Firm of the future or stuck in the past?

Firm of the future or stuck in the past?

21 August 2012 | Lawyers Weekly

As debate continues to rage about whether time-based billing has had its day, legal consultant John Chisholm argues that firms that continue to use timesheets will be left behind as lawyers, and clients, seek new ways to measure the value of their work.

Law firms today face a variety of challenges that we have not seen before, including uncertain economic times, intensified competition, the push towards globalisation and demanding clients seeking to pay less money but still expecting top service.

There is also the fact that traditionally profitable areas are now viewed as commodity services, the reduction in margins and profit levels for many firms, succession issues, and the difficulties of securing and retaining top people.

Add to this the struggle of many firms to get to grips with new technologies, the rise of legal process outsourcing providers and ever-increasing public scrutiny and regulatory interference, and it’s clear it’s not an easy time to be in business as a lawyer.

There will be no return to ‘the good old days’; the ‘new normal’ is here to stay and the challenges will only increase.

To the credit of the legal profession, given that most firms can no longer increase their profitability simply by upping their charge-out rates annually, many firms have taken steps to find solutions to these challenges. In addition to placing a greater emphasis on their service offerings, most firms have focused on improvements to the financial aspects of their practice; often using the traditional profit levers we were all brought up on, such as: improving time recording and WIP management; better rate realisation; reducing lock up; slashing expenses where they can; putting pressure on everyone in the firm to ‘perform’; and generally tweaking their business model.

This is all well and good, but I think most of these solutions are short term in focus and are, at best, only dealing with some of the symptoms rather than addressing the root cause.

We need to do more than simply tweak our existing business model. I believe that if we, as a profession, are going to continue to be sustainably successful and relevant to businesses, our communities and to society generally, we have to accept and embrace a total mindset and business model change.

The traditional law firm business model, at least since the 1970s/1980s in Australia, largely operates by leveraging people and hours. For most lawyers and firms this model has worked, and still works, but it is, I believe, a sub-optimal way to run a legal practice. It is increasingly unacceptable to many in the profession and their clients, and is ultimately destined to have the same fate as dinosaurs, BETA and the USSR.

This business model that has served the legal profession well for many decades is deteriorating as many of our organisational and management structures – modeled on the industrial age command and control paradigm – are no longer appropriate, nor acceptable, in the 21st century.

These practices are Firms of the Past.

There is a better model increasingly being used by thousands of lawyers and other professionals all over the world, which offers innovative, proven strategies for restoring vitality and dynamism to law firms.

A legal practice can be run more effectively when it becomes a knowledge firm rather than merely a product or service firm.

These practices are Firms of the Future.

Creating a Firm of the Future is not for everyone, as it requires leaders of firms to think about why, how and what they do very differently than they have in the past.

What is a Firm of the Future?

The guiding principles for this model are largely set out in two books: one jointly authored by Ron Baker and Paul

Dunn titled The Firm of the Future: A Guide for Accountants, Lawyers, and Other Professional Services (Wiley 2003), and more recently refined in Ron Baker’s latest book Implementing Value Pricing – A Radical Business Model for Professional Firms (Wiley 2011).

Since 1995, Ron Baker, founder of The Verasage Institute, economist, author, speaker, pricing expert, and a thought leader for professional firms, has been speaking to leaders of the profession around the world on why and how to become Firms of the Future, in particular on the need to stop billing our services by time and start pricing according to the value we provide to our clients. Many of you would have read articles by Ron Baker or heard him speak; he has visited Australia many times over the last few years presenting key notes and workshops to numerous professional associations including: the Australian Legal Practice Management Association; Law Council Of Australia; various Law Societies and the Australian Corporate Lawyers Association, as well as working with legal and other professional firms and their clients.

Ron Baker was most recently in Australia in March this year, presenting a series of Firm of the Future forums and masterclasses to more than 300 professionals in Hobart, Melbourne, Brisbane and Sydney.

Those that attended these forums and masterclasses were not really there to hear why they should, among other things, move away from billing by time (most had already made that decision), but were there to be shown by Ron Baker, and a number of other professionals who have already made the transition, how they too can become Firms of the Future.

The foremost principles upon which the Firm of the Future model is based looks at the value a firm creates for their clients (output) rather than the time spent on a file (input). To do this, firms must rid themselves of pricing their services by time and recognise that all professionals are knowledge workers, not machines, and they should not be treated like ‘widgets’ on a production line. Firms of the Future recognise that value is created outside the firm, not inside it, and that clients do not buy time, they never have and never will, so they have stopped trying to sell something that no one buys.

So, if your clients do not buy your time, what do they buy? They buy access to your intellectual capital – the value of which cannot be measured by time.

I advocate that we should, as a profession, agree our fees up front with our clients before we undertake any work. This is how the vast majority of the rest of the business world price their services. This is how you personally purchase nearly everything. Why should we expect our clients to buy something they do not, and we do not, know the price of upfront?

Believe me, I have heard every reason imaginable why law firms are different to all other businesses, and why it is impossible to price our services upfront (most common of course is “we don’t know how long this will take”). I don’t accept any of the reasons proffered – they are simply excuses. You know, as well as I do, that you price some of your services upfront when a client or market forces insist. Furthermore, too many law firms are now pricing all their services upfront for anyone to say it cannot be done.

Unsurprisingly, I also strongly believe that no law firm should slavishly record time. Recording time, especially in six-minute units, serves no valid purpose whatsoever in any professional firm. Time-based billing is but a symptom of the time recording ‘illness’ that many in our profession have become addicted to, and it is time recording that is the real cancer in our profession.

