27 Feb 09

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Written by Richard Wood. 12 comments

Eye Opening Alternative Fee Theory…


I love Twitter! I learn so much. One of my fellow legal colleagues, Matt Homann of the (non)billable hour, mentioned his proposal to one of his legal consulting clients (he’s a consultant to law firms, among other things). Here was the tag line that caught me by surprise, “Just had another great call with coaching client. Building him a brand new, timesheet-free practice niche in Omaha! Gonna be really cool.“

Timesheet-free practice??? I have to admit, I was fascinated by how this was going to be possible! Upon inquiring, here was our exchange….

@LegalAdmin (me): “Timesheet-Free??? Tell us more!”

@MattHomann: “Tell me more. Why must you measure time spent to measure success?”

@LegalAdmin (me): “Suggesting that we not keep track of productivity is like saying a business shouldn’t care how many widgets they produce.”

@MattHomann: “But timesheets don’t measure productivity, they measure time spent working. Big difference. Client happiness is better metric.”

@LegalAdmin (me): “Don’t get me wrong, alternative fees are fantastic, but it can’t be treated as pulling a rabbit out of the hat.”

@LegalAdmin (me): “Of course client happiness determines success! As a business we still have to track COGS. (Tough discussion in 140 characters)”

So, as I said in my last post, continuing this conversation 140 twitter characters at a time would never give either of us a chance to explain real points of expertise.

By all means, I know and feel exactly what Matt is talking about. Why shouldn’t we redefine how law firms and the practice of law operate? We’re certainly cut from that same cloth! Our variations of opinion are very complicated.

I hear him telling me that the only measure of success for any legal practice is the Client’s Happiness. I ceratinly agree that no lawyer or administrator should ever disagree with that thought.

Unfortunately, I think that theory lacks depth of thought from a business perspective. How invoices are billed to a customer (Summit calls them customers) doesn’t have to relate to the measurements of productivity inside the firm. However, in order for the firm to best evaluate how attorneys perform for their customers and how to evaluate how the attorney is paid, tracking time as the baseline for performance is the only way to measure services.

“Measure” is an internal evaluation. Using hours productivity is not to measure the success of a customer’s happiness. It’s a BASELINE

Let’s take an example from the manufacturing industry. They may have set a “flat fee” of $500 for XYZ Television. However, I would bet they can tell you exactly how much the pieces cost to go into that television. So, they know that the Cost of Goods Sold (or cost of the combine pieces and energy it took to build that television) is $380, leaving a profit margin of $120. So, how would they know that $500 is the right price if they didn’t also know how much the components were costing them?

Under Matt’s model in a manufacturing environment, we just sell TV’s. We don’t need to know how much each component costs or how many TV’s we produced today. As long as the customer buys the TV and loves the quality of the new TV, then that pays all the bills and the whole world is a better place.

Does that same manufacturer not create an Income Statement or other monthly financial statements? After all, these are also measurement tools for evaluating how we’re performing compared to past periods.

Customers can have the most amazing experiences and receive the best service and a lawyer can still go out of business when they don’t manage their business.

I don’t think recording hours has to affect fix fee arrangements at all! When a lawyer makes a fix fee arrangement with a customer, that is the fee, period. Even by setting a flat fee they still have to record their time to show themselves how accurate their fixed fee invoice was evaluated from a profitability standpoint. Fix fee arrangements aren’t so much to save a customer money, but to give the customer a tool for predicting and budgeting the investment in the legal project.

I hope this better explains why I’m concerned about completely abandoning the recording of hours. Elimating the “Billable Hour” as it exists on customer invoices is totally fine by me! But firms and lawyers still have to have a baseline and since the widget we sell is a service it’s still time regardless of how it’s packaged for sale.

(Matt I ceratinly hope you can educate me on your process.)


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  • Wheels of Justice

    You are both right – sort of. A firm absolutely needs to know its costs in order to set appropriate prices. Hours worked (note, I avoid use of the word “billable”) is certainly one factor in determining cost. But there are many other factors, (overhead, insurance, etc.) and the number of hours worked can change dramatically, based on the efficiency of the lawyer, the tools and support at his or her disposal, and the amount of embedded knowledge. So, while it may make sense to record hours, perhaps the new paradigm is to produce the work in the fewest, not the most, hours. As with virtually all other businesses, a quality control process should be in place to assure that the work is appropriate, and competently done done. Then, law firms will begin to make rational business decisions that benefit both the law firm and the client.

