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Beyond the billable hour: new ways of pricing legal services

14 Apr 2022

| Author: Rod Vaughan

Traditionally, two things have remained constant in the lives of most lawyers: billable hours and working from an office. But covid has thrown a curve ball into the mix, forcing many to work from home and embrace new methods of billing clients.  Little wonder, then, that lawyers have been flocking to seminars about how to ditch the old billing model and embrace a more client-centred approach to pricing their services.

The sessions are run by legal consultants Simon Tupman and John Chisholm. Chisholm, who describes himself as a ‘third-generation recovering lawyer’ and has been a partner, managing partner and CEO of Australian law firms, is regarded by some as the guru of law firm pricing in Australasia. He told LawNews that billable hours should be a thing of the past. “No one went to law school to learn to be the best time-recorder. As a profession, we claim we recruit the best, the brightest, the most creative – and then make them account for every six minutes of their day. “One of the major problems with the billable hour model is that it focuses lawyers on tasks, activities, and inputs instead of what really matters to clients – what should really matter to professionals who work in law firms – outputs, outcomes and results.” Billing and pricing are two different things, he says. “Billing takes place after the work has been performed. Pricing takes place before the work is performed.”  Chisholm says there is now irrefutable anecdotal evidence that law firms which have abandoned billable hours not only have better work environments but are more viable and profitable.

Firms that have taken that step report other benefits such as:

  • substantially improved profit and cashflow;
  • reduction and often complete elimination of cost disputes
    with clients;
  • improved value creation for clients;
  • enhanced relationships of trust with clients; and
  • a more inclusive and collaborative internal culture.

New models

Chisholm says he and Tupman are both big advocates of adopting value-based pricing and/or subscription-based models in law firms. “Subscription models are the fastest-growing business model in the world now and they are increasingly being used in the law world, not just by online providers such as LegalZoom but also more and more by hitherto traditional firms. “Both models are timeless and require firms to price their services up-front, based on the perceived value they are going to provide to their clients,” Chisholm says. “To implement successfully, lawyers first need to have a value conversation with their client to understand what is important to them, what they value, what they want and, importantly, what they need. “There are, however, important differences and considerations required for firms that wish to adopt a subscription model. A value-based model in the main still prices transactions with a client, whereas a subscription model prices the relationship with a client.” Chisholm says in a value-based pricing environment firms need to scope the value and the work and, after agreeing on the scope, agree on the price. “As mentioned previously, the price is based on outcomes, results, and outputs, all of which are important to clients, not retrospective fees based on inputs and activities or firms’ own costs, none of which are important to clients. “If the scope changes, so might the price but you will always agree change of scope and change of price up-front.” Chisholm says even before covid appeared on the scene many businesses around the world recognised there were better ways of operating without forcing their people to work longer hours. “Back in 2003, two American entrepreneurs, Jody Thompson and Cali Ressler, created Results-Only Work Environment (ROWE) and co-authored two best-selling books on revolutionising the workplace and the practice of management: Why Work Sucks and How to Fix It and Why Managing Sucks and How to Fix It. “In short, in a ROWE environment, employees can do whatever they want whenever they want, as long as the work gets done. Many businesses worldwide have instituted a results-only environment.”

Four-day week

Not surprisingly, Chisholm is also a believer in the four-day working week being advocated worldwide by New Zealand innovators Andrew Barnes (the founder of Perpetual Guardian) and his partner Charlotte Lockhart. The pair co-founded 4 Day Week Global, a not-for-profit community to provide a platform for those who are interested in supporting the idea of the four-day working week as a part of the future of work. “They encourage business, employees, researchers, and government to all play their part in creating a new way of working which will improve business productivity, worker health outcomes, stronger families and communities, challenge the gender equality issue and work towards a more sustainable work environment,” Chisholm says. So what’s stopping law firms from embracing this as well? The answer, according to Chisholm, is plain to see. “No surprises here. In short, it is our business model.” Chisholm cites a comment by Matthew Burgess, ex BigLaw partner and now owner of specialist Australian estate planning firm View Legal, which never recorded or billed by time and long ago adopted a value-based pricing and subscription model: “With timesheets you think what is billable. Without timesheets you think what is valuable.” “Wouldn’t you, your team, and your clients agree that thinking what is valuable as distinct from what is billable is a much better way to practise your craft?” Chisholm says. “And, equally, wouldn’t you, your team and your clients agree that if you base your business model on outputs, outcomes, and results instead of inputs, activities and time spent, everyone would be better off? “You can. The choice is yours.”

