Legal industry ‘cancer’ kills innovation

Peter Godfrey
by |
Firms must fight the 'cancer' of time-based pricing if they are genuine about innovating and being different, a leading legal industry adviser has told Australasian Lawyer.

“I don’t think the law profession is so much saturated with lawyers than it is saturated with sameness,” consultant John Chisholm said.  
“Firms say they want to be different, but they really only want to be a tiny bit different.”
Chisholm, who advises law firms on issues that include value pricing, did not mince his words when it came to discussing time-based pricing, which he sees as the key obstacle firms need to overcome before innovation can occur. 

“Timesheets are the real cancer of the legal profession. Measuring and rewarding by time is a real innovation killer,” Chisholm said.

Chisholm believes firms should shift to value-based pricing, constructing an agreed up-front price that ultimately takes the client’s best needs into consideration. Fixed fees also remove the element of bill shock, giving clients more certainty and predictability when they engage with firms. 

Chisholm argued that while new legal start-ups can adapt alternative models of pricing and partnerships, incumbent firms are often resistant and lack the flexibility to adopt new innovations.
He also believes firms can’t afford to wait until client demand forces them into adopting changes that are already ubiquitous amongst new legal start-ups.

“The start-ups and external disruptors aren’t waiting around for clients to demand changes.  This means we need to be more innovative as a profession,” Chisholm said.
He also took aim at the traditional partnership model which he considers another innovation blocker.

“The partnership model has real problems partly because it’s a 19th century model of management.  When you have to get 50 people to run a business, decision making is slowed down,” Chisholm said.  

“Bizarrely, if you’re a lawyer the last thing you would advise clients to do would be for them to enter into partnerships,” Chisholm added.  

Do you agree that timesheets are the 'real cancer' of the legal profession?  
Let us know your thoughts below.  
  • Fionn Bowd on 2/04/2014 11:43:57 AM

    What is missing from this discussion is the reality that what clients actually want in many industries is not a fixed fee, but a capped fee. There still seem to be clients prepared to 'share risk' with their lawyers with a fixed fee, but in my experience clients are pushing now towards a capped fee which means that all the risk is on the lawyer. Many now 'mini-tender' with their panel firms on each scope of work (say above $20k or $40k) so the idea of 'padding' the fixed/capped fee just doesn't work when a number of major firms are also competing for the work. Instead, firms are forced to submit a 'best case' quote, assuming nothing goes wrong and the scope is perfect, in the hope of winning the work. Given many of these sophisticated clients already receive substantially discounted rates, it is nothing but a lose/lose/lose situation for the lawyer. I have no solutions to offer to this problem, only the observation to include in the debate.

  • David Wells on 30/03/2014 9:53:34 PM

    Chris Hagan is right. Risk sharing with the client is a major reason for fixing the fee in advance. Most clients respect that approach from a professional advisor. And if it can be done with ASX floats, it can be done with commercial litigation too. We have been doing fixed fees right across our practice at Moores for three years. If you are working in an unpredictable area like litigation, you price by stages, scoping for each stage. An expert can do this. Indeed, clients would expect this ability from an expert.

  • Greg Williams on 30/03/2014 12:34:20 PM

    Two years ago I built a new house. My builder (who proved himself during the project to be both honest and competent) was adamant at the outset that it would be cheaper to have him build the house on a time & materials basis rather than a fixed fee basis.

    The reason was similar to those which already appear in the comments. If he was required to quote on a fixed fee basis then he would assume that the cost of each phase of the contract would be at the expensive end of the range of possibilities.

    The key to making time & materials work was to ensure that we had visibility of his records or cost and accumulated time.

    In my view, exactly the same dynamics apply to the provision of law services. Clients who agree to hourly rates and hold their lawyers accountable to ensure that the work is being done efficiently get the best deal. And it is the best way for lawyers to run a matter because they can be transparent and are not put under pressure to match work flows to an artificial budget.

    There is one caveat. If the work is being undertaken in an area of the law which is both highly competitive and commoditised, then the client may be best advised to seek a fixed fee arrangement. This is because competitive pressures will push the price towards $0.

    There should be (and no doubt are) law firms who are set up to undertake such commoditised work well and profitably. However, to suggest that fixed fee is the best model for all legal services is dramatically overstating the point.

