industry for a hundred days and billions of dollars is a small price to pay for a tiny-but-respectable percentage of the revenue generated by webisodes. Because everyone watches webisodes ... right? Ka-ching!

[End of management-biased sarcasm. Actually, I'm just a little cheesed off that "24" has been pushed back to January 2009 because of the writers' strike. For a Gruntled take on "24" from last year, please see "What would Jack Bauer do? Use plain English."]

Since we last spoke, the hourly billing debate has been going full throttle. The current issue of Crain's Chicago Business reports that "only 16% of in-house lawyers say hourly billing is their preferred arrangement." Yet hourly billing remains the dominant way that lawyers bill their corporate clients. Samantha Stainbaum's article, "The end of hourly fees?" quotes Northwestern Law dean David Van Zandt, who offers a possible explanation: "It's difficult for companies to evaluate what they're getting, so they fall back to hourly billing."

That's possible. Still, if five out of six in-house counsel would prefer something other than hourly billing, don't we outside counsel have an obligation to provide it? The February issue of the ABA Journal has a story by David Gialanella called "Taming the Billable Beast." In it, he talks about three law firms who he says are "changing the billable equation last year in hopes of reducing associate and client dissatisfaction."

Two of the firms focused on first-year associates' billing requirements: Dallas's Strasburger & Price, who cut first-year billing requirements from 1,920 hours a year to 1,600; and Atlanta-based Ford & Harrison, who got rid of first-year requirements altogether.

The third firm went even further. (This may sound familiar.) David writes:

Shepherd Law Group in Boston has thrown out the billable hour altogether in favor of flat fees and fixed prices, and it could not have asked for a better result.

In 2007, says CEO Jay Shepherd, the firm “billed exactly 0.0 hours [yet] more than doubled our revenue for all of 2006.” He adds, “It sounds too good to be true. It’s not.”

Now there’s no looking back for Shepherd, whose firm handles labor and employment law. He recently added a sixth attorney, and he denies secretly keeping track of the hours spent on each case.

In their new billing model, Shepherd and the other partners can get together to brainstorm strategies—something that would have required billing for several different attorneys. Most clients would never stand for those sessions if charged by the hour.

It’s easier for a boutique firm to institute a change, but Shepherd cannot argue with results: Research becomes more focused; soon, efficiency improves. For the Shepherd Law Group, at least, eye-popping numbers are to follow.

(Thanks, David.) The point here isn't to trumpet our firm's successes (at least that's not the main point). The point is that clients want a better system, one that puts their interests in line with their lawyers' interests — rather than in conflict with them. And it can be done successfully.

But there are plenty of naysayers.

Next post: The naysayers say "nay." Stay tuned ... (unless there's another writers' strike).

Hourly billing: Presumed unethical

[Originally posted at Gruntled Employees on 22 August 2007]

Lawyer Scott Turow, acclaimed author of Presumed Innocent and other legal thrillers, has fired a warning shot at hourly billing. His provocative article "The Billable Hour Must Die" is the cover story of this month's ABA Journal. It's a well-written, well-argued piece that catalogs the problems that hourly billing creates for lawyers and the legal-services industry.

But the key passage in the piece is this one, where Turow argues that hourly billing is actually unethical:

But at the end of the day, my greatest concern is not merely that dollars times hours is bad for the lives of lawyers—even though it demonstrably is—but that it’s worse for clients, bad for the attorney-client relationship, and bad for the image of our profession. Simply put, I have never been at ease with the ethical dilemmas that the dollars-times-hours regime poses, especially for litigators....

But from the time I entered private practice to today, I have been unable to figure out how our accepted concepts of conflict of interest can possibly accommodate a system in which the lawyer’s economic interests and the client’s are so diametrically opposed.

Looking again to the Model Rules [of Professional Conduct], Rule 1.7 provides in part that “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest,” which the rule defines as occurring when “there is a significant risk that the representation of one or more clients will be materially limited by ... a personal interest of the lawyer.”

I ask you to ponder for just a few minutes whether that rule can really be fulfilled by hourly based fees.

As Gruntled readers know well, I agree with this argument. If I bill by the hour, and a task takes me longer to complete, that's good for me (more money) and bad for my client (more time before satisfaction). That's why my firm has completely abandoned hourly billing — we've billed exactly 0.0 hours in 2007. Once a law firm has done the analysis and has learned how hourly billing is bad for its clients, how can it not be unethical to continue the practice?

Here are some other voices on the topic:

• Luke Gilman, Blawgraphy: "More on the Billable Hour, Charting Your Own Course." Key quote: "The overriding incentive of the billable hour regime is to bill as many hours as you can get away with. When you have a fiduciary duty to your client and a minimum billable hour requirement from your firm, the conflict is inevitable."
• Daniel J. Solove, Concurring Opinions: "Bye Bye to the Billable Hour?" Key quote: "The billable hour does little to measure and reward quality of work. It simply measures how long it took an attorney to complete a particular task."
• David Giacalone, f/k/a: "Broadening the hourly-billing debate — consider yourself, your clients and your ethics." This is a thorough and comprehensive post on the different sides of the argument from an ardent defender of hourly billing. (David's a Harvard Law guy, which I guess explains the poetry at the end of his posts. Hope he's following the Harvard Law blog policy — see here.)