  • Wheels of Justice

    You are both right – sort of. A firm absolutely needs to know its costs in order to set appropriate prices. Hours worked (note, I avoid use of the word “billable”) is certainly one factor in determining cost. But there are many other factors, (overhead, insurance, etc.) and the number of hours worked can change dramatically, based on the efficiency of the lawyer, the tools and support at his or her disposal, and the amount of embedded knowledge. So, while it may make sense to record hours, perhaps the new paradigm is to produce the work in the fewest, not the most, hours. As with virtually all other businesses, a quality control process should be in place to assure that the work is appropriate, and competently done done. Then, law firms will begin to make rational business decisions that benefit both the law firm and the client.

  • Richard

    Mr./Ms. Wheels of Justice, Thanks a lot for your comments! I did miss the efficiency point in my argument, which I totally meant to point out as well.

    My firm was founded on this efficiency model. No associates to teach, just experienced members (a/k/a Partners) who already know what they are doing and can perform the customer’s work accurately and efficiently the first time. At least, that was our contribution to the efficiency model.

  • Richard

    Mr./Ms. Wheels of Justice, Thanks a lot for your comments! I did miss the efficiency point in my argument, which I totally meant to point out as well.My firm was founded on this efficiency model. No associates to teach, just experienced members (a/k/a Partners) who already know what they are doing and can perform the customer’s work accurately and efficiently the first time. At least, that was our contribution to the efficiency model.

  • Wheels of Justice

    I go into a little more theory in this post at:
    http://www.linkedin.com/newsArticle?viewDiscussion=&articleID=27929008&gid=63909&trk=NUS_DIG_DISC_N_more&goback=.anh_63909

    Wheels of Justice – aka Thomas Bowden, lawyer and bike commuter

  • Wheels of Justice

    I go into a little more theory in this post at:http://www.linkedin.com/newsArticle?viewDiscussion=&articleID=27929008&gid=63909&trk=NUS_DIG_DISC_N_more&goback=.anh_63909Wheels of Justice – aka Thomas Bowden, lawyer and bike commuter

  • Richard

    Thomas, I love the concept of using something like microeconomics and pricing theory with something like fixed fee billing, but I’m comfortable believing that studying microeconomics and pricing theory well enough for a lawyer to apply them accurately is quite unlikely.

    Ultimately it would also be great to just say, “How much is this project worth to the client?” But then you run into the fact that even when you ask that question you have outside forces such as, “How deep are their pockets?” as a consideration, and obviously that’s not fair.

    Recording hours and value of the time expended on a project is the basis for cost accounting. Any lawyer who does transactional type work, generally knows roughly how much effort will have to be expended on a certain project. With “roughly” comes the question of, “Am I willing to set ‘roughly’ in stone for bidding on the project?” and “Am I willing to risk my profitability to back up ‘roughly’?”

    Take a risk. “Paralysis by Analysis” is becoming more and more common with lawyers trying to run their firms.

  • Richard

    Thomas, I love the concept of using something like microeconomics and pricing theory with something like fixed fee billing, but I’m comfortable believing that studying microeconomics and pricing theory well enough for a lawyer to apply them accurately is quite unlikely.Ultimately it would also be great to just say, “How much is this project worth to the client?” But then you run into the fact that even when you ask that question you have outside forces such as, “How deep are their pockets?” as a consideration, and obviously that’s not fair.Recording hours and value of the time expended on a project is the basis for cost accounting. Any lawyer who does transactional type work, generally knows roughly how much effort will have to be expended on a certain project. With “roughly” comes the question of, “Am I willing to set ‘roughly’ in stone for bidding on the project?” and “Am I willing to risk my profitability to back up ‘roughly’?”Take a risk. “Paralysis by Analysis” is becoming more and more common with lawyers trying to run their firms.

  • Ron Baker

    Richard,

    I’m Ron Baker, Founder of VeraSage Institute. We have a single, solitary mission: to bury the billable hour AND timesheets across ALL professional knowledge firms. You can ask Matt about me.

    There are over 650 firms world wide that operate without either of these antiquated procedures. The first Top 100 accounting firm in the world is scheduled to trash timesheets June 30th of this year. There are large advertising agencies that operate without timesheets, along with many smaller size firms.

    I’ve written 5 books on this topic and have dedicated my life to eradicating this thinking from PKFs. There is a ton of information on our Web site, from essays, white papers, and case studies from firms that have made the transition.

    Here is the most recent firm to have trashed timesheets, and their two month progress report:

    http://www.verasage.com/index.php/
    community/comments/trailblazer_update_
    brains_on_fire_two_months_without_timesheets/

    Here is a short book I wrote about Trashing the Timesheet, in pdf:

    http://www.verasage.com/downloads/
    Trashing%20the%20Timesheet.pdf

    And here is a summary blog post, with much more additional resources, explaining exactly what these firms have done to replace both the billable hour and the timesheet:

    http://www.verasage.com/index.php/community
    /comments/ask_verassage_all_about_t_a/

    The billable hour and the timesheet are joined at the hip. If you get rid of one, you have to, eventually, get rid of the other. Timesheets are used primarily to price, not for cost accounting or productivity measures. There are far superior productivity measures, known as Key Predictive Indicators. They go far beyond customer happiness. Timesheets aren’t needed for cost accounting either; better methods exist.