  • Matt Burgess on 30/03/2014 7:47:40 AM

    As a commercial tax and structuring lawyer who, over the last 17 years, has spent the second half of my career working only on a fixed price basis (with the first half of the career working only on a time billing basis), some observations in light of the comments to date are as follows:

    1. agreeing a fixed price before a customer agrees to engage your services requires a significant amount of planning and two-way communication.
    2. like most things, the more you do it, the easier it becomes.
    3. having fixed priced work with fees ranging from 3 digits to 7 digits, I am yet to come across anything so complex that it cannot be fixed priced. This said, in the more complex transactions, it is sometimes necessary to communicate and agree both a scope of work and fixed price on a daily basis with the customer.
    4. from an ethical standpoint, certainly some customers (and advisers in turn) see it as entirely appropriate to only communicate on the scope of work, personnel and actual charges after the work has been performed.
    5. over the last 10 years, there seems to be an increasing number of customers who want to agree a defined scope and a fixed price before commencing work. Arguably, empowering a customer to decide before they engage an adviser as to whether the level of service promised and the price to be paid is certain, is infinitely more ethical than the time billing approach, if only for the fact that it allows the customer to choose not to proceed with an adviser that they are concerned may be unethical in the way they charge, which under the time billing model is often unable to be determined until it is too late.
    6. in this regard, while I have not worked on a contingency basis, my sense of things is that the issues under that model can be significantly more complex and are ultimately just a distraction in the debate between time billing v fixed pricing.

  • David Cleverley on 30/03/2014 12:14:25 AM

    "I should also mention that with commercial litigation I cannot see any way of doing the work on an agreed fee basis due to the utter uncertainty of the scope of work."

    I think this insight settles the matter.

  • Rob Gray on 28/03/2014 6:05:14 PM

    I don't know enough about the "fixed fee" or "value based" pricing methods yet to have a firm opinion one way or another but I remain a bit sceptical. The cynic in me detects hype and semantics, if not opportunism, parading as a panacea. The ill? A mythical, or at least grossly exaggerated notion that lawyers are rapacious scumbags exploiting the billable hour to justify outrageous fees and incomes. There is little evidence advanced to support this premise, yet, this is the "problem" fixed fee/value based pricing purports to remedy. As indicated in comments above, fixed fee models seem necessarily predisposed to:
    a) overcharging to accommodate variables and contingencies (with the self-serving justification of "at least I told them up front");
    b) a Robin Hood type system where less demanding clients subsidise more demanding and needy clients; or
    c) lawyers going broke (or at the very least, regularly working for free due to circumstances that are neither of their making or foreseeable at the time fees are agreed).
    It's hard to see how a costs agreement setting out fixed fees with contingency review clauses would significantly differ from an estimate and review time-based billing model or how it would improve public perception of lawyers or reduce complaints. The firms that have implemented fixed fee models for variable/unpredictable work such as litigation seem to be juggernauts who can afford to experiment. One wonders whether they share the love with their employee lawyers who are trying to work out how to do their job competently, meet budget obligations and productively adhere to the fixed fee in complicated matters (or whether employee lawyers will be expected to do any additional, necessary above fee cap work required on their own time if they want to keep their job). I assume the Court will retain its power to award costs against lawyers personally so what to do if something unforseen blows the fixed fee out of the water but competence and duty to the Court demand more work be done on a file. Will it be the lawyer's fault for not having a crystal ball or allowing enough "wriggle room" in the up-front fixed fee (which same "wriggle room" will presumably lead to padding criticisms when matters unfold fairly predictably). The adage "you get what you pay for" holds fairly true, even in the modern marketplace, and the reality is, once the fixed fee has been exhausted (in terms of reward for effort), the matter is unlikely to attract the attention it needs. Lawyers (who are human beings with mortgages and stuff too) are pretty likely to see that festering, multiple-box, ageing fixed- fee stinker in the corner of their office as the dreaded money pit it has become and the legal advice to his/her client as to merit and prospect may suddenly become clouded by a core brain survival instinct known as self-interest. There seems to be bucketloads of nebulous sloganism and hyperbole about this allegedly inevitable change to service pricing models but the evidence of how it will really enhance things for either lawyers or clients seems pretty thin. Is it the iPod or honey flavoured beer?

  • Min Guo on 28/03/2014 3:12:38 PM

    With reference to Terry Dwyer's comment about value-based pricing, I agree there are ethical issues if what is meant is charging with reference to the value of the transaction.

    This is the same arguments that firms like KWM have been using to criticise contingency fees.

