How Law Firms Get It Wrong

What’s wrong with the way most law firms work? It all starts with hourly billing.

“Show me the incentive and I'll show you the outcome” is a quote attributed to Charlie Munger, Warren Buffet’s right-hand man.

Hourly billing means the slower you work, the more money you make. The more you talk, the more money you make. The more inefficient you are, the more money you make.

This doesn’t mean that law firms set out to be slow, inefficient or talk a lot, but you can’t get away from the hard truth. Any business that bills by the hour (and not just law firms) will inevitably create a culture and mindset which implicitly encourages racking up a lot of hours. How could it be otherwise? More hours equals more cash, and in business, more cash is a good thing both for the individual racking up the hours and the firm itself.

There’s also another factor which makes it worse. Most law firms act like taxis. If you ask them to take you to Waterloo station, that’s what they’ll do, and it will cost you whatever it says on the meter. But what law firms rarely do is say: why do you want to go to the station? Are you sure it’s the right destination for you? Or even, why are we going to the station by taxi? Why don’t you take the bus, it’s just as quick and costs a tenth of the price.

Law firms tend not to ask these questions for two reasons: firstly, because they bill by the hour, which makes them effectively indifferent as to why you are doing something and secondly because a law firm’s engagement with its client is typically a series of ad hoc interventions. 

They are hired to do a specific job: once their part in that job is complete, their involvement with the client (like a taxi) ceases until the next job comes along. This means that they often have no insight into how their intervention worked out for the customer. For example, if they negotiated a five-year outsourcing agreement for their client, how did that agreement work out in practice? Did the structures the agreement put in place work out as expected, or did they fail?

The knock-on effect of this is that there is no virtuous circle of improvement: the lessons learnt from the preceding engagement are not fed into the next engagement. Equally, when something has gone wrong more than once, there is no incentive (in fact, there is a financial disincentive) for law firms to discover and fix the root cause.

The core problem with hourly billing is that there is no alignment of interests between the customer and the supplier. Of course, some law firms will offer fixed prices for certain jobs. This addresses part of the problem (though, if you have ever received a fixed price quote from a law firm, you will note that it’s so heavily qualified that it’s hardly ever likely to apply), but the key problem is the culture and mindset that’s been created.

What about in-house lawyers? I hear you ask, surely they are different? Yes, the good ones are different. One of the main reasons that lawyers leave law firms to become in-house lawyers is they grow weary of the dysfunctionality of the hourly billing system and, in particular, the pressure it puts them under. But still, they have been trained, dunked, and soaked in the culture of hourly billing. Hourly billing is the prevalent culture amongst lawyers. It's the way that 99% of lawyers are trained, and it permeates the way that legal services are provided. Even the most well-intentioned lawyers find it hard to free themselves.

If you are looking for a different approach, you’ve come to the right place.