Once again, more chatter from the Australian Lawyer’s Weekly. The billable hour is like what Mark Twain said about the weather: everyone talks about it, but nobody does anything about it. “Scales of (billable) justice,” an article from April 5, 2007, once again proves how lawyers just don’t get alternative pricing.
I love this line from the article:
“The only people on hourly rates work as plumbers, at Burger King or at law firms,” says general counsel for BEA Systems in Europe, Nils Breidenstein. But increasingly, firms say, they are looking for alternatives to time-based billing, which is renowned for trapping lawyers into a working formula of six- or eight-minute units. The billable hour has for years been an irritation for many in the profession, and the clients they serve.
Engage in this experiment for me the next time you drive through a fast food outlet. When you get to the window, do you take the food first, or pay your money first? Yes, Burger King employees may very well be paid by the hour, but Burger King executives at least understand the importance of providing their customers with a fixed price, and being paid BEFORE the product is delivered. Why can’t lawyers understand this?
Even the Chief Justices in Australia understand the tyranny of the billable hour, reminiscent of Supreme Court Justice Bryer writing the Foreword to the ABA’s Commission on Billable Hours report issued in 2002. Here is what two of the Australian judges had to say:
Chief Justice Spigelman has attacked time-based billing, and has called for an end to the “tyranny of the billable hour”. He has criticised the entrenched methodology, saying “I do not believe this is sustainable”. High Court Chief Justice Murray Gleeson has also said it is “difficult to justify a system in which inefficiency is rewarded with higher remuneration”.
They get it, but the law firm leaders don’t. I couldn’t believe this line from Tom Poulton, managing partner of Allens Arthur Robinson:
“I would say that we would be very happy to move off the hourly rate, but every time we try to get off the hourly rate, it is met with resistance because in the end the clients think they can control the number of hours we spend on something when they mightn’t be able to control some other pricing structure. Everyone says very rationally it would be good not to have hourly rates, but I am not sure anyone has a clear idea of what is a sensible pricing structure for legal services,” he said last year.
“There is always the suspicion when you propose billing on a non-hourly rate that we are suggesting it because there is something better in it for us. We have to convince them that it is not necessarily so, but that we are offering a situation that is better for both of us. We are trying to get this right.”
There are many problems with these statements. The first is how he’s shifting responsibility to the customer for changing his firm’s pricing paradigm. That’s nonsense. It’s not the customers job to innovate, it’s the law firm’s.
It’s the second problem that bothers me more. His statement that he’s “not sure anyone has a clear idea of what is a sensible pricing structure for legal services.”
How many books have been written on this topic? Three seminal works from the ABA, by Richard C. Reed, dating back to 1989. Six editions of Professional’s Guide to Value Pricing, by yours truly, dating back to July 1998. Not to mention books by Alan Weiss, Jim Calloway, Reed Holden and Tom Nagle, and many others you can read in our Suggested Reading list. All of these books provide a clear alternative to hourly billing—specifically, using price-led costing, leading to a Fixed Price Agreement and Change Orders for scope creep.
Now lawyers are some of the smartest people I’ve ever met, so I know it’s not stupidity that causes them to say things like Mr. Poulton has. Is it intellectual laziness? Do they not observe how their own customers price their good and services? No business uses hourly pricing, it’s ludicrous. It is a historical anomaly.
Another problem is with his notion that customers will be suspicious of non-hourly rates. But this is nonsense on stilts. If you discuss value with the customer first, and that value determines the price, which drives law firm costs, and the price is approved by the customer before the engagement, then it’s the purest definition of win-win. The article quotes several general counsel who are screaming for exactly that process.
Even more absurd is what the director of marketing, David McClune, from the same firm said:
“[The Australian market] is too small to sustain one premium provider that people come to irrespective of the cost.”
Is he kidding? The size of a market has nothing to do with this. But that said, he’s wrong. When I visited Australia I saw many high-end automobiles. Obviously these owners paid a premium price, even though the Australian market is relatively small.
McClune also says this:
McClune says there is discussion between firms and clients about how to find a suitable alternative to time billing. “There is dialogue about better ways to bill, but no one is really coming up with the answer,”…
Mr. McClune, with all due respect, we have the answer. We’ve had it since 1871 to be precise, with the ushering in of the Marginalist Revolution, which explained how all value is subjective. We’ve had it since Henry Ford and Toyota began utilizing price-led costing in the early 20th century. The fact that you are not aware of this is surprising.
Folks, other than intellectual laziness, what could be the reason for this? I’d love to hear your thoughts.