I know I sound like a reformed smoker, but ever since I began advocating our profession move away from time-based billing it has been constantly asserted to me that you need to record your time both to properly manage your lawyers (i.e. to know what they do all day) and to know your ‘cost of production’. I used to believe that too.

With all due respect, even leaving aside the fact that no human being can possibly accurately record the time they spend on a client’s matter, both these assertions for retaining the mind-numbing and expensive time-recording systems in place in most firms are manifestly wrong and unjustified.

Time to change

People in organisations all over the world are creative, well-managed and highly-productive without management needing to see their timesheets. If you really want to know what your lawyer did all day why not just ask them? If we truly believed we needed timesheets to properly manage our people and to see how effective and efficient they are at doing things, why don’t we have our finance and administration teams, our receptionists, our assistants, our managing partners and CEOs and other non-fee-earners fill out timesheets? Because they do not charge their services by time and to make them fill out timesheets would make them less effective and much less motivated.

As far as timesheets being necessary to record a firm’s cost of production, there is absolutely no economic or accounting justification whatsoever to support this. Time is not an actual cost in the same sense as rent, wages, printing etc. Every lawyer in every firm, indeed every living person, has more or less the same time available to them every day. It is what someone does with their time that makes them valuable. Nearly all of the costs in a firm are fixed and can be predicted. Costs do not vary depending on the amount of time you or your employed lawyer spends on a client. All you are simply doing is making a record of time and then arbitrarily allocating a dollar value to each six-minute unit.

Time-based billing is not only detrimental to clients and our relationships with them, but in my view has led to a whole range of negative consequences for our profession that are too numerous to mention, but include:

•    Demotivating highly-intelligent ‘knowledge workers’ by making them slavishly account and record every six minutes of their working day.
•    Lawyers being treated merely as ‘fee earners’ and primarily assessed more on their hours recorded than anything else.
•    Too many smart people leaving our profession, often citing the time-based billing model as a primary cause of their dissatisfaction.
•    The fostering of a production mentality in firms (“slowest horse wins the race”) with little or no incentive to improve turnaround time.
•    Stifling of creativity or any incentive within firms to innovate.
•    Somewhere between seven and 15 per cent of a firm’s turnover is spent purely on administering a time-based billing model, which adds no value to clients.
•    Cost and communication disputes with our clients.
•    Significant lock up being considered the norm and just another cost of the business of running a law firm.

I cannot ask you to become a Firm of the Future because all your competitors have ditched timesheets and hourly-based billing and if you do not you are going to be left behind – that is far from the case. In the majority of law firms in the western world, especially at the mid to large firm level, the primary basis of pricing legal services, measuring and compensating partners and employees, is still based solely on time. But that does not make it right.

Slowly but surely the legal world is changing. Five years ago I and others were explaining to firms why they should move away from time-based billing; now we are assisting them in how to make that move.

You can choose to adopt the ostrich pose and ignore this trend or you can look at ways you can adopt fixed-fee or value-based pricing.

I know some of you will convince yourselves that your clients are happy with being billed by time, but I have the opportunity to meet with many clients of law firms and invariably the majority tell me the same thing – they would much prefer the certainty of agreeing their fees in advance to the uncertainty of hourly rates, ranges or estimates that invariably change.

As stated previously, pricing your services upfront, according to the value you are providing to your client, not on the time spent on a matter nor how many letters you write or phone calls you make, is a much better way to practise law.

And, as all value is subjective, it is your client’s perception of value that is paramount. If your client perceives they have received value, then they have. Equally, the reverse is true. If your client does not understand the value you have provided to them, whose fault is that?

Reaping rewards

If you won’t take my word for it, take the word of the increasing number of firms that have made or are making the transition to becoming a Firm of the Future. Many of them are now very public about their move and are reaping the rewards and competitive advantages that come to any early adopters. They say the advantages to their clients include greater price certainty and piece of mind, improved relationships and communication, and sharing of risk. The firms themselves all say their culture, especially in terms of supporting teamwork and collaboration, has improved, there is less hoarding of work by individuals, and they have happier, more creative and productive teams of knowledge workers released from the shackles of timesheets. Increased profitability is also cited as a benefit, as is the fact that clients who agree their fees upfront have a tendency to pay quicker.

The choice is yours and all I ask is that you use your enquiring legal minds and look at what moving to a timesheet-less practice can do for you, your practice and your clients, rather than coming up with all the reasons why the status quo should be preserved. There is plenty of information out there in the form of books, articles, online publications and forums for anyone seriously interested in making the change to a better way of practising.

Being a Firm of the Future is not just about moving away from time-based billing. Discovering your firm’s purpose; fostering a culture of innovation; better and more-focused client selection; better project management; using leading indicators predictive of performance (instead of lagging retrospective metrics like KPIs); and eradication of annual performance appraisals, all go hand in hand with a timesheet-less environment. All of this will be more attractive to our lawyers of the future.

Clients too now have an increasing array of choices, so next time a client comes to you and asks you, “How much is this going to cost me?” and you cannot answer them, do not be surprised if they go to a lawyer who can.

John Chisholm is a third-generation lawyer, a senior fellow of the Verasage Institute and principal of John Chisholm Consulting.

1 See www.verasage.com
2 See www.firmofthefutureforums.com
3 The term “Knowledge Worker” was first coined by the late management guru Peter Drucker ca. 1959, as one who works primarily with information or one who develops and uses knowledge in the workplace
4 For an example of some law firms that have made the move to non-time-based pricing and the benefits to their firms, their people and their clients, see Law Society of Western Australia journal Brief February 2012 p 12-14 “The Benefits of Fixed Fee Pricing” and Law Institute of Victoria Journal August 2012 p22-24 “Fixed Fees of Value”.