[Note: This is another in a continuing series in which I am reposting some of my original drafts of published articles.]
In a recent post on the Between Lawyers blog, I linked to a post on the subject of value billing and the post seemed to generate a bit of discussion about the topic. It also reminded me that I wrote an article that includes my most extensive writing about the subject of value billing in an article that was originally published in the April/May 2006 issue of Law Office Computing magazine. Not surprisingly, I focused on the impact that technology might and should have in the area of alternative billing. Sharp readers will note that my real topic was profitability and not so much alternative or value billing, which was a bit of a side issue in the article. Nonetheless, I thought I’d republish my original draft of the article (that means there may be a few typos) on my blog and see if people think that it adds anything to the discussion. I really liked the way this article turned out and it contained some original ideas and approaches that I hadn’t seen elsewhere. I hope you enjoy the article.
Using Technology to Increase Profitability: Moving into Alternative Billing Via Technology
Better. Faster. Cheaper. These three words have long made up the mantra for the benefits of legal technology, at least for those trying to sell new technologies to lawyers.
However, these three words, even if proven, have never been quite enough to close the sale with many lawyers, especially for technologies that promise to change the nature of the practice or substantially alter the ways legal services are delivered.
The final barrier is often concern about the impact of technology in a system where fees are based solely on the number of billable hours worked. Simply put, if you can use technology to do what is now a twenty-hour project in four hours, haven’t you just cut your earnings by eighty percent?
This article is not going to be another manifesto about how lawyers need to end the tyranny of the billable hours system. However, I do want to make you think critically about your current approach to pricing your services.
This article, in fact, is about supplying the missing part of the legal technology equation: how will new technologies or better uses of technology improve profitability, client satisfaction and make your life better? In other words, how does the mantra of better, faster and cheaper actually help you make good decisions about alternative billing methods?
The Billable Hours Dilemma.
Let’s assume that your practice includes drafting a legal document that takes you six hours to produce a solid draft, and that you draft one hundred of these documents a year. You find that you can implement a document assembly application that will reduce the time to create that solid draft to six minutes per document.
Forget about the cost of the software and developing the document assembly application. What have you done to your practice? In a billable hours system, you have reduced six hundred billable (and collectable) hours down to ten hours! In addition to software and development costs, you have lost 590 hours of earnings. However, you definitely have achieved the goal of better, faster and cheaper with your technology.
Of course, this simple analysis is just the starting point. Perhaps not all of the hours are “lost.” You might be routinely writing off some of this time. You might “replace” the hours with higher value hours doing something else.
When you implement any technology, you must rethink your approach to the use of your time and how you bill your clients.
I chose this example for two reasons. First, it is a great example of a place technology has a negative impact in an hourly billing approach and almost drives you to consider an alternative billing model. Second, clients increasingly think that lawyers have these capabilities.
In today’s world of computerized forms, what does a client think if they see that you spent six hours producing a first draft of a will? Your client will believe that you chose the method that maximizes your billable hours.
Here’s one of my favorite analogies. You contract with a builder to build you a new house on an hourly billing basis. The workers show up with no power tools, only hand tools. How do you react?
That brings us to the great billable hours dilemma. If there are strong pressures from clients to reduce the number of hours spent on projects and strong resistance to rate increases, what will the impact be on your practice? In general, the answer will be that you simply have to go out and find more hours (new clients and new projects) each year.
Alternative Billing Primer.
For a growing number of lawyers, technology is one of the drivers toward alternative billing methods. There is a list of good resources for learning about alternative billing in the sidebar.
For our purposes, I want to divide alternative billing into three categories: (1) value billing, (2) enhanced or blended hourly billing, and (3) other innovative approaches.
Think of value billing as flat fee billing. You and the client agree in advance to a fee for the project based on the perceived value of the work to the client. Implementing the document assembly application I mentioned earlier definitely makes sense here.
There are many examples of enhanced or blended billing approaches. You might have one rate for drafting and a higher rate for tax planning, for example. The document assembly application might make sense if your clients pay you more for you tax planning time.
We are also seeing a large number of innovative approaches, Bonus pools and incentives for meeting budget targets are examples in this category. Typically, these are used by large corporations or where there is a high volume of work. Technology might enhance your profitability in these settings.
Billable Hours Not Going Away – Ethics and Other Concerns.
Experts have been predicting the death of the billable hours system for many years. It’s still going strong. In many cases, both clients and lawyers are comfortable with the approach and believe it achieves fair results. Changing your existing billing approaches may take time and negotiation and involve changing systems. There is also a vocal group who believe that any type of billing other than hourly billing is unethical, and innovative billing approaches can raise issues under applicable ethical rules.
You will find both a growing momentum for alternative billing approaches and receptivity on the part of clients to these approaches. If you want to see what lawyers really think of hourly billing, watch a lawyer’s reaction when any other service provider suggests hourly billing.
