Excerpt from THE PRODUCTIVE CULTURE BLUEPRINT
This is an excerpt from Chapter 8 - entitled "A Not So Modest Proposal for Change" - of The Productive Culture Blueprint.
The structure of law practice has not changed markedly for a hundred years, notwithstanding sea changes in the composition of the workforce, in technology, and in the businesses that legal services enable and support.
It is interesting and telling that a great deal of what clients view as highly value-added is traditionally considered non-billable by outside law firms. Consider for example:
- relationship management
- acquisition of business acumen
- improvement of teamwork and leadership skills
- development of a solid base of knowledge about the cient's business, industry and marketplace
- preventive risk analysis
- work product retrieval databases, extranets and other IT efficiency enablers
- development and maintenance of forms, training of lawyers and paralegals, and other process and resource efficiency enablers
By focusing on technical expertise alone as our value, and then charging for it by the hour, we are creating absurdity and begging for the very problems we have. Clients often cannot discern between A+ and B- legal work, and, in any event, clients consider providing appropriate (a.k.a. "good enough") legal services to be the responsibility of the lawyer to figure out and deliver - not the client's to discern and value.
Both are valuable, but the five minutes of advice that help a CEO frame a difficult issue for his board of directors are of more value than the 10 hours spent drafting a basic loan agreement for a commodity lending product. The relationship manager who builds in her firm a strong up-to-speed team that is ready to go for the client adds enormous value - and saves cost, too. Nevertheless, in our system, the five minutes and the relationship management are likely not billed at all, while the 10 hours most assuredly are. The billable hours system gives the wrong result - for the client and for the firm - in each of these instances.
I think the reason is both an inherent shortcoming in that system and a category mistake. That is, we are allowing one measurement of cost of goods sold to stand in for value and price, and we are also applying that measurement to the wrong thing.
Both technical expertise and client service are very hard to quantify in terms of value. Value, however, is hard to quantify for everything: stocks, commodity lending products, sweaters in a department store, household repair services, etc. Still, for just about everything other than legal services, a common belief system and marketplace dynamics provide context in which acceptable pricing can be approximated and agreed. Cost, whether expressed as billable hours or otherwise, is essentially arbitrary without due regard to value and context.
A business approach to value determination and pricing would take into account client needs, supply and demand, market conditions, history, client and circumstance specifics, cost of providing the services, profit margins, and all the other contributors to perceived value. There is no reason, other than habit, to think that legal services differ fundamentally in this regard from every other type of service, professional or otherwise. From a value quantification standpoint, legal services are not more dependent on the time spent producing them than anything else one might buy.
We do not pay more for a cashmere sweater or, for that matter, for a Chanel sweater solely because it took longer to knit. It may have done so, but the contributors to the higher price are more ineffable: the tacit agreement between buyer and seller that cashmere is a finer fabric, with more softness or better warming properties, that a Chanel design is worth more than a run-of-the-mill design. The billable hours protocol tries to make time spent - expressed as billable hours - serve as a proxy for value, but is very hard to justify as such because it creates absurd results and is, in any event, irrelevant to clients.
Nothing is more central to the legal services industry than the relationship between lawyer and client. Nevertheless, legal work is typically requested, provided, and paid for not on a long-term relationship basis, but on a project-by-project, one-off basis. Interests are often not aligned; trust and loyalty are not exactly commonplace. These factors, in turn, make open communication (the sine qua non of good relationships) a risky proposition.
Not every client is a good client for every law firm. Like any other business, the outside law firm should consider which clients it is best suited to serve, taking into account the firm's capabilities, work style, revenue and profit requirements, and other parameters. The firm should then do everything it can to develop long-term, entangled and mutually beneficial relationships with those clients.
The billable hours system and the compensation structure that rewards new business over repeat business are, I suspect, to blame for the prevalence of the project-by-project, one-off approach to legal services procurement and delivery. As noted above, a lot of what it takes to build long-term, entangled and mutually beneficial relationships is traditionally non-billable. Moreover, for everyone but the original billing partner, doing what it takes may be an investment with a highly dubious return under the firm's compensation system.
If you agree, however, that establishing a foundation and then building on it incrementally is more productive (and gets you farther over the long haul) than, like Sisyphus, pushing the rock all the way from the bottom of the mountain to the top every single day, then you will also likely agree that a longer-term, relationship-based approach to procuring and delivering legal services is a better, more efficient strategy than a transactional, one-off approach. Once there is a relationship, familiarity, and a firm sense of what will add unique value and generate repeat business, there will also be sufficient context to develop a mutually beneficial pricing arrangement in which both buyer and seller perceive and agree on value, taking into account marketplace dynamics. The value so agreed will be far more comprehensible and justifiable than the so-called value that derives from a simplistic reliance on hours spent - even assuming complete integrity and efficiency in the spending of those hours.
Despite all the frustration and complaining, clients do not typically insist that their lawyers provide right-sized legal services at a fair price, all in the context of the client's business objectives, industry and marketplace dynamics, corporate culture and risk appetite. Clients seize on complaining about fees, rather than recognizing that this targets the symptom, not the disease.
That is, because legal costs are high, clients perceive the goal to be reducing costs. Then, they conduct expensive beauty pageants or RFP processes to decide what firms to use. They demand limited involvement by outside counsel and impose other approaches that, in the end, increase legal costs. They spend inordinate time, and cause inordinate aggravation, by disputing fax charges or attempting to micromanage how the firm staffs or handles each discrete matter.
How any of this reduces costs is a mystery to me. In any event, however, reducing costs is not the goal. It is instead more properly viewed as an outcome, with the goal being cost-effectiveness - and cost-effectiveness results from relationships, familiarity and right-sized, "good enough" legal services.
The chapter goes on to offer my proposal for how to transform the legal services industry for the benefit of clients, lawyers and law firms.
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