The Lost Art of Pricing for Legal Services
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.
The idea that lawyers business is any different than any other business is an interesting concept. Since at least the beginning of the latest financial crisis Adam Smith has come back into vogue.
Accordingly, “Profit is so very fluctuating that the person who carries on a particular trade cannot always tell you himself what is the average of his annual profit. It is affected not only by every variation of price in the commodities which he deals in, but by the good or bad fortune both of his rivals and of his customers, and by a thousand other accidents to which goods when carried either by sea or by land, or even when stored in a warehouse, are liable. It varies, therefore, not only from year to year, but from day to day, and almost from hour to hour.” Wealth of Nations – Chapter Nine.
However Sir Thomas More, beheaded by Henry VIII, wrote in and of “Utopia” that this problelm could be solved:-
“They have no lawyers among them, for they
consider them as a sort of people whose profession
it is to disguise matters as well as to arrest laws;
and, therefore, they think it is much better that
every man should plead his own cause and trust it
to the judge, as well as in other places the client
does it to a counsellor. By this means, they both
cut off many delays and find out truth more certainly.
For after the parties have laid open the
merits of their cause, without those artifices which
lawyers are apt to suggest, the judge examines the
whole matter, and supports the simplicity of such
well-meaning persons whom otherwise crafty man
would be apt to run down. And thus they avoid
those evils which appear very remarkably among all
those nations that labor under a vast load of laws.”
Excellent article.
Billing presents so many problems for clients that I don’t kno(w where to begin. Bills are complicated to understand for most people. And most people don’t really know what to expect. Therefore when they initiate the process they aren’t aware that they should be asking how the lawyer bills, what he charges, how he charges etc. Clients also are not aware that they can reduce the actual amount that the bill will be by doing a lot of the work themselves, but of course the lawyer will not tell them that.
I believe that the LSUC should provide a schedule for all lawyers in order to streamline billing and fee structures. There should be something in place much like the MOH has for doctors and their billing. If I get a divorce it shouldn’t cost me any more if I go to Mr. Smith or Ms. White. It is the same end result. (taking into account the services that were provided…pension valuations etc.)
Once you receive your rather complicated bill, you only have 30 days to ask for an assessment. It takes 30 days to understand it for most people. That too, has to change. This particular regulation works in the lawyer’s favour exclusively.
It’s time to change the system. Start making this system a justice system. Clients are frustrated. They aren’t getting justice in the courts and they aren’t getting justice in their lawyer’s offices.
They understand this and they are going to walk away with their chequebooks. Believe me when I say this.
About thirty years ago, when I was working at the E.K. Williams Law Library, a lot of lawyers were talking about this case: Sellner Estate v. Pesto (1982), 17 Man.R.(2d) 101 (CA). O’Sullivan J.A., a very senior justice at the time, had written, at paras. 15-17 (MLB):
My recollection is that the younger lawyers of the day thought O’Sullivan was very much out of touch.
We can’t sell results. We don’t have that power. We don’t control the other side, judges, not even our own clients.
However, I do not charge hourly either. I do criminal defense and we generally charge flat fees, basing those fees on the amount of work we expect we’ll have to do.
We usually have a free or low-cost consultation before we’re hired so we can get a good idea of what the case is really about and how much work it’s likely to be.
Small firm solicitors rarely charge by the hour; rather, they charge flat fees for the services required, be they real estate purchases, sales and refinances, wills and powers of attorney, incorporations, or other matters. There are times when it is appropriate to charge by the hour such as in a complicated business transaction, but the hourly rate is merely a guide. Solicitors are half the practising bar, and small firm solicitors are major part of that. It is very common for commentators to lump all lawyers, barristers and solicitors alike, into the same frying pan for roasting, but we solicitors wish very, very much that commentators understand and make clear to their audiences the very significant differences between how solicitors practise and bill and how barristers practise and bill. Thank you.
Result based compensation? Reminds of those little pockets on the back of barrister robes.
With due respect Mr. Wright, it may be time to do a poll of lawyers, solicitors and barristers to determine just how they are billing clients. You may be surprised at your findings.
It would be interesting to hear from in-house counsel and clients more generally as to how they would like to be billed. While I try to offer creative solutions when it is feasible, I find that many clients like the idea in theory but, when offered the choice, opt to be billed by the hour.