For purposes of this article, I am going to assume that hourly billing remains the dominant approach to billing, with a small, but increasing, number of alternative experiments going on in many law practices.
My first rule is that you must think carefully about how technology might help make any alternative billing approach more profitable.
My second rule, which I will now turn to, is that, whatever your billing method, you must always consider the impact of technology on profitability. The vendors may be telling you better, faster, cheaper, but your response should be to ask about and understand the impact on profitability.
Profitability – The Key Measure.
Profitability is the key factor in technology decisions today. I had two recent conversations that brought home this point to me. First, I talked with a partner at a large law firm that is looking at its practice, staffing, technology and much else all in the context of how each item contributes to profits per partner. Second, I spoke with a lawyer in a small firm who made a large commitment to modernizing technology, with the result of a 50% increase in profit on the same annual revenues as the prior year.
Profit, classically, is the result of subtracting costs from revenues. In the short term, we can increase profits by decreasing costs and/or increasing revenues. In the long term, improving customer service also plays a key role in keeping profits strong.
I often find that lawyers underestimate the role technology can play in cutting costs, increasing revenue and improving customer services. Let’s look at each of them in turn.
Using Technology to Cut Costs – The Cheaper of Better, Faster, Cheaper.
My wife’s brother, Kevin Ford, started a solo law practice with a notebook computer, speech recognition software and no secretary. His calculation was that the technology would cost him $4,000. A good secretary would cost him $4,000 per month and need to be paid before he earned anything. His belief was that the technology investment would help him become profitable more quickly and that the savings each month would accrue to his benefit until he determined whether he needed a full-time secretary.
He was able to wait nine months before hiring a secretary. He saw the technology had a real-world payoff of $32,000. However, more importantly, it had a profound impact on the profitability (and cash flow) of his practice and helped him get his practice off the ground.
Here’s another example. Lately, there has been much interest in Internet telephony or Voice over IP (VoIP). It’s sold as a way to save money on your telephone bills. Annual call savings might be hard to calculate, but, if as a consultant recently told me, it would cost a law firm that was moving offices more to move the PBX and phones to the new office than to switch to VoIP, then I can easily see the bottom-line benefits.
I recommend taking a much more careful look at real cost savings as part of making your technology decisions. Notice that “better, faster, cheaper” benefits of technology may well offer you cost cutting opportunities. Some of these can be subtle and require that you think about your business model.
For example, outsourced technology services and even hosted software services may help you avoid large investments in hardware and software, reduce staffing needs and provide other savings. Similarly, you might use technology to let you hire part-time employees rather than full-time employees.
There are almost no end to the ways you can look at new technologies as potentially cost-cutters. Keeping documents in electronic form will save you on paper and printer ink or toner costs. Making documents available to clients on secure, private websites might save you postage and overnight shipping costs.
Cost-cutting uses of technology will work for you no matter whether you use hourly billing or alternative approaches. If you are realistic and think carefully about the economics, using technology will help you increase your profit margins on projects and run your office more cheaply, and that’s a recipe for having a better year than last year.
Improved Revenues – the Faster of “Better, Faster, Cheaper.”
Many variables come into play in determining a law firm’s revenues. Projections involve assumptions that may or may not prove true. However, let’s cautiously take a look at how technology might improve revenues in both hourly billing and alternative billing settings.
As a general matter, the case for technology improving revenues is easiest to make in the alternative billing approach. Client happily agrees to a price of $1,000 for a will. Rather than taking you ten hours at $100 an hour, you use document assembly to reduce the amount of time you spend to four hours. Assuming you do the same number of wills in the year and use the six hours you “saved” in other fee-generating work, you will increase revenues for the years. By comparison, in the billable hours world, you simply have reduced your fee for the will to $400.
While this example shows how technology can lead you to alternative billing, it’s important to see that alternative billing models may not be realistic without the use of technology.
What is the biggest untapped information source in any law practice? It’s the time records.
If you start to process and analyze those records, you will learn many important things, not the least of which is how to price flat-fee projects. If you don’t know how long it takes you, on average, to do projects, how can you set a flat-fee that works for you? You’ve been forced to enter your time every day; why not use that information for something that benefits you?
In hourly billing, one of the hidden problems is time write-offs. Let’s go back to my example of the document that takes six hours to draft. If you routinely write off half of that time for clients on every bill, then you are not making an accurate calculation of the economics of the impact of technology. Any process where you consistently write off time is an invitation to consider technology alternatives.
The biggest area to consider using technology to improve revenues is to improve your staffing. If using speech recognition allows you to avoid hiring a full-time secretary and hire a paralegal instead, or other technologies allow a secretary to do paralegal work, you’ve turned a cost into a revenue producer.
Another good area from increasing revenues through technology is to see whether you can automate documentation or other processes to create fees for “annual corporate maintenance” or other legal support or service packages as annual subscriptions.
