Lawyers need not limit their pool of potential precedent to only similarly situated law firms, yet many often do. Throughout 2019, we will be using this new series, “Lessons from the Outside” to look at business practices from outside the legal industry that may provide valuable insight for lawyers, and possibly even examples to follow.
It comes as a shock to no one in the legal industry that lawyers love precedent. Even in the face of statutory language explicitly on point, lawyers will often look for case precedent applying the statute, just to make sure the statute has been interpreted in the same way as the lawyer thinks.
Lawyers are also quite adept at argument from analogy. It is rare to find precedents that are exactly on point with all facts and legal arguments of the case currently being worked, so lawyers look for the best similarities they can find and appeal to the logical connections.
This same skill set is often underutilized when it comes to implementing business practices within law firms. Here, lawyers rarely look to examples beyond other law firms, and sometimes limit their precedent examples to other law firms of similar size, practice areas, or geography. Unsurprisingly, this creates a fairly small pool of precedent.
Other professional services providers, such as accountants, and even industries like insurance and even retail can provide such precedents.
…[W]hen it comes to implementing business practices within law firms, lawyers rarely look to examples beyond other law firms, and sometimes limit their precedent examples to other law firms of similar size, practice areas, or geography. Unsurprisingly, this creates a fairly small pool of precedent.
For the first installment, my mind went back to an example from the American Institute of CPAs (AICPAs) from a few years ago. The article begins with a question as to why a tax preparer would want to become more efficient in preparing the return if it ultimately means billing less time. Lawyers should see an immediate similarity in philosophy.
As the author lays out the scenario, the accountant takes on a new client on an hourly basis. The first time the returns are prepared, the preparer must spend a fair amount of time familiarizing himself with the client’s accounts and other matters, and as a consequence, the final bill is higher than the accountant feels it should be. So, the bill is discounted back into line with what the preparer feels is a more reasonable price. The second year, the preparer is more efficient, but cannot now justify charging the client more money for less overall time spent when ultimately the same service was delivered. So, the bill is discounted again. In the third year, the time spent on the matter generates a bill below what the client has been charged the two previous years, but because the engagement was on an hourly basis, the accountant is out of luck. Even though the client has a demonstrated history of paying more for the outcome, the preparer can’t charge that much because the time doesn’t justify it.
In this scenario, the client wins three times; the preparer loses three times. But this didn’t need to be the case. The preparer had an idea already in mind about how much preparing the return should cost. Had the initial engagement simply reflected that, the scenario could have been a win-win. The client would have received a consistent price for services rendered and the preparer would have reaped the eventual benefits of improved efficiency.
Much of this should ring true to lawyers. Most lawyers have the same impulse to bill based on gut instinct. In a paper we released a few years ago, we found that 75% of law firm partners apply discounts to their matter to simply arrive at a number they feel will make the bill work for the client.
A billing and discounting strategy that lacks a data-driven foundation provides a shaky groundwork upon which to base a profitable practice.
To be sure, there are serious problems with this practice. A billing and discounting strategy that lacks a data-driven foundation provides a shaky groundwork upon which to base a profitable practice.
But the impulse itself is instructive. Despite lawyers’ loyalty to the billable hour, the data shows that the majority of lawyers may actually favor more value-based billing arrangements. They are already applying discounts with the end-goal in mind of arriving at a number that the client will find palatable; and further, they believe their experience will help guide them to what that number should be. In other words, the number of hours spent on a matter often takes a backseat to what the reasonable price range for the outcome should be.
Ultimately, a matter priced on value delivered rather than time spent is a matter where increased efficiency accrues to the benefit of the lawyer, particularly for repeat business. In the AICPAs example, the preparer there would have benefited from improved efficiency by the third year, and every year beyond.
Yes, it requires a short-term sacrifice. But in truth, most lawyers are already making that sacrifice by discounting bills they believe the client will perceive as too high. They’re just losing out on the opportunity for long-term gain.