The Market Problem

As I tweeted a couple of days ago, I recently received three telephone calls over a three-day period from entrepreneurs looking for a new law firm because of the excessive fees of their current law firm.  Two of the three entrepreneurs advised me that they were reluctant to even call their lawyers with a question because of the fees.  I thought to myself:  I get it! 15 minutes = $125-175 for most partners (and those phone calls add up).

In fact, it can be worse than that.  Often clients can’t get ahold of the partner in charge so they’ll call the associate directly; and often the associate doesn’t know the answer so he’ll have to talk to the partner; and then the partner and associate will call the client back together; and here’s what the billing statement looks like for one question: 

Attorney     Date           Hours    Description of Services                  Rate               Fee

Alan Associate	3/10/10	.60	Telephone call with Client; conference with Peter Partner; conference call with Client	$425/hr	$255
Peter Partner	3/10/10	.40	Conference with Alan Associate; conference call with Client	$650/hr	$260

 

How do I know this?  Been there, done that.  Indeed, I worked for nearly 8 years at two major law firms in New York City.  This is how phone calls from clients often play-out.  The same inefficiency exists for the drafting of agreements: a junior associate spends a lot of time preparing the initial draft (pulling together different forms, learning on the job); a senior associate and/or partner reviews and revises the draft; the junior associate meets with the senior associate and/or partner to discuss the revisions; and then the junior associate finalizes the agreement and sends it out.

The bottom line is that the traditional law firm model – i.e., the billable hour – rewards inefficiency, overstaffing and padding.

The Solution

So what’s the solution to all this?

One solution is the advice given by Bram Cohen, a smart entrepreneur, in the comments section of my post on VentureHacks entitled Top Ten Reasons Why Entrepreneurs Hate Lawyers:

“Associates doing work is a real problem. I’ve found that insisting that all work be done by partners results in better work for less money in the end, even though the nominal hourly rate is much higher, because an associate will bill for several hours researching a subject which the partner already knows off the top of their head.”

That’s great advice – and that’s why my firm has no associates and each attorney on my team has 10+ years’ experience, was trained at big law firms and has stellar academic credentials.  But even that advice doesn’t completely solve the inherent problem of the billable hour model because inefficiency is still rewarded: the longer the project drags on, the more the law firm is paid.

There’s only one solution: fixed fees – i.e., the law firm and the client agree beforehand how much the project will cost.  This is the dagger to the billable hour model.

No more incentive for the law firm to be inefficient.  No more overstaffing.  No more associates banging the file to meet their annual minimum billing requirements or bonus targets.  And the best part from the client’s perspective: no more surprises at the end of the month when the invoice arrives.

Conclusion

It’s time to destroy the billable hour.  If entrepreneurs cannot call their lawyer with a question, there’s obviously a problem in the marketplace.  The solution is easy: a fixed fee (which includes unlimited phone calls and emails).  That’s what we’re doing – and that’s why entrepreneurs love us.

Tags: associate, billable hour, entrepreneurs, fixed fee, fixed fees, law firm, Lawyers, partner