Break the law firm business model

The ABA’s Center for Innovation, where I serve as an advisory board member, asked me to submit a post for its excellent new blog. I was happy to send them this takedown of the traditional law firm, which I’ve also posted here below.

“Innovation destroys hours.”

Those three words, written by Neota Logic founder Michael Mills in a 2014 blog post, summarize the fundamental challenge that every law firm faces today. They reflect two market realities that are inherently incompatible with each other.

1. Virtually every recent innovation in the legal services market — from automation to process improvement to multi-sourcing — has operated to reduce the amount of time and effort required to produce and deliver legal services.

2. Virtually every law firm in the legal market prices its work, bills its clients, compensates its lawyers, and rewards its shareholders on the basis of the amount of time and effort required to produce and deliver legal services.

This fact has to constitute the starting point for all our inquiries into “why law firms don’t innovate.” The hours billed by a traditional law firm’s lawyers represent the entire inventory of the firm — it’s what the firm sells and the sole means by which the firm makes money. When a law firm engages in any of the most common types of innovation, it eliminates hours, thereby reducing its inventory and lowering its lawyers’ revenue. It’s no wonder innovation is anathema within most law firms: it’s antithetical to the law firm’s foundational business premise. You might as well ask a ship to innovate by drilling holes in its hull.

Don’t make the mistake, therefore, of blaming lawyers for the lack of law firm innovation. Sure, lawyers are change-resistant and conservative and all the rest — but so are most people, to a greater or lesser extent. Since almost any worthwhile innovation in a law firm will destroy hours and therefore reduce lawyers’ stock in trade, lawyers will understandably fight those innovations. It’s an entirely rational response.

The true barrier to law firm innovation is the firm’s ironclad insistence on measuring value — both external to the client and internal within the firm — on the basis of lawyers’ time and effort.

Law firms maintain a direct, causal connection between the time and effort lawyers expend to deliver a service and:

(a) the money clients pay to receive that service, and
(b) the money lawyers receive as compensation for their services.

But there is no fundamental economic reason why either of these should be the case. These aspects of your business can and should be largely independent of each other.

(a) Clients need not be charged on the basis of lawyers’ time and effort. They can be charged on the basis of successfully accomplishing a task within previously agreed parameters for a previously agreed price (with both parameters and price established according to competitive market realities). Indeed, clients have been telling firms this for the last ten years: they don’t care how much time and effort was required to generate their legal services. All they care about is the result they received and the experience they enjoyed (or endured) to receive it.

(b) Lawyers need not be compensated on the basis of the time and effort they expended to deliver a service. They can (also) be compensated for other means of contributing value to the firm, including clients landed, business generated, relationships maintained, solutions identified, teams managed, projects led, efficiencies found, juniors mentored, and a host of other criteria. Should we really be surprised that law firms that incentivize maximum lawyer time and effort are filled with overworked male lawyers disproportionately prone to depression and substance abuse?

Law firms have trouble appreciating that their costs of production and their revenue from clients aren’t really supposed to be causally connected.

If you want to successfully introduce innovations into your law firm, therefore, you first need to recognize that these innovations pose an existential threat to the way the law firm does business. So your real challenge — the challenge every law firm faces, whether it wants to innovate or not — is to change the way the law firm does business. Break the causal relationship between the amount of time and effort required to render a client service and (a) the price clients are charged for those services, and (b) the rewards provided to lawyers who helped deliver those services.

That’s not going to be easy, obviously. In fact, it might seem like I’m just substituting one insurmountable challenge for another. But here’s the difference: You have zero chance of stopping innovation from destroying lawyer hours. But you have a non-zero chance of changing the way law firms charge their clients and compensate their lawyers.

You’re going to have to change your law firm’s business model eventually. Eventually might as well start today.



