Some in the profession may well see it as ‘heresy’ and a curse, but law firm consultant, Ted Dwyer, says firms are being forced to dig up alternatives to time-based billing.
Rio Tinto has hired a team of lawyers in India to try to reduce its annual £60 million legal bill by 20 per cent. This decision is yet another ‘wake up’ call to leaders of law firms. This will have major impacts on the legal market in England and Wales, with aftershocks in the major legal markets around the world, including Australia.
This should be no surprise to leaders of law firms. However, I suspect it might be, for some. Time and time again, clients have expressed unhappiness with the cost of legal services, driven by time billing. Yet many firms have been found wanting in their response.
It’s not hard to see why. The current generation of equity partners have been reared on the leveraged profit model. Net profit margins over 35% have become the norm for many law firms. High profit margins like t, see is are a blessing and a curse. They permit law firms to produce very high quality work. They can also blind partnerships to the need for change.
At the heart of the leveraged profit model lies time billing. For many firms, time billing has been the engine of growth for over 30 years. To some partners, the idea that it might have to be changed is heresy. They point to surveys showing that clients are happy with time billing. They argue that time billing, while not perfect, is the most accurate method that exists. They argue that it produces quality, transparency and value.
Lawyers often confuse quality and value. Leading law firms produce work of exceptional quality. But that, in itself, does not mean it is good value. The client’s evaluation of work is driven by the price paid, for the quality received. Rio Tinto’s recent decision shows that clients want more value for their investment.
The simple fact is that clients have decided that the model works against their needs. Clients need to reduce legal spend – how many firms are helping them do this? Hardly any. Sure, over the last decade, there has been a proliferation of ‘alternative fee agreements’, which are often minor variations on the leveraged model. However, as time remains the basis of billing, these AFAs are like using a band aid to cure a virus. Complaints about inaccurate estimates, ‘low balling’, costs blow-outs, inefficient work practices and a lack of commerciality are common.
Some law firms have responded to the new environment with innovative, fresh ideas. Lovells’ ‘Mexican Wave’ was groundbreaking. Simmons & Simmons move to outsource legal work to India, South Africa and Australia is positive. In Australia, however, there is little innovation when it comes to how legal services are delivered. Smaller firms such as Optim Legal are the template for the future, but among the majors there appears to be a worrying lack of preparation for a very different future environment.
What is required is strategic renewal, combined with a degree of courage and risk. Major law firms will need to grasp new opportunities, as well as fundamentally re-engineer their overhead to deliver quality and value. Among other things, this means:
- the first major firm that remodels their pricing strategy will gain a competitive advantage over rivals. For many legal services, this will mean replacing the leveraged profit model with a new model based on certain fixed fees, agreed in advance.
- aligning capacity requirements with client needs. The traditional recruitment model, which requires clients to fund a ‘quality pipeline’ of expensive solicitors, may no longer be appropriate.
- the fee-earning base must be trained in commercial management skills.
- innovation and fresh thinking about how to provide legal services has to start now.
- investing in advances in technology to increase workflow efficiency.
- starting to think about different organisational structures to deploy legal services. Must the entire workforce be housed in expensive city offices?
The good news is that law firms who start to align now with the emerging environment, will succeed. Those that don’t, won’t. However, alignment will take at least 2-4 years to achieve, so it needs to start now.
Ted Dwyer, director of Dwyer Heath, is a strategy consultant to law firms and in-house legal teams.