Incentives and Changes in Law

October 19, 2016 - Dan Rubins

At the highest ideal, lawyers are trusted consultants. Traditionally, the billing practices of most lawyers reflect that identity. Lawyers get paid for hours they decide are “billable” hours.  Billing research shows that 40 percent of lawyers’ hours, as they sit in their offices, are not billable. Nearly all law firms make their money by billing their clients by the hour for services attributable to the clients’ business.

Before the concept of billable hours emerged, lawyers charged set fees for services. These were usually supplemented by retainers and bonus paid by satisfied clients. State laws strictly limited the legal fees. The limited fee structures were very unpopular. By 1975, the Supreme Court declared the set fee laws to be a classic example of price-fixing and a violation of anti-trust laws. Billable hours were regarded by the court as a clearer way to value legal services. 40 years later, it’s clear this change only benefited the public, right?

Public interest law firms and government employers are not under obligation to charge for billable hours because they do not bill their hours to paying clients. Increasingly, many law students choose not to enter legal practice where billable hours are required because they fear the intrusion of work hours on their private lives.

Perverse incentives

The pressure to build-in more billable hours creates many perverse incentives, that are injurious to the stability of the firm and compromise the quality of their product. Yet, there is ever increasing internal pressure in many firms to venture further down that dark path.

Many law firms struggle with an oversupply of competitive providers and dropping demand that causes downward pressure on what they can charge for their hours. Most lawyers who work for private clients are under pressure to achieve sufficient billable time to justify their practices. They are unable to take on many interesting cases and cases on behalf of less affluent clients because of the pressure. They have to push their work time so that it interferes with home life. They have to bill for every hour of proofreading corporate reports, document reviewing and travel hours because of the financial pressure.

Law firms are continuously under pressure to become profit-oriented businesses, as many big medical practices have become. This drive is a perverse incentive caused by the pressure to build up billable hours.  Legal firm consultant Tim Corcoran says,

“the business school maxim that earning a profit is the primary goal is interpreted primarily as a toxic quest for short-term profit above all else. including the long-term health of the business….A law firm can generate a healthy profit … while simultaneously improving client satisfaction and work product quality.”

The partnership structure is usually not useful as a management model. After a law firm reaches a certain size, partners are often not well suited to manage the operation of the business. A core leadership team, identified by the practice group should simply be given the authority to lead. Important decisions about management should not be crowd sourced. Lawyers should be practicing and leaders should be leading.

How can technology help?

Due to recent pressure from clients, and changing engagement models, Lawyers are often moving to alternative fee arrangements. Lawyers often don’t use new techniques to improve client satisfaction, but tend to grind away doing things they know. Law firms don’t tend to have what other professions would call a sales or customer relations department. They have long been discouraged from engaging in sales-like activities by the puritanical ethic of their profession.

The management of the firm should focus on reducing overhead, which will reduce the need to cover costs with billable hours. Office-wide discretionary purchases like décor or client perks that do not contribute to income from actual cases should be considered very carefully. The best accounting systems for lawyers combine time management functions with invoicing, trust account management and allow billing at different rates correlated with the matters and lawyers concerned. Practice management software adds task management, document creation and document assembly.

Customer Relations Management (CRM) systems are a kind of automated rolodex that can allow a firm to greatly improve the tracking of clients’ needs and expectations and share this information confidentially among a team within the firm. They greatly enhance the potential for sharing case information and team approaches to case management. The CRM system professionalizes the firm’s approach to their clients on a practical level. They help avoid duplication and prevent spelling errors in client names. The CRM system can be linked to the firm’s billing system and the conflicts database.

Solo/Small Practitioners and large law firms alike need to admit their profession is being productized, just as other professions have in recent decades. Legal services should be regarded as service products that are repeatable and for which most of the steps are well rehearsed. Repeatability leads to greater profit (more billable hours per working hour). A law firm can price services with a well established number of billable hours well enough to gain a profit without adding in unreasonable charges for every email or fax.

In addition to basic technology investments, like CRM, some law firms have started to invest in knowledge management (KM) software and automation tools that help the lawyer provide a higher quality legal service. These tools organize factual information enabling powerful searches of a knowledge base. KM systems store knowledge in language and numerical format.  They can locate knowledge sources, mine for repositories of new knowledge, then capture any knowlege in a format that makes the data base searchable. The KM system could be used to organize projects in product units that could be marketed under a clear price structure. KM software tends to be most useful for case-law, which can be downloaded into the software for searches and for associate training.

Ch-ch-changes

“Ch-ch-changes Where’s your shame You’ve left us up to our necks in it” - David Bowie

While many legal purists are slow to admit it, law firms are businesses and they need to innovate in the same way that other professions have over the last couple of decades. The introduction of eDiscovery and practice management software into a law firm are simply not enough to compete in a rapidly changing legal marketplace.

Software is an important part of that change; so too are new operating frameworks like lean law and Alternative Business Structures (ABSs, aka “non-lawyer” ownership) like those in the UK. The idea that these changes will somehow erode the capacity, ethics, and professionalism of lawyers is difficult to defend when a law school posts a bar pass rate of only 28%. Those lawyers truly concerned about the profession would be of better service by automating legal grunt work, investing in some basic technology, then spending that time they saved at a nearby law school.