Why Law Firms Can’t Help but Bill by the Hour

In law firms, lawyers are everything. They do everything: They are the owners of the firm, and they’re also its officers and directors, but they’re also its managers and supervisors, and wait, they’re its workers too, and they set all the rules and make the policies and create the culture.

The only thing lawyers don’t do in law firms is the stuff they consider beneath them, the clerical and support work. I’ve said before that these entities should really be called “lawyer firms,” because that’s what they consist of and what they’re organized around. The molecular building block of a law firm is the individual lawyer.

Because law firms are lawyer entities, they are primarily concerned with the time and effort that lawyers expend. From the firm’s perspective, nothing is more important than its lawyers: how smart they are, how hard they work, how much business they bring in, and how much money they generate. They are essential. Without lawyers, there is no law firm.

This is why the billable hour isn’t just a way in which law firms price their work to clients. The billable hour is the fundamental expression of the lawyer’s existence in the firm. It’s the end product of all that intelligence and expertise and business generation and hard work. It is central to lawyers’ identity, and therefore to law firms’ business model.

And this is the main reason why every other type of pricing mechanism struggles to gain purchase in law firms. Pricing by a client’s outcome value, or their service experience, or their business relationship, “re-centers” the firm away from the lawyer and towards its clients. It suggests that the client and their interests take priority over the lawyer and their efforts. That won’t fly.

Every law firm I’ve ever encountered tracks lawyer time to the last minute and lawyer billing to the last dollar, obsessively. But I can count on one hand the number of law firms I’ve seen that maintain so much as a spreadsheet to track (a) what the client hired the firm to do, (b) what the firm did, and (c) what the client thought about it. You don’t need to know anything else about what law firms are focused on than that.

And this, when you get right down to it, is also the fundamental problem with the billable hour. It tells the client, “Our time is more important than your outcome.” Until that changes, it will drive every aspect of the firm-client relationship. I do think AI will change this over the coming decade, but I don’t know how much, and I can’t even be entirely sure of that.

But there is another way.

Law firms built on a different premise — that the client and their needs should be the focus of the firm and should drive its activities — have much more upside, in terms of growth and profitability, than traditional firms. This kind of firm does’t think “in lawyer terms,” or look at the world through a lawyer lens. This kind of firm doesn’t care who or what is doing the work that gets the client’s job done — so long as the work is being done right and in a timely fashion.

A law firm like this — one that right-sizes the importance of its lawyers and removes their time from its pricing formula — is therefore incentivized to increase its internal productivity. Because when you price according to outcome or value or experience rather than by lawyer time, then you can maximize the efficient assembly and deployment of the people and programs that generate those outputs. And your ever-increasing productivity will drive your profitability through the roof.

Law firms that center their clients rather than their lawyers can provide their services as a firm, systematically. They can price by client outcome, experience, or relationship because they’ve decoupled their internal costs from their external pricing. Clients pay for what matters to them — outcomes, experiences, relationships — which is exactly what they should be paying for.

One way or another, this is the structure and business model towards which the legal industry is heading. Lawyers’ time and effort will become continuously less intrinsic to law firms’ deliverables and financial success. People who aren’t lawyers will contribute ever-increasing value. Machines will contribute more again.

So if you want to build a future-looking law firm, build around your clients’ needs and interests, not around lawyers’ time and effort. Employ the most appropriate means to solve clients’ problems, whoever and whatever that might be. Don’t just be a bunch of lawyers billing their time. Be a law firm.