Steve Matthews of Stem Legal has a thoughtful post at Slaw that talks about The Economist‘s recent article on the demise of billable hours. As Steve points out, focusing on how a law firm bills its services obscures the more fundamental conversations around value and cost that are needed to frame the process of negotiating price. Hourly billing’s real damage is that its over-simplicity and ubiquity make it hard to have those conversations.
It’s becoming clear that “value to the client” and “cost to the lawyer” are the only two concepts that have any utility to the legal services pricing process. Clients are getting their act together when it comes to determining exactly what “value” means to them in the legal services context. As soon as the value assessment process becomes standardized and even routine in the client world (and it will), then lawyers will suddenly inhabit a much less flexible pricing environment, one in which their customers understand exactly what they need and what they’re willing to pay for.
For this reason, those lawyers who intimately understand their costs of operation and production have already opened a lead on their competition, a lead that will widen into a gap over the next few years. That’s why the single most important thing you can do for your law business, right now, is to know your costs inside out, down to the last dollar, pound or peso. And then, once you understand your costs, streamline them — through technology, knowledge management, automation, and creative use of legal talent (including contract and offshore lawyers).
Every time you reduce your costs, you create an equivalent opportunity in your profit column, because the amount you spend to render a service to your clients has no effect on the value of that service to the client. (It never has.) Your client doesn’t care how much profit you make for yourself; the client only cares that you delivered excellent value in a cost-effective (to the client) manner. How you bill your services is between you and your client; how much it costs you to deliver those services has to be your number-one business priority.
The goal should not be to stamp out the billable hour once and for all. The goal should be an open, rational legal services pricing system in which the question “How many hours did you bill?” — whether asked by a client of its law firm, or by a partner of an associate — is, for the most part, completely irrelevant.