I Want To Murder The Billable Hour (Part 2)

A few months back, we wrote an introductory article discussing the downside of the billable hour.  You can find that here: http://growthcounsel.com/i-want-to-murder-the-billable-hour-pt-1/

In the second installment, we get into the weeds of why fixed fees are better for the client.

Why Fixed Fees are Better for the Client

Let’s face it – if fixed fees didn’t solve an obvious problem inherent to the current billable hour standard then I wouldn’t invest time to write about it (and you certainly wouldn’t spend time reading about it).  A sustainable solution must work for both the client and the lawyer.  In this installment, we’ll focus on the benefits to the client – both the obvious and the (more compelling) non-obvious.

There are superficial reasons why fixed prices are better for the client.  By “superficial” I don’t mean unimportant.  I simply mean benefits that are obvious and can be easily identified by both parties (client and lawyer) during a specific transaction.  Nevertheless, like an iceberg, the most substantial portion of this new dynamic lies well beneath the surface.

The more exciting and compelling reasons are the ones that may not be readily apparent to the client.  However, since the superficial reasons are still very valuable, we’ll start there and then dive into the less obvious reasons as to why fixed fees have the potential to both (a) drastically improve the work product given to clients and (b) dramatically transform the client/lawyer relationship for the better.

The biggest superficial benefit to the client is cost certainty.  In a world where clients are fed-up with lawyers frequently blowing past estimates due to “unforeseen complexities” or missed deadlines and associate “training,” this is by no means a trivial benefit.  From the client perspective, they know, “I am spending $X to get result Y.”  There is significant value in knowing the expected result and the legal budget needed to get there.

The secondary benefit (which cannot be overstated) is that it forces the client and the lawyer to clearly scope out and define a project upfront.  With an hourly schema, important considerations can be left amorphous, which typically hurts both parties.  With a fixed fee and scope of work, both parties have skin in the game and the incentive to really think about what needs to be accomplished.  If the client doesn’t engage in the process, they may not get the result they want.  If the lawyer is lax about the scoping process, they run the risk of getting paid way too little for way too much work.  As with anything in nature or business, clear consequences and costs force everyone to pay attention and (very tangibly) align incentives from the outset.

Now let’s get to the more compelling (and less obvious) reasons why fixed fees are often the best structure for the client/lawyer relationship.

REASON NO. 1:       The Lawyer is Incentivized to Do Better + More Efficient Work = The Client Gets Better Work Product at the Same Price Point

Let’s stop talking about the law for a second.  Let’s pretend we are producers and consumers of automobiles.  Since lawyers oversee everything in this alternate (and likely deathly boring) universe, let’s assume that all products are priced based on the man-hours that go into producing the cars.

Because a car is an expensive and important purchase, the manufacturer must clearly define and convey the benefits of the car (just like a lawyer scoping out a fixed fee proposal).  The customer knows EXACTLY what they are getting for their money (unlike the billable hour dynamic).  Imagine a customer agreeing to buy a car without knowing (a) how much it will ultimately cost or (b) what features/attributes the car has.  No rational consumer will sign up for that deal – yet that’s exactly how the majority of legal services are sold!  Something else very important happens when the price is fixed – the quality and efficiency MUST increase or the car manufacturer suffers.

They won’t stay in business long if their cars (a) add less value to their consumers than their price tag, (b) vary wildly in quality from car to car or (c) take different amounts of time to manufacture. For the car manufacturer, the focus MUST shift to (x) quality and (y) efficiency, both of which benefit the client AND the manufacturer.

Under the traditional and outdated model, the law firm is incentivized by the quantity of hours it can “produce”.   With our proposed model, the law firm is only rewarded for quality and efficiency.

Which approach sounds better for consumers/clients?

REASON NO. 2:       The Client/Lawyer Dynamic Shifts from a Reactive Relationship to a Proactive Partnership

Admittedly, the second reason why the fixed fee benefits the client is a bit subtler.  While some of the rationale is anecdotal, I think we’ve seen enough data points at this stage to justify a fairly concrete conclusion.  In short, client relationships that do not center solely on the billable hour tend to be more proactive, more valuable and have less friction.