  • Michael Greig on 28/03/2014 2:16:45 PM

    Sure lets be flexible re billing. Hours alone do not give clients value. But time spent is and will always remain an important factor. Builders can do fixed prices because/if their clients deliver full plans and specifications. Clients with legal issues/work, just don't do that. If a deal takes a year and not a week, it costs the client more. Otherwise, if the lawyer takes that risk, the lawyer goes broke. Electricians, plumbers etc charge by the hour. Lots of people do. Its not perfect but combined with good estimates, regular updates and a costs discussion with the client as the end, that's the best we've got.

  • Ian Field on 28/03/2014 1:44:48 PM

    Until the regulatory framework is amended so that a client who agrees a fixed fee arrangement cannot then request that a bill be assessed, on a time spent basis, and the legal practitioner face the prospect of disciplinary action if the time costed model does not match the fixed fee arrangement actually agreed, then many of us will remain wary of fixed fee arrangements.

  • Stephen Earl on 28/03/2014 12:47:46 PM

    I am not sure I agree entirely with Denise's comments but with her comment that the concept sounds better than its practical application is correct. If we (lawyers) are to provide a fixed fee quote we need to take into account the risk that there will (almost invariably) be a complication or loose end that was not anticipated at the start of the matter. If, for example, I was to assist with a commercial matter that on hourly rates would lead to a cost estimate of $9,000.00 to $12,000.00, I would probably give a fixed fee quote of of $13,000.00 to $15,000.00 to allow for contingencies. If I got an indication from the prospective client that he, she or it might be difficult, emotional or demanding (and I can usually pick them), I would account for this by increasing the fixed fee to, say, something around $16,000.00 to account for the added time. This is the logical approach for a lawyer who does not want to end up doing extra work for no fees or, in other words, discounting their hourly rate.

    The result is that fixed fee lawyers would probably be providing quotes considerably higher than the cost estimates of their time based billing counterparts. I think fixed fee work sounds great. Who wants to go first?

  • Tom on 28/03/2014 12:16:37 PM

    In defence of the partnership model, I think many lawyers aspire to being 'self-employed' or to run their own business.

    Under a corporate model - where ownership and management is split - lawyers just become the machines on the shop floor. At least with partnership you can aspire to have a proportionate ownership interest in your practice (rather than just a few shares in a listed company, or no interest at all if you are unlucky).

    Most law firms have a management committee to run the business anyway.

  • Denise King on 28/03/2014 11:51:54 AM

    While I think the concept sounds good, the problem is that clients (particularly Family Law) continually want attention because of their emotional issue and take up a huge amount of the solicitor's time. It is not possible to factor this into a value based set fee or the solicitor will be doing a lot of work for nothing, which already occurs even with timesheets as it is not always possible to record everything. Add emails that are sent whenever a client feels like expressing their issues and this becomes even worse. At least with timesheets they can be added to the cost. Billing the client regularly is one way to ensure that they at least realise how much money they are spending and may be mindful to curb their excesses. Why should a solicitor be tied to a fee that is much lower than the time they have to spend (waste sometimes) on clients when they could be earning from other clients.

  • Terry Dwyer on 28/03/2014 12:46:42 PM

    How would value based pricing work in tax or bankruptcy matters?

    There seem to be potential ethical issues which need to be addressed.

  • Chris Hagan on 28/03/2014 2:24:23 PM

    I started my own practice in 1982 doing a number of ASX floats, corporate & commercial work - including commercial litigation - I did the first technology float in NSW in 1983 - myself and a number of firms have been doing agreed fee retainers for the past 30 years. However only certain matters are appropriate for an agreed fee basis - an ASX float can be appropriate and what you do is to agree on a fee and a scope of work - if the work goes beyond the scope of work , it is a variation to increase your fees - similar to a building contract variation - however, it is a highly skilled matter to draft and manage the scope of works- it is really a project based method of charging but unlike most project work legal work is highly variable - taking again ASX floats -even these are highly variable in the work - some floats end up being double the agreed fee due to unforeseen legal complications. Thus from a prudent practice management viewpoint it is higher risk to use agreed fees and is usually done to win the work (in informal tender processes against other legal firms) . It is a complex equation with large legal jobs - I also remember one large legal firm took on a float matter on the basis that if the company floated it received its full fees but if the company did not float it received 40% of the face value of its fees in recognition that its clients would suffer a heavy loss - thus the issue is really about sharing risk with the client - other than winning the work , by taking on agreed fee basis charging what benefits does the solicitor receive from doing it? I should also mention that with commercial litigation I cannot see any way of doing the work on an agreed fee basis due to the utter uncertainty of the scope of work.

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