    Timesheets don’t measure the productivity of your people because they track inputs but are silent as to outputs. You can’t measure the productivity of a knowledge worker the same way you can a factory worker. PKFs are not factories, they are knowledge environments that don’t work to the rhythms and cadences of an assembly line.This is one of the most dangerous biases that exists in PKFs today–the illusion of control and precision provided by timesheets, which we have proven are precisely wrong. I rather be approximately right.

    In a PKF, a judgment is far superior to a measurement, and effectiveness is far superior to efficiency.

    I hope you look around our site. There is much there about all of this, all based on solid economic research and empirical evidence from real firms. Most of these ideas are common in industry, but are just now diffusing among PKFs. After all, how many people in private industry keep timesheets? I assure you, not many, and I also assure that Bill Gates and Steve Jobs don’t. For a simple reason: they don’t think they are selling time.

    It’s a Revolution that I hope you eventually join.

    Sincerely,
    Ron Baker, Founder
    VeraSage Institute
    http://www.verasage.com

  • Ron Baker

    Richard,I’m Ron Baker, Founder of VeraSage Institute. We have a single, solitary mission: to bury the billable hour AND timesheets across ALL professional knowledge firms. You can ask Matt about me.There are over 650 firms world wide that operate without either of these antiquated procedures. The first Top 100 accounting firm in the world is scheduled to trash timesheets June 30th of this year. There are large advertising agencies that operate without timesheets, along with many smaller size firms.I’ve written 5 books on this topic and have dedicated my life to eradicating this thinking from PKFs. There is a ton of information on our Web site, from essays, white papers, and case studies from firms that have made the transition.Here is the most recent firm to have trashed timesheets, and their two month progress report:http://www.verasage.com/index.php/community/comments/trailblazer_update_brains_on_fire_two_months_without_timesheets/Here is a short book I wrote about Trashing the Timesheet, in pdf:http://www.verasage.com/downloads/Trashing%20the%20Timesheet.pdfAnd here is a summary blog post, with much more additional resources, explaining exactly what these firms have done to replace both the billable hour and the timesheet:http://www.verasage.com/index.php/community/comments/ask_verassage_all_about_t_a/The billable hour and the timesheet are joined at the hip. If you get rid of one, you have to, eventually, get rid of the other. Timesheets are used primarily to price, not for cost accounting or productivity measures. There are far superior productivity measures, known as Key Predictive Indicators. They go far beyond customer happiness. Timesheets aren’t needed for cost accounting either; better methods exist.Timesheets don’t measure the productivity of your people because they track inputs but are silent as to outputs. You can’t measure the productivity of a knowledge worker the same way you can a factory worker. PKFs are not factories, they are knowledge environments that don’t work to the rhythms and cadences of an assembly line.This is one of the most dangerous biases that exists in PKFs today–the illusion of control and precision provided by timesheets, which we have proven are precisely wrong. I rather be approximately right. In a PKF, a judgment is far superior to a measurement, and effectiveness is far superior to efficiency.I hope you look around our site. There is much there about all of this, all based on solid economic research and empirical evidence from real firms. Most of these ideas are common in industry, but are just now diffusing among PKFs. After all, how many people in private industry keep timesheets? I assure you, not many, and I also assure that Bill Gates and Steve Jobs don’t. For a simple reason: they don’t think they are selling time.It’s a Revolution that I hope you eventually join.Sincerely,Ron Baker, FounderVeraSage Institutewww.verasage.com

  • Richard

    Ron, I can’t tell you how excited I am to read all your material.

    I guess “I believe” is a start to explain where I stand, but my spirit has to be supplemented by enough convincing practices to make the full shift. After all, I’m the Accounting Manager and can’t do it on my own. Although I can help educate those who do… and most won’t need anything but a nudge!

    Thanks for your insights Ron. I’m really excited to dig through all that you’ve given me.

    (P.S. I’ve always thought they were antiquated, just didn’t have an alternative.)

  • Richard

    Ron, I can’t tell you how excited I am to read all your material. I guess “I believe” is a start to explain where I stand, but my spirit has to be supplemented by enough convincing practices to make the full shift. After all, I’m the Accounting Manager and can’t do it on my own. Although I can help educate those who do… and most won’t need anything but a nudge!Thanks for your insights Ron. I’m really excited to dig through all that you’ve given me.(P.S. I’ve always thought they were antiquated, just didn’t have an alternative.)