Some qualms

Chisholm’s enthusiasm for new business models and four-day weeks may appeal to many lawyers but there were reservations among those spoken to by LawNews, especially about working from home and abandoning billable hours. McElroys partner Kiri Harkess says the Delta lockdown demonstrated the disadvantages of long-term remote working. “It is much harder to stay engaged, work collaboratively and give and receive mentoring,” she says. “The boundary between work and home life dissipates, especially in lockdown as that is all there is. “I feel that junior lawyers and new recruits bear the burden of these disadvantages. It is hard to work from home in a shared home or apartment. They miss out on the incidental learning and collegiality that happens day to day in the office. “They don’t have the same opportunities to observe what happens around them or, say, run up to court and appear in a list. All that they see of the firm or the profession generally is the direct work product that they are involved in,” she says. She also has reservations about the four-day working week as a business model, particularly for traditional law firms which operate a billable hours system. “I don’t see law firms moving away from that model any time soon, despite its imminent death being talked about since I was first admitted,” Harkess says. “The reality is that lawyers work to fee budgets of, on average, six billable hours per day over a five-day week. To achieve the same targets in a four-day working week they would have to work considerably longer hours each day. “Each billable unit carries with it non-billable time and work, so it is not as simple as adding on another 1.5 budget hours for each work day.” That said, she thinks hybrid working is now the new normal. “Our clients have adapted exceptionally well to hybrid delivery of legal services. Working with them is a pleasure, even if we don’t see them in person as much as before.  “Although I was initially concerned the restrictions would cause significant delays to civil proceedings, that has not been the case for most of the litigation our firm is involved with,” she says. “Most practitioners, experts and mediators we work with are now comfortable with online meetings, mediations and hearings. Life goes on, just in a different direction. “I do think hybrid working is here to stay and that is a good thing for lawyers and law firms. I hope the result is that as a profession we make our firms workplaces where our employees choose to be, not have to be.” But working remotely doesn’t suit everyone, she says, and practising law is much more than producing work and recording units. “The early part of your legal career should be a really fun and exciting time, learning how law works in real time, dealing with clients and other practitioners and building professional relationships. “This can all still be done remotely, but it is not as effective. I feel for graduates and new practitioners who have missed out on that over the last two years.” Working from home suits experienced lawyers the most, she says. “They know what work they need to do and how to do it. They are more likely to be in control of their workflow. They have established relationships with colleagues and clients, and it is far easier to maintain those relationships remotely than build them from scratch.” Harkess says senior practitioners are also more likely to have a private and quiet area at home to work in and, particularly if they have dependents, there are real benefits to not having to commute and flexibility around work hours. “They are leading the charge for hybrid working and in the current market are well placed to negotiate those terms. Legal employers will have to adapt to this, if they have not already.” Harkess says she has taken a keen interest in the northern hemisphere experience where corporates and law firms have had much longer periods of remote working and greater prevalence of covid in the community. “They had a similar trajectory: employees’ strong preferences to work from home; realisation from businesses that the sky was not falling; adaptation of a hybrid model; and a renewed appreciation of the office. “Interestingly, women often reported they prefer working from home because they feel their performance is assessed on work product and not on things like sports chat, socialising after work and being seen to work late, where they may be at a disadvantage in white-collar workplaces. “I didn’t experience this, but I wonder if other women lawyers in New Zealand have?” Harkess says after the first lockdown McElroys encouraged people to come back into the office. “We took it slowly and we were flexible around individual circumstances and perception of risk. At the beginning, it felt quite lonely in the office. It was hard for new recruits and junior lawyers. “Many of our lawyers wanted to retain the benefits of working from home some days per week, which we supported with flexible working arrangements, but for most the novelty of working from home wore off over time. ■

Next issue: how the four-day week and fixed-fee billing is working for some Kiwi law firms ■

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