Please lend your own voice to the debate.

No-alternative billing

[Originally posted at Gruntled Employees on 9 February 2007]

I hate the term "alternative billing." It has that sneering, look-down-your-nose quality to it, like "alternative lifestyle." Actually, I think lawyers have done a very good job of marginalizing it. I mean, there's hourly billing, and then there's ... what?

The lawyers look away and reply, "Well, there's ... (ahem) ... alternative billing."

"Oh?" the clients ask. "How does that work?"

"Uh, well, there are contingency fees, blended rates, flat fees, fixed fees, retainers. That sort of thing. It's not the traditional way of doing things. Very few of our clients ask for it."

"Oh."

As if there's something wrong with it. As if traditional (hourly) billing came over on the Mayflower. (In fact, it's only two or three lawyer generations old.) And the menu of "alternative" arrangements sounds ominous: a collection of ways to bilk the client.

Actually, 62% of in-house counsel say they're interested in "alternative" billing arrangements, according to the Association of Corporate Counsel's 2006 Managing Outside Counsel survey. This figure is surprisingly high, since most in-house lawyers migrated from large law firms where the almighty billable hour rules. But after working in the real world of business and bottom lines, in-house lawyers are seeing hourly billing for what it is: a way to increase clients' bills.

But in the same survey, corporate counsel report that 90% of their outside lawyers resist the idea of "alternative" billing. (Read more about the survey in Outside counsel ignoring GCs on hourly billing.)

Maybe clients will continue to put up with this. But I doubt it.

Pretty soon, they'll start looking for "alternative" lawyers.

Why businesspeople hate lawyers

[Originally posted at Gruntled Employees on 2 January 2007]

Oh, they may tell you that they don't. "Hate" is such a strong word, and so forth. But most businesspeople really, really don't like lawyers.

Why?

Three reasons, all of which are related:

1. Billing by the hour
2. Using legalese
3. Giving legal answers instead of business answers

And what do these three things have in common?

They're all examples of lawyers putting themselves first, instead of putting clients first. Hourly billing prices legal services based on the time the lawyer spent, not on the value the client received. What difference does it make to the client whether something took two hours or four hours? Rarely does the client get twice as much value when something takes twice as long (and thus costs twice as much).

Next, lawyers speak and write in legalese to show off that they are, in fact, lawyers. Rather than trying to find the clearest way to communicate with their clients, lawyers fall back on shopworn phrases whose meanings they're not even certain of. "Wherefore, premises considered" — I mean, who really talks like that? Lawyers use legalese the same way doctors and cops use the jargon of their professions — to set them apart from the people they serve. (For more on jargon, see Abandoning jargon "at a high rate of speed.")

Finally, businesspeople ask their lawyers business questions but get legal answers in return. How many of you have asked a lawyer a question about your business only to receive a memorandum on what a statute or regulation or court opinion says. You don't care about the dicta in Smith v. Landingham; you just want your lawyer to solve the problem.

So as we start the new year, lawyers should add to their lists of resolutions three things that put the client first:

1. Price legal services based on the value to the client
2. Use plain English
3. Give clients business answers

For more about putting clients first, read Dan Hull's always-excellent What About Clients? blog. Dan's a lawyer who understands about putting his clients first. His blog's tagline asks the fundamental question: "True service — are we lawyers delivering?" I'm certain that businesspeople don't hate Dan.

Dan started the year off with a terrific list of client-service blogs, which include heavy hitters like Guy Kawaski's How to Change the World and David Maister's Passion, People and Principles. Check out the list here.

Happy New Year!

Outside counsel ignoring GCs on hourly billing

[Originally posted at Gruntled Employees on 1 November 2006]

The Association of Corporate Counsel has just released its 2006 Managing Outside Counsel Survey. Martin Daks of the New Jersey Law Journal summarizes some of the key findings. Much will be made of GCs' concerns about compliance issues. But what I find most interesting is in-house lawyers' feelings on hourly billing. Daks writes:

Despite criticisms of the hourly billing format, its use continues to grow. In 2005, 87.1 percent of companies said they used standard or discount hourly rates, compared with 81.2 percent in 2004 and 81 percent in 2003. While 62 percent of respondents are open to alternative fee arrangements — including fixed, blended hourly rate, contingency and retainer — they say that 90 percent of outside counsel resist the suggestion.

(My emphasis.) Ninety percent? Outside lawyers will tell you that they listen to their clients' concerns, but apparently that doesn't apply to the almighty billable hour. Now tell me if this sounds like a coincidence:

And companies are quicker to fire outside counsel. In 2005, 55.6 percent reported they terminated the relationship with at least some of their firms, up from 50.7 percent in 2004. The most-cited reasons were poor quality of work and results, lack of responsiveness, high fees and personality issues.

I wonder how much of the "lack of responsiveness" had to do with resisting clients' requests for alternative billing. You can get the ACC's press release here, and you can order the survey here. Compare all this with Ed Poll's post on the popularity of alternative billing in his excellent Law Biz Blog, and the discussion in Carolyn Elefant's always-insightful My Shingle.