Law firm models need to reflect more business boardroom thinking.
Law firms must create new business strategies that focus on growing firm revenues by delivering greater value for every dollar a client spends. Additionally, law firms that serve business clients should be looking for ways to help clients grow their businesses and revenues, not just protect them. To do this, law firms will need to adapt their business services models to reflect more of the kind of thinking that goes on in the boardroom rather than the courtroom.
Lawyers typically do not bill for the result of their efforts. Rather, most bill based on one thing: time. I suspect even for matters where a flat fee might be offered, that fee is usually calculated based on the expected hours of effort required.
However, since the great recession, client needs and expectations have been changing rather dramatically. Today there is increasing demand for pricing that is more predictable and transparent. The notion of an $875 per hour rate for some unknown number of hours is not sitting well with many clients. This change in demand is now forcing many members of the legal profession to rethink the type and nature of services they provide to clients.
As a revenue strategist, I recognize that time-based billing has never been an ideal approach because time-based billing doesn’t scale. There are only 24 hours in a day. Assuming a lawyer could work 24 hours a day and bill at a rate of $550 per hour for every single one of those hours (which of course would impossible), that lawyer would be capped at $13,200 per day.
Now $13,200 is a good deal of money, but that’s not the point. The point is that the model simply doesn’t scale. Even if one were operating at absolute maximum capacity, potential revenue is always capped as a factor of the hours in a day, one’s ability to work them, and the rate that one can charge.
With the time-based approach, the only way to increase a law firm’s revenues is to increase the amount of time it can bill, which means having to hire more lawyers to increase billable time. That’s why time based billing doesn’t scale. The growth curve is linear. Think “1 + 1 = 2.”
Because the legal profession has traditionally been seen a services industry, time-based billing worked. Until recent years, lawyers spend their time doing research and coming up with solutions to legal issues. People paid lawyers for their time because they were the experts. But today, as legal services become more automated and standardized and as the profession becomes more competitive, time-based billing is making less and less sense.
There is also another problem with time-based billing: opportunity cost. Devoting time to one client means a lawyer cannot be devoting that same block of time to another. Because time has been the primary unit of value in transactions with clients (even more so than the actual outcomes a lawyer might achieve), and because time is finite, this model has tended to drive up the price for that time.
Today, standardization and automation are breaking down business model constraints. This means time is no longer the sole requirement for producing value for a client. Unlike the time of a human lawyer, which is finite, technology-driven legal services can be scaled to deliver significantly more client results per unit of time spent by lawyers. Thus, legal services are gradually becoming a lot more scalable. Scalability means that each additional increment of input can produce a disproportionately larger output. Think “1 + 1 = 5.”
As has happened in other industries, these kinds of changes are and will continue to be highly disruptive. The shift toward standardization, automated research, and process automation will make many legal services more commodity-like. And when people perceive something to be a commodity, they become far more sensitive to price.
Every law firm’s goal should be to leverage technology to create more work product in less time and at lower costs – operationally and to clients. As this happens, law firms will need to find effective new methods to scale and grow their practices. While this may mean earning less money per client than is possible in today’s hourly billing world, in the future it will be the only viable option if firms want to survive.
The trend toward new business models supported by new kinds to technologies has only just begun, but it is quickly becoming one of the most important drivers shaping the future of doing business in the legal services industry.