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Beware the Big Bad Wolf: Traditional Law Firms Offer Too Little, Too Late

November 8, 2012

This is the third installment of my “Cliff Notes and Takeaways” series, which discusses, from a client’s perspective, 3 Geeks and a Law Blog’s recent five-part series: “The Economics of Law and the Future of Legal KM.”  Toby Brown, the author, is a smart guy who is doing his very best to help traditional law firms navigate the challenges facing them today.  Recognizing that the “gravy train” of the last fifty years is over, Toby offers advice on how “traditional” law firms need to adapt to ensure continued profitability (and hence, their continued existence).  In Part 2 & Part 3, Toby identifies the four profit drivers for traditional firms:

  1. Rates
  2. Realization
  3. Productivity
  4. Leverage

In Part 4, Toby discusses how market forces, including technology and the Great Recession of 2008, have negatively affected the first 3 drivers, leaving leverage as the profit driver that should be highly prioritized by firm management.  In Part 3, Toby notes that:

Leverage is the highest impact profit driver.  And firms looking to enhance their profitability will want to encourage the best use of leverage and not let low productivity encourage counter-productive behavior.

The basic economic concept of leverage is that the more workers work, the more owners (partners) benefit.  Workers generate the profits that pay partners.  Therefore the more work is pushed down to them, the better leverage you have and the more profit is generated.

Of course caveats apply.  Partner level work should be done by a partner.  The mantra here is:  push work down to its lowest cost, appropriate labor source.  This sounds obvious and reasonable; however, until recently, firms have profited from pushing work up to the highest rate source, which was a great idea when competition was low.

According to Toby, properly managed leverage, i.e., work done by the lowest cost, appropriate labor source, can result in a “win-win” situation because if work is always pushed down to the lowest cost competent resource, the overall fee to the client should go down and profit is maximized for the firm.

Wow.  Toby is good.  I was almost starting to drink the Kool-aid.  But informed client’s must understand that Toby’s recommendations are merely advising law firms to tweak the status quo.  They do nothing to significantly change the “world of pain” that your law firms have been inflicting on you for the last 25-50 years.  Yes, in Toby’s perfect world, your firm would efficiently handle your matter using the lowest cost, qualified time keepers.  Back in the 50’s when the ABA stated that a lawyer could reasonably bill 1300 hours a year, you might have actually paid a fair fee.  But, as Toby notes in Part 2, firms now conservatively demand 1800 to 1900 hours a year from their associates.  And as I’ve pointed out on all corners of my blog, these high billable hour quotas invariably lead to bill padding and overcharging.  So if you are fine with all that, and really like golfing with your firm’s senior partner (who made $1.4 million last year thanks to clients like you), that’s your prerogative.  Using a firm efficiently implementing Toby’s leverage model will result in some modest savings and will upgrade you from an “Ugly” client to a “Bad” client.  Of course, you’ve still got a long way to go to get your knuckles off the ground and become a “Good” client.  Baby steps, grasshopper.  Soon you may be ready to free yourself altogether from the evils of the billable hour . . .

5 Comments leave one →
  1. November 10, 2012 9:41 am

    Interesting perspective. Do you think it’ll get read and taken on board by the people who should do both? The best bit, of course, is the final line!

    [Originally posted on LinkedIn group Profitable Pricing for Lawyers]

    • November 10, 2012 9:58 am

      David, I’ve discussed elsewhere (All Billable Hours are Not Created Equal) that the problem is less about the billable hour in theory, but rather how the rise in billable hour quotas invariably causes bill padding and rampant overcharging. Who bears the ultimate responsibility for this? I’d say it’s the GCs and clients, who after all, write the checks. Lucky for them, it appears a tipping point has been reached and the end is near for the Good Ol’ Days, as reported by many, including Bruce MacEwen (“Growth is Dead” series), Jordan Furlong (“The evolution of the legal services market” series), and on your side of the pond, Stephen Mayson (“The Grand Delusion”.) Exciting times, actually.

  2. November 13, 2012 7:51 am

    I agree that there are problems with time based billing, particularly the way some firms apply it, but is it really dying, and why isn’t this conversation applying to any other industry? My plumber and accountant charge on a time basis and I haven’t heard that that’s changing any time soon.

    We really need to consider what our clients want and take it from there. I offer fixed fees, but some clients prefer time billing because they feel that they’re then paying for what has actually been done.

    [Originally posted on LinkedIn “Profitable Pricing for Lawyers”]

  3. November 13, 2012 7:53 am

    It is changing in other professional services too, but slowly. Some Accountants, Business Advisers, Coaches, Doctors, Dentists etc. are seeing the light and making the move. In fact there is lot going on in Australia, which is possibly the second most enlightened country in this regard after the USA.

    There are actually three types of service business and your plumber is not in the same group as lawyers and accountants. I am not at all surprised that plumbers continue to charge by the hour and I wouldn’t seek to persuade them otherwise.

    As for your own clients, you might need to educate them on the difference between your effort and the value they derive from it. I doubt they’re really paying you just to show up.

    [Originally posted on LinkedIn “Profitable Pricing for Lawyers”]

  4. Thomas Bowden permalink
    November 13, 2012 7:55 am

    Nova – I agree with David. We are not plumbers, because we deal in knowledge in the abstract. A plumber’s results tend to correlate with the number of hours they spend, because there is not much technical innovation in that field, but I bet you dollars to doughnuts that if someone invented an automatic pipe soldering device that saved a lot of time, plumbers would use it and increase their rate to reflect the increased productivity.

    [Originally posted on LinkedIn “Profitable Pricing for Lawyers”]

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