‘Law firms have conflated using time as a management tool with using it as a pricing tool,’ said Richard Burcher, a pricing expert and chair of the Virtual Pricing Director platform.
And this goes to the heart of legal tech’s number one challenge: time vs efficiency. I.e. technology fundamentally does one thing, it creates efficiencies relative to the desired goal. Yet, legal work is priced mostly by time. QED, the two forces, one economic, one technological, are working against each other.
So, what does Burcher think is the way ahead? After all, he’s spent many years focused on helping lawyers as a consultant to improve how they price their work.
One key challenge to any real change is the lack of pricing experts in law firms. Burcher noted: ‘They are often only used on big tenders and work reviews, so their impact on the firm is skin-deep. But where they do have an impact it’s very beneficial.’
He added that when it came to figuring out what things should cost ‘80% of the time it’s partners having a go’, often using their instincts, or if there is some software at the firm it can sometimes be no more useful than an Excel spreadsheet.
Naturally, Burcher believes that Virtual Pricing Director can help lawyers understand what things should cost in a better way, and it’s part of the new Slaughter and May collaborate incubator – although it’s been around for some years. It does this by connecting with the firm’s deal data and enabling lawyers to extrapolate from there.
Margin Management
A key change that Burcher is seeing is an increasing focus on ‘margin management’. He noted that as costs rise for law firms, sometimes above their rate rises, the focus centres on profit margins. But, you can only figure out a profit margin if you have a sense of the overall cost to the firm of each piece of work.
And here is where it all goes wrong. The lawyers tend to think of using time to get to the fee figure they want for the client to pay. Although it’s not a charade as such, partners may have an idea of what the price will be before they start, yet the entire bill is formed from time entries. I.e. you have a fixed fee in mind, but you use time to get there…..even when you’re using tech to go faster.
As you can see, that is an approach that is implicitly going to create systemic conflicts.
Meanwhile, another challenge is that internally the law firm is very used to timing everything. How many associate hours for X task, or Y task? How long did an associate work? Do they merit a bonus based on those hours? And so on. But, these are management issues. Not pricing issues.
The solution then is to separate the management issues, i.e. timing work inputs and using that data to manage / reward the firm’s lawyers, from the fees the firm charges and hence derives its profit.
And the answer here is fixed fees, or at least that’s Artificial Lawyer’s belief.
Burcher responded that there will always be some billable hour work, because some legal work is always too unpredictable – and that sounds right. He also noted that ‘at least 50% of the reason for the billable hour’ and its continuation is the clients.
He then argued that the way ahead is via data. Again, strong agreement there from AL.
But, do we then have a real market if a law firm uses its data better? I.e. a market only works when the people in it know what things cost. So, we need data sharing on pricing. Maybe not a totally public sharing, but clients need to know between them what they are paying for the same thing, at least by law firm type.
Burcher accepted that there ‘is no serious visibility’ on pricing in the wider market. Instead, law firms have their data; each client has their own data as well. Yet, little of it ever connects or is broadly organised.
Because there is a lack of comparability or solid data, people turn to something they can rely upon, something that looks ‘real’, i.e. time. And so we are back where we started.
So, to sum up, to change things we first need to separate a firm’s need to manage internal work effort (time) from the desired profit margin (the fee they will charge the client). It can be done, and the data is there to help achieve this.
The next thing to do is to create an actual ‘legal market’, and that will only happen when clients can make informed buying decisions, not just using their own data, but knowing what other companies of the same type have paid for similar matters from a group of similar law firms. And finally, we need a predominance of fixed fees, which is a price the clients pay, but is not a record of the time used for the matter – because when tech comes into it, time is not the key value.
Burcher ends with the point that if you let a client choose between time and fixed fees, they get more engaged.
‘It has a big effect. The dynamic with the client goes to collaboration because the client feels they have a choice and are in control.’
Getting to where we need to get to is going to take a long time…..but, at least there is a path ahead and a more collaborative approach will certainly help.