The difference is apparent every time a client is empowered to pick up the phone before an issue arises.  Almost without fail, it’s cheaper and faster to proactively prevent legal issues than it is to fix them after they’ve arisen.

Inevitably, proactive engagement leads to the lawyer having a deeper and more nuanced understanding of the client’s business.  This helps to make the lawyer’s advice customized, efficient and effective.  The company lawyer is no longer helicoptered in to solve a problem, spending time getting back up to speed and then helicoptering back out until there’s another issue (when the cycle repeats from scratch).

In our experience, nothing is more important to improving the client/lawyer relationship than to allow the lawyer to completely understand the client’s business, needs and pain points.  When there is an on-going and in-depth relationship, it becomes easier to quickly and effectively solve client problems.  This benefit is amplified when the lawyer has a working relationship with team members within the organization instead of just the CEO or General Counsel.  As those relationships develop, the lawyer is enabled to quickly identify and solve problems.  Problems can be pre-emptively addressed with 20 -minute phone calls instead of 10-page memos from 3rd year associates that will get passed around the exec team (without anyone really being able to act on said memo).

The catalyst for this shift is simple – incentives are not aligned.  It’s often said that you can only manage that which you measure.  In the traditional law firm model, only the billable hour and corresponding realization rates are being measured.  Not surprisingly, legal fees tend to grow a lot faster in those scenarios.

Often, the concern from the CEO is something in the line of, “How do I know we are getting value if you aren’t keeping time?” This concern is very clearly and simply addressed with the following counter-points:

1.  Why do you feel that you have a better sense of cost vs value when you are getting billed by the hour? After giving it some thought, it usually becomes apparent that this is a false comfort.  Chances are that they have never been positively surprised by a legal bill.

 2.  With any salaried team member (let’s use salary as a stand-in for fixed fees), the CEO is always intuitively assessing the team member’s value vs. their cost.  Whether that’s a janitor, VP of Engineering or COO, the calculus remains simple and consistent.  Employees who produce more value than they cost are retained and promoted.  Those who produce less value than they cost typically do not last long.  In most cases, hours of the salaried employees are not being tightly tracked and yet the CEO is very comfortable making these value assessments on a regular basis.  We’d argue that the relationship between the client and outside counsel should be no different.

By now, hopefully we’ve spilled enough ink to illustrate the benefits of fixed fee arrangements from the client’s perspective.  For our next installment, we’ll examine the benefits of the fixed fee approach for the law firm.   Our goal is to convince you that this “new” model of client/lawyer relationships creates absolute (and relative) value for both sides.

I Want to Murder the Billable Hour (Pt. 1)

“If all you have is a hammer, everything looks like a nail.”

When I started my career at a big law firm, something about the billable hour always felt off to me.  It’s almost as though it ran counter to every basic principle of economics and human psychology.   One late night after a week of filling up a timesheet with 80+ billable hours and being fueled almost exclusively by espresso and Chinese takeout, it hit me.

We weren’t really selling legal advice or effectiveness or talent or even expertise.  We were manufacturing and selling billable hours.  When viewed in the most favorable light, the billable hour is an arbitrary and illogical unit of production and performance with only a loose correlation to results or value.

The typical law firm only makes money by billing hours.  The 5 minutes of perfectly nuanced advice that saves a billion-dollar deal gets valued exactly the same as the 10 minutes that a first-year associate spends formatting font size on an internal checklist.  To borrow a legal turn of phrase, that seems pretty f!@%ed up.

Let’s consider two fictional (albeit common) scenarios that illustrate the vast disconnect between billable hours and actual value:

Scenario 1:  Lawyer spends 50 hours solving a $10,000 problem.  Lawyer gets paid way too much for way too little value.

Scenario 2:  Lawyer spends a single hour giving timely, important and nuanced advice that takes her entire work experience and distills it into a vital decision that saves a deal worth $10,000,000 to the client.  Client gets way too much for way too little.

The misalignment in incentives is obvious.  In Scenario 1, client is penalized for proactively engaging legal counsel.  In Scenario 2, the lawyer is penalized for being great at her job.   Expertise, efficiency and effectiveness are undervalued when those are the 3 things that actually created value for the client.  Play out this scenario a few thousand times in every firm every year and it’s easy to see why the industry generally lags behind the market when it comes to innovation.  In turn, inefficiency, and not maximizing internal resources, gets rewarded in Scenario 1.

