As readers are aware, I have been very vocal about the scourge of the billable hour.
Recently a lawyer asked me, if I don’t bill by the hour, then how do I charge for my services? It then struck me that the real reason lawyers bill by the hour is because they don’t know how else to charge for legal services. To a person in any other line of business this would be a bizarre question.
But for lawyers, the art of pricing for legal services has been lost to time.
There are now fewer and fewer lawyers who realize that over the long history of the legal profession, lawyers have not billed for their services by the hour.
I spoke at a law firm retreat last month at which one of the very senior lawyers fondly remembered the days when he started practice saying that he did not bill by the hour. If the file did not go well, whether in court or otherwise, the fee was less than if the file went extraordinarily well.
Sadly this “lost art of pricing” was thrown overboard by the ease (and feigned business-like process) of simply billing for every minute spent on a manner, despite the fact that not every minute spent on a file was equal in value.
As a result, the billable hour has created a false reality for lawyers; that a lawyer’s mere presence, or any activity undertaken by the lawyer, no matter how mundane, is worthy of compensation at a very handsome rate. And older members of the bar wonder at the sense of entitlement that some younger lawyers have today……
The traditional concepts that successful business people use to price products and services have been ignored by most lawyers. On a simplistic level, businesses will look at how customers value a product then factor in the cost of production and the profit margin they would like to see. Clearly the market for a $20 chocolate bar is smaller than that of a $1.00 bar.
If I were planning on producing super titanium 1/8 inch screws, I would look at the cost of producing these screws, add on the profit that I would like to make from the sales and then do some market research to determine if customers are willing to pay that price for such screws. Will customers pay a premium for such screws or do they even need such a product at all, given the marketplace? If I determined that my price was too high for the market to bear, then I would look for ways to reduce my costs so that I could price in line with what the market was expecting or I would produce another product.
Lawyers don’t do that. And they should.
In answer to my colleague who asked about pricing, I suggest that he should have a very good understanding of all his costs (monthly rent, staff, equipment, his salary etc.) and be continually looking at ways to reduce those costs. That will tell him how much he needs to earn each month. Then he can look at the services he wishes to provide, determine what the market will pay for those services, then determine how many of those services are needed every month in order to break-even.
Ontario lawyers who do a great deal of residential real estate serve as a great example of this thinking; assuming that each purchase transaction can be charged at $799.00 plus tax and disbursements, it’s simply a mathematical equation as to how many deals need to be closed each month. The lawyer then goes out and ensures that she fills the pipeline.
I really don’t see why lawyers should be different from any other business in this regard.
We should be selling results, not time.