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.