In no world does that combination of mismatched incentives lead to a great result for either side.  Everyone loses.  The work product and client relationship suffer across the board.

Clients lose the desire to proactively engage legal counsel when they should.  Law firms lose the desire to innovate or become more efficient.  The net result is that the vast majority of legal matters get over-lawyered or under-lawyered.

Companies like LegalZoom don’t exist because LegalZoom does amazing legal work (spoiler alert:  they don’t). They exist because law firms have no incentive to evolve their business practices to keep pace with the modern age.    The war cries to commoditize legal services only exist because there are basic market needs that are not being met by the current system.

Clients are rightfully attacking the billable hour out of a growing frustration with rising legal costs. “Put most bluntly, the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour,” said Cisco’s general counsel, Mark Chandler. In a speech at Northwestern University’s law school last January, he called the billable hour, “the last vestige of the medieval guild system to survive into the 21st century.”

There is no perfect solution, but there is a better way.

In future installments, we’ll dive deeper into the problem and our proposed solution.   Stay tuned…

 

GrowthCounsel Mission and Core Values (Costa Rica Edition)

On our recent firm retreat to Costa Rica, we sat down and really thought about who we are, what we value and what we view as our mission.  This was an incredibly valuable experience for us and we want to share the results with you.

The “Why” of GrowthCounsel.  Our core mission is simple.  We want to the make the professional lives of our clients and our team members more productive, satisfying and successful.

For clients, this means helping them amplify their efforts, protecting them and using our skill sets to enable them to reach their goals.  We want to make the experience of working with a law firm productive and enjoyable.
For internal team members, we want to make working for a law firm a professionally/personally rewarding and enjoyable experience.  We don’t want to fix the old model; we want to build a new one.  We want to help our team grow and truly feel like they add value and are valued.   It’s our job to make our teams members feel like they get more value from us than we get from them.

This mission is our North Star.

GrowthCounsel Core Values

  1. Do great work.  This comes before and above everything else.
  2.  

  3. Focus exclusively on adding value.  Fees, hours, rates, etc. are always secondary.
  4.  

  5. Be responsive.  Don’t be the bottleneck.  Don’t put off projects.  Be pragmatic.  Get shit done.
  6.  

  7. Be thoughtful and thorough, but smartly embrace risk and uncertainty.  This is where the good stuff happens (for our firm and for our clients).
  8.  

  9. Work with people that excite you and with whom you want to build something.  We don’t need 500 clients.  We want 50 true partners.
  10.  

  11. Don’t talk ourselves up.  That’s not our job.  If we do great work and add value, we will always have our choice of clients.  If you have to tell people how good you are, then you ain’t that good yet.
  12.  

  13. Focus on what matters.  Ignore everything that doesn’t.  Random events, awards, accolades don’t mean anything and take you away from client service.  Skip the happy hour and get shit done. Be selective about what you take on.  We should do fewer things, but do those things really, really, really well.
  14.  

  15. Be honest, direct and transparent.  Keep your word.  “I will get you something tomorrow” means actually getting it done by tomorrow.  This is a huge part of trust and what sets us apart.
  16.  

  17. Be vulnerable enough to ask great questions.  Don’t try to impress someone with how much you know about their industry.  We all have Google.  Really understand it and give a damn about them.  If you’re doing all the talking, maybe try shutting the hell up and listening.
  18.  

  19. Have the courage to respectfully disagree with clients when necessary.   We are paid to help make tough decisions, not to rubber stamp things or to be someone’s justification for a course of action.
  20.  

  21. Be a connector.  Go out of your way to link up like-minded people.  Great things come from that.  Never expect or want anything in return.  Worry only about what you can give to people.  Make the tide rise.
  22.  

  23. Be generous.  Always pick up the tab.  Always treat people to unique and important experiences.  Take joy in being able to give those things to other people.
  24.  

  25. Stay hungry.  Complacency will kill what makes us different.
  26.  

  27. Have fun and appreciate the good times.  The firm and our clients work too hard not to celebrate the great moments when they are here.
  28.  

