The billable hour was set in its ways. So were clients, law firms, and the regulators. What happened? John Chisholm divulges what, and when, things ticked over for time-based billing.
In the normal business world history suggests sellers determine their own pricing structures, not buyers.
Here in Australia 20-30 years ago, law firms as vendors changed their whole pricing model to bill by time instead of scale, weight, judgement, agreement or value and clients bought this change.
Not only did clients buy this change, many clients actually got better at the pricing model than their law firms - so much so they turned the tables and used the six-minute unit of measurement against the law firms to continually drive down the price of legal services.
It took law firms a long time to realise what was happening. This was mainly because there has traditionally been so much profit margin in law firms' hourly rates that a few dollars off here and there would have little effect. And even if some areas were taking a hit on rates (such as insurance, retail mortgage lending and the like), other areas were growing in volume and the market could stand annual rate increases. Profits from these areas could cross subsidize the more price-sensitive work.
Now that was all well and good while the business market itself was making huge profits from their law firms. Yes, that's right, our clients profit from our work! And, in the scheme of things, for many corporate clients legal expenses were just a small fish in a large ocean of their business expenses.
Sure, it probably annoyed some clients that whatever their legal spend was they couldn't actually budget for it accurately, but this was a small price to pay for the benefits they were getting out of their firms. And there was no alternative anyway. Most law firms were offering the same rates, and it wasn't as though any firm could give them a fixed price.
And then it changed. Some clients started asking for estimates and quotes, the regulators made law firms give estimates, and the odd, particularly bold client actually started asking for a fixed price on the occasional legal purchase. Added to this was the emergence of the odd (again, very odd) law firm that broke ranks with its peers and started giving fixed prices. This in turn meant the odd client could sometimes find an alternative to how their own law firm was charging.
Before long, aided by the global financial crisis, work started to dry up and law firms could no longer annually increase their rates by 5,10 or 12 per cent, as they had done previously. By now, an increasing number of clients had gotten a smell of fixed prices, by which they could budget more accurately. They were not so keen to let things slip back to how they used to be. Most clients, of course, are not going to change their legal providers based solely on price, but they may consider it based on a mixture of value and price certainty if they can't get that from their existing providers.
Both my own and others' experience with clients is they are crying out for certaintyof price and want their law firms to be more innovative on value and in providing options. Most of them could not care less what a law firm made out of the relationship as long as they, the client, were getting good value.
Good clients were not after the cheapest price (even though they say law firms often think they are), but the best value. They would prefer not to force their law firms into change that the firms themselves do not want to make. But they will if no change starts to occur. At the very least, if clients cannot change law firms pricing models they will do their best to influence them.
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