7 Comments

  1. John Gear

    As an engineer turned consultant turned attorney, I was all set to use value billing and really help clients without the perverse incentives created by billable hours. But this piece, like thousands of others, claims that it’s lawyers who are resistant to this idea — but it’s not. It’s the rules for attorney fee petitions. If I want to be paid AT ALL I have to submit a petition that breaks down my time for each distinct activity (so the lawyer I just beat in the case can flyspeck it and challenge each item, from how long I spent on it to whether I should have done it or my assistant — this lawyer gets paid BY THE HOUR to challenge my fee petitions).

    The litigation part of my practice is almost entirely as an attorney for ripped off consumers and employees in contingent fee cases.

    I would say that

    “The true barrier to law firm innovation is the court’s insistence on using lode-star analysis to assess attorney fee petitions.”

    If you don’t have a litigation practice there’s no reason to be welded to hours. But there’s no hope for getting away from them until courts will accept an alternative to hours that will compensate the plaintiff’s attorney in fee-shifting cases.

  2. Jim Bliwas

    Typically, lawyers are terrified of their clients and will turn somersaults to do whatever is needed to keep a client happy. Yet even though clients are increasingly vocal in their demand for greater value from outside lawyers and firms, attorneys keep finding ways to avoid doing what the client wants. As much as anything, this may help explain why companies keep pulling work in-house.

  3. Blair Botsford

    Great blog. It must be the economist in me but I see the problem as just a constrained optimization issue. Clients have issues they want/need resolved. They value having them solved at a certain level which represents the maximum charge, unless lawyers can change the valuation perspective. From there, we are tasked with working backwards to decide how to most effectively “build” legal services and still make a decent profit.

    This model of course put clients at the centre of the exercise rather than lawyers. What a radical thought. However, as the blog suggests, the time is upon us to change voluntarily or change for which we are unprepared will be thrust upon us.

    I’m not opposed to docketing my time for the purpose of business analysis. I actually find it a useful exercise. However, I am already starting to move away from billing templates that just list docket entries and go “old school” with general descriptions and an amount that reflects what I feel is the value of the exercise. So far so good and clients can always ask for detailed billing if they really want to look behind the amount charged.

  4. Lise

    I agree with the article. In a past life I was the client and frankly I was ok with the billing by the hour because it meant the lawyer was accountable for what they were billing. I could tell if things were out of hand. Now that I’m on my own and trying to get clients – and these are institutional clients – to open up to different billing models, I find it’s the clients that are resistant – suspicious of my motives maybe? I’ve given that up and basically don’t nickel and dime them or consider the time spent when billing. I always look at what was done and charge what I would have initially quoted for the work. It’s backwards but it seems to work. So.. .with that said, maybe law firms are resistant to change but I think clients are also somewhat resistant. It takes two.

  5. Elizabeth

    Thanks for this post.

    Seven years ago, I founded a law firm (with a – somewhat inadvertently – “#newlaw” approach) after working for eight years in more traditional law firm settings. Unlike some of the other comments, I have not found clients resistant to flat rates or my firm’s team/collaborative approach, where one or more of any of the five lawyers at our firm will be working on their file at any given time. Our institutional clients like the certainty of flat rates and the value we provide. The more efficient we are, the better for us and for the client. For the lawyers in our office, it is liberating not to have to track time by the minute, and working in a collaborative, non-competitive environment provides a measure of security, since we all have each other’s backs. My current challenge is figuring out how to scale up. Technology, education and regulation have not kept pace with our needs. For example:

    – we’d like to expand and have software that would further streamline our practice but the type of technology we need does not exist
    – we’d like to be less constrained by trust account rules that are archaic and cumbersome
    – because we are in a niche practice area, we have trouble finding talent, even though we pay competitively, provide benefits and have a decent work environment. Training in our line of work takes around 2 years (aside: oh how I wish one year of law school was actually a co-op placement or clinical program or some mandatory practical experience and that articling was structured differently).

    Despite these issues, the practice is working well for us and we feel fortunate to be leaders in our field. But I have seen how tiny, incremental changes make a huge difference to clients and the work environment and I know there is so much more we could be doing. The pervasive feeling of being hemmed-in is something I have learned to live with, it’s as much a part of law practice as paper cuts and office ukuleles. Oh, wait, I have heard some firms don’t use paper.


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