Legal Business Model is Broken

Two interesting articles came out this past week on the problems facing the legal firm’s business model.

When the intellectuals at Knowledge @ Wharton write “It’s Time for Law Firms to Re-Think Their Business Model,” you know something big is happening. Academia tends to be a lagging indicator, as many folks have been pointing out the flaws in the billable-hour-pyramid-leverage model for decades.

Still, it’s worth reading, not only for the problems with hourly billing, but also why the partnership model needs to be revamped.

Our problem with the partnership model is it’s one based on broad-consensus, and as Margaret Thatcher was fond of pointing out, “Consensus is the absence of leadership.” Combined—hourly billing and partnerships—these two factors are responsible for the lack of innovation within legal firms.

To be innovative, one needs time to think, and in the billable hour model that’s “non-billable” time, an anathema. So all of the knowledge companies that provide anywhere from 15 to 20 percent free time to work on what you want, such as Google, Gortex, 3M, aren’t emulated by PKFs because of this mentality.

The second article is from Down Under, The Australian Financial Review, “Lawyers in dock over hourly bills.” (Thanks to John Chisholm and Paul Dunn for passing this along).

This article cites a survey by the Australian Corporate Lawyers Association that found only 1 percent of corporate counsel thought hourly billing was the best approach to pricing! Then is states this:

Major law firms say the are open to different models, but that no better alternative had been proposed.

Are they kidding? Look around the rest of the business world, and you’ll discover all sorts of pricing paradigms.

This is clearly letting the perfect be the enemy of the good. The logic seems to be, since we can’t find a perfect alternative to the hell of the billable hour—which most everyone despises—we’ll stay with what we know.

The article cites a partner from a major law firm saying there are no agreed common standards for value billing. Well, duh. That’s because value is subjective, and trying to standardize it is insane.

Are they waiting for a formula, like hourly billing?

A couple of alternative firms have started-up Down Under, Optim Legal and Advent Lawyers, that operate on a fixed-price model.

Yet the problem with these models is they’re all about “lower price,” not great value to the customer.

Don’t get me wrong, I’m not against a low-cost business model, and if that’s what you want to do strategically, go for it. But my guess is most readers of this site aren’t interested in competing on price but rather value.

As one General Counsel says:

The focus for us is not on costs for costs’ sake, but on value.

Unless you want to be Wal-Mart, firms should focus on maximizing customer profit.

Loosely defined, customer profit = Value – Price. Most people don’t think about customer’s making a profit, but they surely do from every transaction, otherwise it wouldn’t take place.

In-house counsel is screaming for value, not low price.

The smart law firms know this; the dumb ones price less than even hourly billing.

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