Client Satisfaction – The Better of “Better, Faster, Cheaper.”
The notion of “better” rarely resonates with lawyers. In most cases, the “better” is something that benefits clients more than lawyers. Although you might perceive few immediate benefits, the benefits over the long term can be substantial.
Let me give you two examples of ways to use technology to improve client satisfaction.
First, after developing a document assembly application to generate first drafts of complex estate planning documents, I realized that the same process could routinely generate document summaries and charts of the estate plan for clients with little additional time or effort. For almost no additional cost, clients received a package that helped them really understand the contents of complex legal documents.
Second, with just a couple of mouse clicks, the ReportBooks feature of CaseMap 5 generates a handy client summary of the main facts, issues and cast of characters in a litigation matter, along with an assessment of some of the strengths and weaknesses of the evidence. That’s something that clients will appreciate and will keep them coming back to you.
In each example, you are looking to use some aspect of technology, small or large, to improve your client’s experience in working with you. It might be as simple as using a color printer or enlarging the font size for elderly clients.
You want to look at technology with an eye for how it might improve client service, which will help tie your clients to you for the long-term. Study after study shows that it is better and easier to land new business from existing clients than it is to go out and land new clients.
Making the Turn to Alternative Billing.
Better use of technology will help you build an environment where alternate billing approaches make sense and may even thrive. I am not, however, trying to convince you, that you must switch to alternative billing methods. I do want to suggest that experimenting with alternative billing is advisable. You can expect to see it from your competitors and be asked about it by clients.
Five essentials for using technology to move toward better billing practices and enhanced profitability are:
1. Understand the Facts and Do Not Rely on Assumptions. If a project takes ten hours of time at $100 an hour, then charging a $500 flat fee will never make economic sense. Similarly, if you do not know the costs per page of printers and copiers, you can’t evaluate whether it makes sense to buy a new one. Knowing the total costs of hiring an employee is essential when evaluating outsourcing or technology alternatives.
2. Use Your Facts, Not Anyone Else’s Facts. People always give me examples of cost savings from technology for a litigation practice. I do not have a litigation practice. The examples simply do not apply to me. Keep the focus directly on you and what’s going on at your firm.
3. Cheaper Will Help You the Most Now, But Faster Will Be the Key in Alternative Billing. Keep your eye on profitability. The benefit of technology today is in how you can use it creatively to cut costs. Cutting costs will help you increase profits, which will give you the flexibility and capital to try new technologies and new approaches to billing. However, cutting costs is only one step. Almost every alternative billing approach makes the most sense when you reduce the time it takes to perform services and become more productive.
4. Look for Billing Inefficiencies as Indicators Where to Experiment with Alternative Billing. I’d be surprised if you cannot use your existing software to analyze your time, billing and collection records to generate useful business information. Are you doing that? You should be. Do some analysis with those programs or a spreadsheet and then use the information. Tasks that are consistently written off, expenses that are not billed and similar facts may show you areas where technology can help you or provide fertile ground for alternative billing experiments.
5. Look for Happy Clients You Can Make Happier. My informal surveys suggest that lawyers often use new clients to test alternative billing approaches. I suggest that you might get better results and feedback by approaching your happy clients. If you’ve used technology in the past to improve client service, they may be even more receptive.
It will be a while before we see a massive shift away from hourly billing. However, do not make the assumption that productivity gains from technology are always at odds with the hourly billing system. Instead, focus on the contributions that technology can make to improving profitability – cutting costs, increasing revenues and improving client service – and then use a hard-headed realistic approach to looking at whether your technology helps you in these areas. Then, apply some of the ideas I discuss in this article to begin to experiment with alternative billing models where they make sense for you.
Useful Resources on Alternative Billing Methods
Dennis Kennedy and Tom Mighell, Alternative Billing Requires Alternative Resources, Law Practice Today, September 2004 (http://www.abanet.org/lpm/lpt/articles/slc09041.html).
Jim Calloway and Mark Robertson, http://www.amazon.com/gp/product/1590311175/Winning Alternatives to the Billable Hour, 2nd Edition: Strategies That Work, ABA Publishing.
Ron Baker, Professional’s Guide To Value Pricing, CCH.
Alan Weiss, Value-Based Fees: How to Charge—and Get—What You’re Worth, Pfeiffer.
The [Non]billable Hour Blog – http://www.nonbillablehour.com
Other Helpful Books on Value Billing
[Originally posted on DennisKennedy.Blog (http://www.denniskennedy.com/blog/)]
Learn more about legal technology at Dennis Kennedy’s Legal Technology Central page. More information on the “Second Pair of Eyes” packages for legal technology audits and strategic planning may be found here (PDF).
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[Note: This is another in a continuing series in which I am reposting some of my original drafts of published articles.]