  29. Get shit done.  Have we said that already?

 

Please Welcome Ted O’Connor to GrowthCounsel!

GrowthCounsel is absolutely thrilled to announce that Ted O’Connor (“Teddy O” to us) has joined the firm as our newest partner.

Ted’s legal acumen and experience speak for themselves; he gives us a breadth and depth that we could have only dreamed of a year ago.

More importantly, he is the type of person that fits perfectly with the collaborative community we are striving to build. Ted’s bio, experience and contact info are at the end of this email, but we really wanted to share our thoughts on Teddy O, the human being, and why it was important to convince him to join GrowthCounsel.

There’s a quote from Almost Famous that has always resonated with us:

“The only true currency in this bankrupt world is what we share with someone else when we’re uncool.”

There are a lot of people who look out for you when it’s what they’re supposed to do or when there’s an expected payoff. Great people take care of you even when they have nothing to gain.

When Geoff and I started our careers at our first firm out of law school, we found ourselves in tumultuous times. People were getting fired. People were leaving. People were generally unhappy and wrapped up in their own situations. It’s fascinating to watch people react in those circumstances. Some look out only for themselves, hoard work, stop mentoring and generally stop caring about those in lower positions. As first and second year associates, we were admittedly lost and (if we’re being candid) scared at times.

Teddy O, on the other hand, took us under his wings. He helped us through the turmoil even when we had nothing to offer him back, when it wasn’t in his self-interest to do so. We’ll never forget that. Ted (along with some other great mentors along the way) helped to shape us into the lawyers and people we are today. We are forever indebted to him (and them) for that.

The fact that Teddy O is a tremendous lawyer (and he certainly is that) is just a bonus. We’d have found a way to work with him no matter where his career went.

We’re incredibly excited to see the great work Ted will do for GrowthCounsel clients and partners. We consider ourselves extremely lucky that we were somehow charismatic (or maybe just lucky) enough to convince him to leave a great gig to help us build something in the wilderness.

Ted makes us a bigger firm and a better firm. He gives us more high-end M&A and corporate firepower.  We can’t wait to watch him thrive in our environment.

Please join us in welcoming Ted to the GrowthCounsel family. Let’s continue to grow together.

Onward and upward!

Cheers,

Geoff and Ryan

 

Ted’s Contact Information: 

Ted O’Connor, Esq.

Ted@GrowthCounsel.com

267.225.8795

448 N. 10th Street, Suite 301

Philadelphia, PA 19123

Ted’s Bio:

Ted brings broad and deep in-house and transactional experience to GrowthCounsel, having split his time between a Philadelphia-based AMLaw100 law firm and cutting-edge data/marketing companies. Ted’s focus is serving as outside general counsel to mid-market and emerging companies, as well as guiding his clients through M&A transactions. His clients regularly turn to him for advice on general corporate, commercial contract, data privacy, employment, real estate, and other matters to help them achieve their business and legal goals.

Ted’s mix of legal expertise and pragmatic business acumen are what separate him from run-of-the-mill legal counsel. He serves as a lawyer, advisor, and de facto member of the management team to his clients and enjoys adding value well beyond the typical lawyer-client relationship.

Prior to joining GrowthCounsel, Ted spent over seven years as in-house counsel for private equity-backed marketing services companies. Most recently, Ted served as Associate General Counsel and Senior Vice President of Business Affairs and Privacy at global marketing network Engine Group, as well as General Counsel and Secretary of Engine’s global market research firm ORC International, where he advised teams across the US, Europe, and the Asia-Pacific region. His extensive in-house experience makes him exceptionally qualified to assist his clients with growing and protecting their businesses.

Ted lives in the Chestnut Hill section of Philadelphia with his wonderful wife and two middle schoolers—and the dog. Like Benjamin Franklin, Ted moved from Boston to Philadelphia as a young man, and, while usually displaying great taste, he remains a die-hard Bruins, Celtics, Patriots, and Red Sox supporter. Please do not hold this against him (or us). We have looked into this, and, apparently, New England sports fans have rights, too (for now).

  Education

· Juris Doctor, Duke University School of Law

· B.A. (History), University of Pennsylvania