Since the credit crunch the buzz words for law firms have been “alternative fee arrangements” and “value added pricing”, but still the billable hour is holding strong, even though it so obviously leads to inefficiencies and does not prevail in any other industries than the legal services market. The underlying reasons for this has been discussed in a recent blog post by Adam Smith, Esq. – “Kaizen comes to the City”.
“In the context of a big firm, efforts at abandoning the billable hour really don’t work because associates (for example) were being measured by their number of hours – it goes to compensation, evaluations, and so many other things that every time they really tried to do it it became a “train wreck”. “Our ability to implement real change was being blocked by structural barriers endemic in the traditional law firm model. The most obvious barrier is the built-in incentive towards inefficiency that haunts every private practice lawyer who is rewarded on increasing billable hours ahead of removing the need to do future work.”
But, in this post, Adam Smith, Esq., also tells the fascinating story about a new law firm – radiantLaw – that has been built around the principles of delivering price certainty for clients and with a business model and processes to provide that. According to the founders of radiantLaw, the motivation was “the firm belief that the model of the past 20 years has not been good for clients. Particularly in the wake of the credit crunch, law firms have closed ranks and raised gates, given no transparency on their inner workings, and frustrated clients.” Instead, they tried to go back to first principles: No timesheets, no billable hours. “What clients are buying is a service, an output, and the last thing clients are interested in is lawyers “whining” to them about how it took longer than they thought, was more difficult and complex than anticipated, and accordingly acquired twice the hours estimated from the start.”
According to one of the founders of radiantLaw, Alex Hamilton, the key to radiantLaw’s success has been the flat structure and the performance of legal services as projects with clear deliverables. “Another key component is technology. Systems that will significally improve clients’ ability to manage their deals by “a combination of project management and knowledge management tools.”
Alex Hamilton also points to another aspect of increasing quality and revenue by using external providers (like Pangea3) do to things as conformance of a contract. “These are just things that need to be done right and done well, but not in the “quill-wielding sausage factory” way it has been done.”
In connection hereto, an interesting point is made of the barriers that the billable hour creates for development and increased efficiency. When the billable hour is used, efficiency and quality improvement investment can ironically result in decreased revenues. “Say, automatic document generation, using systems which are fairly sophisticated these days. You invest a fair amount upfront and then down the road your reward is fewer billable hours.” But, as Alex Hamilton points out, “note the important premise of installing the documents generation system: You generate more consistent documents, give yourself more time to think about what really matters rather than reinventing the wheel and spending all your time on cutting and pasting. Most importantly, it delivers high quality.”
For those who wonder about the title of Adam Smith’s blog post – Kaizen is the concept of continuous improvements made famous by Toyota. This is a concept adopted by radiantLaw and a concept that could very well serve as a target picture for law firm development, or as Adam Smith puts it “The end is never plainly in sight; it’s an ever-shifting goal, with the standards for what constitutes superb automotive quality – or superb service to clients – constantly receding as you enhance and build upon your capabilities, make your processes more rigorous and efficient, and develop more innovative approaches to the thorny problems that remain.”