Billable Hours, Practice Pointers, Small Law Firms

Small Firms, Big Lawyers: Pricing Legal Services in Eight Easy(ish) Steps

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So Lat calls me up all excited about some Biglaw Midsummer Bonus or something, which I totally ignore, and also about some hysterical dicta that Judge Kozinski wrote, which I also ignore (although it probably was pretty funny), and then he starts asking me about my law career. Which, you know, ended. And he points out that I failed to get ATL approval of my decision to close my small firm, which means technically, my column should just be called “Big Lawyers,” which is a whole other kettle of fish.

Then Lat says he knows how we can fix it. “Go on,” I say. Lat says that I can tell our readers exactly how to start pricing their legal services instead of just billing their time. “But Lat,” I plead, “I can’t give away my secrets. I have a whole new consulting firm to tell people these secrets in exchange for scads of dollars.”

Lat is quick to admonish me. “We don’t keep secrets from our readers, Jay. That’s why our readers know all about my obsession with all things Sophia Chua-Rubenfeld and why they all know that Elie is as jovial as an Ewok in real life.” Then his tone sharpened: “Plus we can always get Staci to write your column in a tenth of the time it takes you. And we can even have her use your name as a pseudonym.”

Well played, Mr. Lat, well played. So here then are the secrets to pricing your legal wares in eight easy(ish) steps.…

Step 1: Commit to pricing.
Most firms I talk to that have tried pricing have doomed themsleves to failure because they haven’t committed to it. Now there’s commitment and there’s commitment. In 2006, my firm trashed timesheets completely, and never tracked another hour again. Color me committed.

But that’s not for everyone. You don’t have to flip the switch completely on your whole firm. Instead, you might try starting out with a certain practice area, or type of case, or certain kinds of clients. However you decide to limit your pilot pricing program, though, make sure you truly commit within it. Don’t get all mealy-mouthed and offer “alternative” options and let the client “choose” hourly billing if it wants. It’s your business; it should be your business model. If you’re going to do certain work on a pricing basis (instead of a time-billing basis), then commit to doing it.

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Step 2: Toss your timesheets.
Most lawyers find this the hardest step of all: getting rid of the security blanket that the timesheet represents. Even some so-called “alternative-fee experts” argue that you should maintain timesheets alongside your priced work to “compare how you’re doing.” (Here’s a hint: If someone describes himself as an “alternative-fee expert,” he isn’t one. And especially not if he advises you to track time.)

Keeping timesheets as some sort of backup defeats the whole purpose. By doing so, you’re falling back into the Prohibition Era business model of hourly billing. (Time-based billing was introduced to lawyers by Hale and Dorr in 1919. Talk about innovation….) The whole point is not to think of your legal services as activities performed over a span of hours, but rather as the culmination of your knowledge and experience gained over a span of years. See my previous articles here and here.

You can’t compare priced work with time-based work, because when you price a matter, you actually perform the work differently. You also staff it differently. Comparing to how you “would have done hourly” is comparing apples to oranges. Don’t. Within your pilot pricing program, don’t track time at all.

Step 3: Don’t use a menu of prices.
Some lawyers have the mistaken notion that setting prices means having the same prices for every client. These aren’t Happy Meals, and you’re not a fast-food joint. Different clients have different problems and place different values on solving those problems. Making a menu of prices means that you’ll leave money on the table.

Step 4: Form a pricing committee.
I never said that pricing was easy. Prices should be based on the client’s subjective value placed on solving his or her problem. Because it’s subjective, it can be hard to figure out. Get help. Use your colleagues’ judgments to help your own. Even nonlawyers can contribute on a pricing committee. Using a group to price helps weed out outlier prices (kind of like throwing out the scores from the East German judge). Even if you’re a solo, find some colleagues of whom you can ask their opinion when it comes to pricing. Don’t do it alone.

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Step 5: Make sure the time is right to price.
Pricing means deciding beforehand the amount of money to pay for something. Time-based billing is not pricing because the amount is never decided beforehand. Instead, it’s calculated after the work is done by multiplying rates and hours. In other words, after it’s too late. To price successfully, you need to do it before the work is performed.

On the other hand, you can’t do it too early either. If a client calls you up and asks, “How much would you charge me for a so-and-so case?” the proper response is “How the hell would I know?” You can’t give a price until you know everything you can about the client and the client’s problem. Never quote a price over the phone. Instead, bring the client in for a meeting, learn about her and her problem, and then offer to get her a proposal in writing by the next day.

Step 6: Spell out the scope of your engagement.
After you’ve met with the client and learned about her problem, figure out the scope of what you’re going to do and the price you’re going to do it for. Spell that scope out clearly in writing. This helps you avoid the dreaded condition called “scope creep,” where you find yourself doing work that you never intended to do, and maybe doing it for free. And don’t feel like you need to scope and price the whole matter in advance. In fact, it’s ridiculous to scope and price the trial phase of a case that only has a one percent chance of going to trial and only after two years of litigation. Don’t be afraid to “TBD” (to be determined) future parts of the engagement.

Step 7: Use change orders, but sparingly.
If over the course of the engagement, something happens that changes the scope of the work, use a change order to come up with a new price to cover it. But don’t go overboard, or the client will think you’re baiting and switching. Don’t use a change order because the other side took extra depositions, for example. That was something that you should have foreseen. Instead, use a change order for an unexpected change, as when the defendant files a counterclaim that you couldn’t have anticipated.

Step 8: Learn from your mistakes.
Pricing is an art, not a science, and all artists make mistakes. And what I mean by a mistake is not “we could have made more billing hourly.” A mistake is when at the end of the engagement, you realize that the client would have been willing to pay you more to solve her problem. Another mistake is where you didn’t adequately scope the job beforehand.

After each engagement, get with your team (your pricing committee and the lawyers who worked the case) and figure out what went right and what went wrong. Then learn from the mistakes so that you won’t make them in the future. I can tell you that after five years of exclusively pricing our services at Shepherd Law Group, we had dramatically improved our pricing skills.

So there you have it. You now know my secrets, too. How to start pricing your services in eight kinda easy steps. It takes work and practice, but once you and your clients learn that there’s life after the hundred-year-old hourly billing model, you’ll never want to go back.

Jay runs Prefix, LLC, a firm that helps lawyers learn how to value and price legal services. Jay Shepherd also spent 13 years running the Boston management-side employment-law boutique Shepherd Law Group. He writes the ABA Blawg 100 honoree The Client Revolution, which focuses on reinventing the business of law, and Gruntled Employees, a workplace blog. Follow Jay on Twitter at @jayshep, or email him at [email protected].

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