How to Change Law Firm Billing Practices to Better Meet Client Needs
Law firms continue to base their entire business model on tracking billable hours. More often than not, clients feel they have little control of what a specific legal proceeding will cost. Why is it so hard for law firms to offer fixed deliverable-based pricing?
Legal Firms Could Offer Deliverable-Based Pricing By Driving Internal Accountability for Delivery
Bill By The Hour
The business model of today’s law firms has changed little in the last 50 years. Centered around billable hours, this business model relies completely on maximizing the number hours that are billed to the client. Entire forecasts and compensation models are based on everybody hitting a target number of billable hours based on level and seniority to be able to cover corporate expenses, overhead, and, most importantly, partner compensation.
Trouble in Paradise
Current law firm billing practices have a built-in incentives for personnel in those firms to over-bill, extend cases unnecessarily, pursue things that have little or no value to the client, and many other troublesome behaviors.
Clients often complain about the open-ended nature of this business model. Law firms argue that it is impossible for them to predict how much effort a given case will take and therefore it is the only reasonable way to go. The simple explanation is that, in essence, law firms have transferred all the risk to the client, and they are getting away with it.
The reality is that there are a number of cases or legal work that could lend themselves to a more predictable fixed-fee kind of billing model.
Deliverable-based cases, such as patents or corporate transactions, and/or retainer-based cases, such as family or employment law, could be prime targets.
But how do we change a law firm’s mindset to ensure that these fixed fee projects are equally or more profitable than the good old billing-by-the-hour model?
Hold Partners Accountable
In order to be able to execute client projects on a deliverable or retainer-based model successfully and profitably, the following 4 steps are critical:
1. Understand Risks
Carefully understand all the potential issues, events, constraints, and risks that can impact the amount of effort required to complete a case on a fixed-fee model.
2. Select Cases Carefully
Once the size, complexity, and risk of a case are understood, identify those engagements that can be safely priced on a deliverable or a monthly retainer basis. Avoid those with a risk of extreme variability.
The Risk of Offering Deliverable or Retainer Based Billing Is Manageable
3. Create Case P&Ls
Establish an arms-length relationship between the firm and the partner in charge of running the engagement. All resources required from the firm will be billed to the project as if it was a third party at predetermined rates.
4. Hold Partner Accountable
Hold the partner in charge of deliverable or retainer-based cases accountable for the selection, the estimate, the pricing, the successful execution, and the overall profitability of the engagement.
Monitor the engagement P&L regularly and closely and adjust as needed to ensure the overall profitability and completion of the engagement as planned.
Accountability Is The Key
The key to being able to offer deliverable and retainer-based cases is accountability at all levels. The firm must hold the partner in charge of these cases accountable for the entire life cycle – from identification, evaluation, sizing and estimation, staffing, execution, billing, collections, completion, and, most importantly, profitability.
CommandHound Helps Law Firms Drive Accountability to Make Sure Things Get Done
An accountability and project management tool like CommandHound has been successfully used by law firms to drive accountability to ensure that financial targets are met for these types of cases.
Once a tool like CommandHound is in place, a managing partner or COO can set up specific milestones by engagement to monitor progress on a management by exception basis.
Would you like to learn more about how CommandHound can help you successfully run deliverable and retainer based cases at your firm by driving accountability?