Monday, October 30, 2006

The Innovators Dilemma in a Billable Hour World

The last several conferences I have been to have been revealing with regard to the challenges that innovators face when trying to sell new products to the legal industry. The vendors all expressed how difficult it is to sell to law firms since decision making is so decentralized and because the logic for investing in new technology that works so well in "normal" businesses does not work in the legal industry. In fact, the logic is BACKWARDS. What do I mean, you ask? Well, if the legal industry is so different in that regard, you might find the root of the problem by asking what makes the legal industry so different from a normal business. Yes, since this is my blog, you can probably guess it is that the legal industry bills by the hour. Normal businesses actually tell you how much their product costs BEFORE you buy it! How does this impact investments in technology and why do you care? Here is the link. . .

In Normal businesses, you and your competitors give the customer a fixed-price. Since there is competition in the marketplace, you use every edge you can to gain cost efficiency so that you can offer your customer a better price than your competition and/or improve your profit margins or market share. Since your price is fixed, your profitability depends on your efficiency and investments in technology that improve your efficiency have a positive return on investment. This puts maximum pressure on companies to innovate and embrace new technologies.

Law Firms, on the other hand, bill you by the hour. The economics of this business model are exactly the opposite of a normal business. In the billable hour world, you make more money when you are inefficient. Since law firms are billing for time (and therefore cannot amortize the cost of R&D over the course of several projects -- eg. like a good template, for example) there is an incentive to reinvent the wheel for each client rather than build on solid foundations that we already know exist. Investments in technology that improve efficiency actually REDUCES revenue in a billable hour firm. The faster we are able to do things, the less money we make (that's really backwards, isn't it?). Technology has a negative return on investment in most firms. So, such investments are only made at the lowest-common-denominator level or when the customers demand it. Have trouble believing it? Well, there is easy math here. Billable hour requirements at the largest firms are at historic highs. With recent charges of billing fraud and padding at large firms, high attrition rates, and sweat-shop work environments, you can count on the fact that the pressures to bill more hours are enormous. With that fact, you can also count on the fact that the associates are not looking for "innovative ways" to make it harder to bill hours (to be more efficient) and partners who are getting rich by eating their young are also not looking for "innovative ways" to reduce their profits at the end of a quarter.

This leaves us with two types of technology providers to the legal industry: 1) Providers who have technologies that the practice of law more efficient, and 2) Providers who make non-legal activities more efficient. Here is what I have discovered about their fate.

1) Providers who have technologies that the practice of law more efficient: These providers fall into two categories:
A) Mass-market products (high consumption)
B) New Innovations

A) The category makes all of the difference in success. Mass-market products that are widely subscribed-to (Lexis and WestLaw are examples of these). They provide tools that actually make the lives of the attorneys who use them easier. The resources they provide actually do make lawyers more efficient and, arguably, reduce billable time. What makes them acceptable is that they are so widely consumed that it effects the competitive market equally (all boats rise with the tide) and these technologies actually serve as the "innovation floor" for the legal industry. In addition, the products are already being consumed . . . the partnership is not being asked to consider a "new" product that would change the way they operate. The firm evolves with the subscription.

B) The New Innovations have the most difficulty. The vendors I have spoken with cite tremendous frustration selling to firms, saying that they have been challenged by partners of firms who ask them "why would I buy your product? If I did I would make less money!". Sadly, it is true. The problem, however, is not the technology. It is a backwards billing model!

2) The true winners in the legal industry have been the products that reduce non-billable time. These new technologies are widely purchased because they are the only technologies that have a positive return on investment. With partners wanting to squeeze every minute out of each hour in order to bill their clients (as well as to get their associates to bill more), they happily purchase products that make non-billable time more efficient. These technologies can include document retrieval systems, or billing software (counting time for you), etc. Next thing you know, innovators might find a way to put a toilet in every lawyers office just to reduce the commute time (non-billable right?). Sadly, many big firm attorneys I know admit that they think about the client on the way to, and during, their bathroom break. It will show up somewhere on their timesheet. . . you can count on it. So, if the next time you get a bill from your law firm you notice that something stinks, You'll know that it's not just the service. . . . . it's, well, "pressure!"

This is just a glimpse of the innovators dilemma in the legal industry. In general, I find it quite backwards that the legal industry has adopted a billing model that promotes inefficiency and where investments in new technologies have a negative ROI. It is no wonder why the legal industry is one of the most stagnant industries in the nation. Hopefully, with the new trend toward fixed-pricing in the profession, we can be rewarded for innovation and provide customers with the service they deserve and a high quality product without reinventing the wheel!


GGBennett said...

Though you touched on it here and elsewhere, I would like to reiterate the importance of reducing the ethical challenges facing attorneys by eliminating the billable hour. By no means is the billable hour the sole ethical concern attorneys are dealing with, but it certainly is a significant one (I'm assuming, perhaps naively, that attorneys do still struggle with the ethical issues raised by the billable hour).

Not only is the entire model reverse-efficient, but the current pressures to produce hours, resulting in padding, double billing, and premium billing are overtly unethical.

Any steps taken to relieve conscientious attorneys of facing these moral pitfalls should be lauded and welcomed.

Christopher Marston said...

No question. We are extremely passionate about the ethical issues we solve through transparency in pricing. You are probably aware of the Holland & Knight billing fraud scandal where a partner and whistleblower caught the firm billing for more than $100,000 in time that was never put it. What's worse, a Partner actually tried to justify the fraud, saying "that the amount of the bill was consistent with the value of time put in". . . . which is not only an admission of compelte fraud, but a statement of outrageous and out of control the system is. The problem: There is no federal body regulating this
perfect crime" and noone has an interest in speaking up. See my post on this case at: (Aug 31st Post)

Hopefully, we can inspire more professionals to be a part of the solution and examine the practices of our profession to create a better future.