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Many lawyers laugh at me when I tell them that hourly billing will be the death of their law firm. This is particularly true of the BIG LAW firms. You see, to BIG LAW hourly billing is an addiction no different than an addiction to crack or heroin. Through 2007 they were used to changing whatever they wanted (on an hourly basis) for their service and people would pay it.
Well that is changing.
Last year Pfizer (you may have heard of them) announced they were no longer going to pay law firms by the hour. They created a group of sixteen law firms to whom they give all their legal business. These sixteen law firms knew they were going to make less money in the short term but they felt they would make more money over the lifetime of their relationship with Pfizer. That is a focus on client lifetime value.
You don’t have to take my word for this. Watch this video from The Wall Street Journal. It is an interview with Amy Schulman, Pfizer’s General Council. Listen to her carefully.
What Ms. Schulman is really saying is: “If you charge by the hour, your law firm will not survive.”
When I utter this statement in front of litigators, they laugh at me. That’s right. Even though we have just come through the worst recession since the Great Depression and non-bankruptcy legal work was scarce, most litigators will not embrace a fee that is not based upon hours billed. Fortunately, it is not my problem. I just don’t work with them.
Let me explain why:
As someone who gets paid to increase the profitability of a law firm, if I work with a litigation firm that does not bill by the hour, I can get them as much work as they can handle. Often times, I can get them more work than they can handle. And the firm as a whole makes more money – in most cases DOUBLE what it made under an hourly billing model.
Here’s how:
Our Value Based Fee Model has a flat monthly rate assigned to each client. The law firm then assigns a “managing partner” to that client. The managing partner handles a good portion of the legal work the client requires. In large clients, Managing Partners are assigned per matter.
The Managing Partner’s salary is charged directly to that client account (internally). The law firm then has a pool of other attorneys (usually less costly employees) who handle the day-to-day matters from the client (matters the client believes should settle, some transactional issues and legal research). There is a “trigger” built into the agreement with the client that automatically increases the monthly rate if a matter goes past a certain point.
Structuring the legal fees in this way, the client can make a decision on how to dispose of a case with full knowledge of the legal fees.
This is a competitive advantage for the lawyers with whom I work. Their clients always select this approach over the approach of a law firm that bills hourly.
So if you still bill on an hourly basis, let me tell you how my clients eat your lunch five days a week:
So as you can see, if you still bill hourly, it is only a matter of time until my clients find your clients and steal them.
You can keep your head in the sand or you can embrace the future and move to this type of model.