GPSOLO July/August 2010
How to Kill the Billable Hour
By Jay Shepherd
When I tell other lawyers that I haven’t billed an hour since 2006, they usually look surprised. When I tell them that I do litigation using fixed, up-front prices, they think I’m crazy.
The most common question I get from lawyers is “How do you do it?” I usually give short, pat answers accompanied by a mischievous smirk. (“Uh, Jay, what’s wrong with your face?”) I usually don’t give out the secrets of how I do it. But for you, and only you, I will. Just don’t tell anyone.
First, a little background: My firm, Shepherd Law Group, is a Boston boutique that defends and counsels employers. I founded it 12 years ago as a solo, and as of this writing we’re at four lawyers. For the first eight years, we billed hourly like every other firm. I hated it—I’ve always hated it—but I didn’t know how to do it any other way.
But one of the perks of having your own firm is the ability to do it your way. So I spent those eight years figuring out how to ditch the billable hour. In 2006, we started to fix prices on a trial basis, usually with new clients on discrete matters. As the year passed, we noticed that the clients with the fixed prices were happier. We also noticed that for the most part, we were happier doing the fixed-price work.
So on the last day of 2006, we billed our last billable hour, and we’ve never looked back. Our revenue grew substantially, as did our client satisfaction.
How did we do it? The following ten steps will teach you how to kill the billable hour. Follow them, and you’ll be on your way to a more fulfilling, more successful practice.
Step 1: Commit. This is all or nothing. It’s a cop-out to “offer” so-called alternative-billing options while still falling back on the same old hourly rates. This tells the client that you don’t actually believe in the value of your services and don’t have either the requisite confidence or knowledge to be able to set a price. It shouldn’t be up to clients to determine your business model. When you go to the mall, do the shopkeepers ask you how they should price their wares? Of course not. We are the vendors here. It is up to us to determine our own business models and our own prices.
Step 2: Recognize that value and cost have nothing to do with each other, and that price is all about value. Your clients don’t care a whit about your costs. That’s your problem, not theirs. All they care about is the value that solving their problem has for them at that instant. If your price equals or is less than that value, clients will be willing to hire you. That’s it. In hourly billing, where the price is kept hidden from the client (and generally from the lawyer, too), the decision to hire is based on guesswork. When the final price ends up being more than the client’s perceived value, you end up with disgruntled clients. Hence, lawyer jokes.
My law firm’s costs are for the most part fixed, as are yours. I pay fixed amounts for rent, insurance, utilities, office supplies, and payroll. If a particular case ends up involving more work for me or my colleagues, that doesn’t affect my costs. There is no such thing as a profitable case or client—just profitable practices. Quit worrying about the costs of a particular matter, and start worrying about your clients’ measurements of value.
Step 3: Toss your time sheets. For many lawyers, this is the hardest step. We all use time sheets as a crutch. It gives us something we can measure. Often, we are afraid that our clients won’t trust us—that they will question whether we actually did the work. You need to have confidence in yourself and in the value you provide. You are not in the business of selling hours. You are in the business of selling widgets, and the particular widget you sell is the solution to the client’s legal problem.
In the end, you either got the problem solved (or tried to) or you didn’t. What difference does it make to the clients how much time you spent on it? Are they paying for your time or for your knowledge and experience? As long as you educate clients beforehand about what they are buying (a desired solution, not hours), then you will never need to provide a pedantic, Industrial Age recitation of the hours you spent.
Step 4: Start figuring out the value of your services. This, of course, is the real trick. How do you know what the value of your services is in the eyes of your clients?
The first step is to know your clients. How serious are they? How sophisticated? Are they experienced users of legal services? How urgent is their problem? How hard will it be for them to find someone else? What will your competition charge? What does the client stand to lose if the problem isn’t solved? Or gain if it is solved?
And how do you fit in? How much does your particular expertise matter to a favorable result? What have you charged this client in the past? Or other clients? Were those fees light or heavy, in retrospect? How much do you want this particular business?
People often ask if I looked at old bills before setting my prices. I did. We actually analyzed eight years’ worth of hourly bills. But we didn’t do this to reverse engineer prices from our past hourly rates. Instead, it was more to see how our past “prices” compared to our retrospective sense of the clients’ values. If you don’t have eight years of past bills, don’t worry about it. You can still figure out what your clients think about their problems.
Step 5: You’re not a restaurant, so don’t make a menu. A lot of people think that having fixed prices means having the same prices for every client. These aren’t Happy Meals, people. They’re not commodities. Your services are as unique as you are, and your clients’ needs are as unique as they are. How could you possibly set a single price for a single type of matter for any client that comes walking through your door? You can’t. Don’t.
Step 6: Form a pricing committee. Pricing is difficult and incredibly subjective. Don’t just go on your own gut feelings. Ask your colleagues what they think. Describe the work required and the needs and traits of the client, and ask them what they think is the right price. Even if you’re a solo, find people you trust whom you can bounce pricing questions off of from time to time.
Step 7: As with comedy, pricing is all about timing. One of the biggest problems with hourly billing is that the price (which is merely the rate times the time) doesn’t become known until it’s too late—after the work is done. You need to set your prices before you do the work.
On the other hand, you can’t set a price until you know enough about the job. Don’t quote a price over the phone. Instead, bring clients in for an interview, learn about them and their problem, and then agree to get them a proposal in writing by the next day.
Step 8: Remember that scope isn’t just a brand of mouthwash. When you propose your price, you’ll want to put it into a fixed-price agreement. This explains the scope of what you’re agreeing to do to solve the problem. Otherwise, you risk “scope creep,” an insidious condition where you end up doing more than what you agreed. Spell out the scope of what they’re buying, and both you and your clients will avoid nasty surprises.
Step 9: If contractors can figure out change orders, why can’t you? If the scope of the job does change, you need a way to be able to price the new work before you start doing it. That’s what change orders are for. Contractors use them all the time.
Just don’t let the change orders become the tail that wags the dog. As you get more experienced with fixed pricing, you’ll get better at anticipating the scope of the work, and you won’t need to use change orders too often.
Step 10: Learn from your pricing mistakes. You will make them, of course. We have. Everyone does. But a pricing mistake doesn’t mean comparing your price to what you would have received had you billed hourly. A pricing mistake is realizing that you probably could have charged more for a job.
The solution is to learn from the mistake. Could you have charged more? If so, remember that, and charge more next time.Pricing is an art, not a science. It’s hard, and it takes practice. But it is better for clients than hourly billing, and for you, too. Follow these steps, and pretty soon you’ll be wondering why you ever billed hourly.