[Originally posted 9 May 2017. Updated 14 November 2019].
A number of my other blog posts have suggested clients should look at how their lawyers work and ask questions, like what systems do they have? What training do they do to ensure they provide the best levels of service?
This time I want to look at the related topic of pricing. I say related topic, because the pricing options a law firm can offer will depend heavily on the systems they have. A firm that has not invested in good systems is unlikely to be able to offer transparent and certain pricing.
Perhaps reflecting this lack of investment in systems, many lawyers still use hourly rate billing and loose estimates of cost based on time that will be spent (e.g. $3,000 to $5,000...), which is inherently unsatisfactory for clients as it contains little incentive to be efficient and can often lead to nasty bill shocks (e.g. $7,000) at the end of the matter when the lawyer advises that it took longer than they thought it would.
To try and get good value, clients often focus on discounts to the hourly rate, which does not solve the problem if the number of hours is open ended. The firm could just throw 5 people onto a simple job.
Pricing in this way can be a complete finger in the air, where not only would different lawyers within a firm be likely to charge different amounts for the same piece of work, but the same lawyer could charge different amounts on a different day. Isn't that bizarre?
Firms that can give greater clarity and certainty on pricing - while still giving good outcomes and not taking shortcuts - should be rewarded by clients. But, for that to happen, clients have to look beyond hourly rates and ask the right questions.
10 How do you price our work? What pricing tools do you use?
Please note that this post is not intended to be a detailed examination of the best approach to pricing, or to suggest a single one-size-fits-all approach. There are genuine experts in this area such as John Chisholm, Richard Burcher and Colin Jasper if you want to look at best practices and particularly how lawyers and clients should agree prices based on value rather than time. This article by Richard Burcher is particularly relevant: “We’ll have a chat at the end” – a $20 Billion Black Hole.
My suggestions in this article are more basic. I think there are advantages for clients just in finding out what pricing options law firms offer beyond hourly rate charging, and how they apply. If they don't offer agreed up-front fixed prices, do they have a pricing system at all, or is it just a case of doing the work first, counting the hours and applying an hourly rate to come up with a price?
I'll break the analysis down into two ways of working:
- the traditional, more labour intensive approach
- an approach that takes advantage of emerging technology
Working traditionally - get the scope right first
If you've read many of my earlier posts, you'll know that I'm not a fan of the way that lawyers traditionally work. I think it's too labour intensive, variable, and slow, compared to how lawyers could be working if they wanted to take advantage of technology options that are readily available to them. It didn't work for me!
However, not all work can be reduced to minutes with technology, not all lawyers are currently working with technology as much as they could be, and most firms and their clients primarily rely on hourly rate charging (or something based on it) so what should you do in that case?
The key thing here is to properly scope the job first, before fixing the price. You should have a clear - upfront - understanding of what work will be done, when, how and by who. If this is worked out in advance, it should then be possible for lawyers to come up with a robust scope and price using a simple Excel spreadsheet. The spreadsheet can break the job down into tasks and associated costs, and this will enable a much better discussion about how much the job will cost, relative to what it is worth. If the costs need to come down, it may be possible by agreement to remove some tasks or to change the way they will be done. The job can be “unbundled” so that different people can do different tasks. You can easily do "what if" analysis to see the costs of different scenarios.
This does not just benefit the client. From the law firm’s perspective, this should be better for them too. Whenever I came up with a "ball park" figure, I was routinely 20% light on the costs as there were miscellaneous things which I had forgotten would need to be attended to, but which the client would have agreed to if I had raised them in advance. Forcing myself to go through the process made it easier to avoid overlooking something and to agree a fair and reasonable price. It was also helpful to have a clear initial scope because when things changed (which they often did for reasons outside our control) it was good to be able to clearly point out what the differences were, and to agree adjustments in charges or scope before the work needed to be done. I could usually recover for my extra work in this way, where there was almost always a write-off if the discussion occurred after the work had been done.
Pricing this way should also get easier (for law firm and client) the more often you do it, because often you can re-use an earlier spreadsheet for a new job. You can pick up all the steps from the earlier transaction (including any adjustments made along the way), and (if you’ve recorded your time in a way that allows reconciliation) also see how accurate your earlier estimates were, and make further adjustments.
While Excel can often do the trick, there are new matter management systems emerging though that can make this process much simpler. Check out tools like www.lawvu.com or Actionstep which aim to provide a much easier and more intuitive way to set up and scope out matters and workflows.
Of course, this can also be used even when there isn't hourly billing. If the scope of the matter is clear, and the parties understand what work the firm is going to do, and the outcomes it will provide, there is no reason why a fixed price based on value could not be agreed. The key is to do the up-front scoping work.
For more on pricing, come to this (free!) LegalTechNZ event with Colin Jasper in Auckland on 19 November 2019: Will technology kill the billable hour?
Working with document automation and other technology
The approach mentioned above should work well for a law firm that is working traditionally, where work still takes many hours to do, mostly by the lawyers.
However, increasingly this will not be how lawyers will work. In the near future, law firms will more proactively help their clients to do more of the work themselves using systems the firm has helped design, and only coming to the law firm's people when they need the specialist added value the firm can provide. The firm's contribution will be knowledge more than time. When we work with firms we encourage them to think along these lines. In that type of case, the law firm has developed more of a managed solution/product, which is not well suited to hourly rate charging because there is ongoing value in it. It would be more appropriate for the firm to charge on a regular retainer or service fee basis.
Also, with current and emerging technologies, when the firm is instructed to do the work, it will no longer take the law firm as long to do it. Again, with the type of online questionnaires that we are developing at LawHawk as part of our HotDocs document automation services, it should be possible for the client to complete much of the required information themselves being guided through an intuitive smart-form that the law firm has designed so that:
• The law firm can instead spend its time reviewing the client's information and getting straight to the valuable parts of the job, rather than copying and retyping it into multiple documents.
• Instead of having one or more people generating single documents at a time, it is possible to generate all of the documents required for the process at the same time, from the single set of information.
• What might have been 8 hours work for a relatively senior lawyer on a complex transaction could be reduced to 30 minutes.
When you are working like that, you simply cannot charge on a time basis for it. The only sensible approach is for the firm to charge an agreed fixed fee for that work, which reflects the value they are providing to the client and the investment they have made in developing such a system. While they are spending less time on the job than they used to, they are providing greater value. After all, they are able to give the client what they need faster, and with better quality and consistency, so the client can get on with what they really want to do. It should be possible to agree a price that is cheaper for the client than what they currently pay, but more profitable for the firm given the amount of work they have to do.
The days of open-ended estimates based on hourly rates should be coming to an end. Increasingly it should be possible for law firms and their clients to agree fixed prices for agreed outcomes, knowing that technology will enable efficient and seamless delivery.
Even where technology is not currently available, more rigorous up-front scoping and an Excel spreadsheet would enable much better and fairer outcomes for clients and law firms.
Clients shouldn't just rely on a discount to hourly rates as the basis for charging. Ensuring that there is a robust scope is better for everyone.
If you would like access to 13 suggested questions clients could ask their lawyers, please download this PDF ebook