The legal industry has operated on a time-based billing model forever. But, as you may know from our previous post about why the law firm business model is broken, billing for time doesn’t scale (if you haven’t read that post, you should probably read it before you continue). The lack of scalability in the legal business model actually creates a significant barrier to growing a law practice. This begs the question, why do so many law firms bill by the hour? And where are all the innovative, scalable law firms? In this post, we’ll answer these questions and also explore some ways of rethinking the legal business model with a greater focus on scalability and creating opportunities for growth.
Why Law Firms Bill By The Hour
Before we can come up with a new, more scalable business model, we first need to analyze the current business model and understand why it works the way it does. Here are a few reasons:
No two legal issues are exactly the same, which leads law firms to design a custom-tailored solution for every single client. As you can imagine, creating a unique solution to every problem can lead to inefficiency and wasted time as firms are forced to re-invent the wheel.
In order to prevent the inevitable strain on profitability that comes with wasted time, law firms have solved the problem by charging their clients for all these extra hours.
Lack of Operational Efficiency
Few law firms have placed much of an emphasis on operational efficiency. This is somewhat due to the lack of technology and innovation, but mostly due to the fact that they have always been able to bill their clients for every hour of work.
Hourly billing is great if you are inefficient with your time. Why work efficiently if you will actually make less money doing so? Rather than scaling up by increasing their client volume, law firms scale up by billing their clients for more hours.
Fear of Change and Lack of Innovation
You shouldn’t be shocked to hear me say that lawyers, on average, are not the most innovative people. In fact, they are trained to help their clients minimize risk and avoid problems.
Naturally, lawyers’ risk aversion translates into a hesitancy toward change and innovation in their own line of business. Hourly billing has always been the way of the industry, so people have tended to stick with it. Sort of an “if it ain’t broke, don’t fix it” mentality.
The problem is…it is broke! Hourly billing, and even flat-fee billing that is based on the estimated hours required, is not scalable and significantly inhibits your growth potential.
Rethinking the Legal Business Model
So, what can we do to create a more scalable business model? How can we maximize the value delivered to clients while maintaining affordable, predictable pricing? How can we operate with incentives to increase efficiency, rather than minimize it? How can we grow by serving more clients per unit of time rather than billing more hours per client?
Below are some answers to these questions, and some ideas for a new-look legal business model that is more scalable, and which opens the door to rapid growth that would be unattainable through the traditional hourly billing approach.
Productize the Services
The beautiful thing about selling products, compared to services, is that products have uniformity. They can be re-sold over and over again, with minimal additional costs.
This is how technology companies are able to scale up so rapidly and earn millions or even billions in revenue in just a few years. Once a product is developed, it can be used by millions of people and the marginal cost to serve each additional user is effectively $0.
Rather than creating a custom-tailored solution for every client, a scalable law firm would create packaged legal solutions, each with a standardized set of services for a fixed price.
Sell Results, Not Time
Clients come to a lawyer because they have a problem, and they are looking for a solution. They aren’t interested in buying your time. They just want results.
Most importantly for the law firm, time is finite. There are only 24 hours in a day. And when you take away all the time you can’t possibly sell, e.g. weekends, sleeping, eating, admin tasks, etc., your total potential billable time is far, far less than that.
In fact, according to some shocking statistics from the 2016 Legal Trends Report produced by Clio, lawyers actually collect payment on an average of only 1.5 hours per day.
Now you should be starting to see why selling time doesn’t scale. And it’s just as problematic for your clients because it leads to inefficiency, higher costs, and ultimately less satisfaction with the results you deliver.
Systematize the Processes
When you shift your mindset and focus on selling a product that solves a problem, rather than a custom-tailored service, your incentives start to align more closely with the client’s. Both parties want to achieve the best result possible with the least amount of time and effort.
Instead of racking up hours, your goal becomes selling the maximum number of solutions per unit of time. This is why it’s critical to implement systems that maximize your efficiency. The more efficient you can be, the more solutions you can sell, and the more easily you can scale your business.
Automation is going to be one of the biggest drivers of success for this new breed of scalable law firm in the future. Technology can strip away tedious, repetitive processes through workflow automation, allowing you to focus your time on the high value activities, such as selling your packages to clients.
Implement Recurring Billing
Recurring billing is a very novel concept in the legal industry, but one that we find intriguing because it unlocks massive growth potential. For a transactional law practice, offering subscription based legal services can be a powerful way to scale up rapidly, if done correctly.
The reason recurring billing is so effective is because you don’t have to constantly find new customers and re-sell your products to earn more revenue. You sell each customer once, and they pay you continually as long as they want to have access to your products.
A Hypothetical Example
Let’s look at some hypothetical law firms to show you the power and scalability of productized legal services and a recurring revenue model.
Assume we have two firms that do estate planning and tax law. They are exactly the same in terms of size, operational capacity, marketing budget, etc. The difference is that Firm 1 bills on a flat fee or hourly basis, and Firm 2 has implemented a creative, recurring revenue model.
Firm 1 charges $3000 for a standard estate plan, plus $300 per hour for any additional work not covered in the standard plan. It costs them $500 in marketing to acquire a client. They are able to serve up to 20 new clients per month with their current infrastructure, yielding about $60,000 in gross revenue and $10,000 in marketing expenses.
Firm 2 charges only $2500 upfront for the same standard estate plan, and they have two tiers of subscription-based service offerings, with the first month’s subscription included for free with purchase of an estate plan.
The lower tier subscription costs $50 per month and covers 1 hour of consultations via phone or email to get estate planning and tax related advice each month. It also provides access to a self-serve video library with lots of useful content where clients can learn about various legal issues related to estate planning and tax law.
Firm 2’s premium subscription costs $100 per month, including everything in the lower tier, plus 1 free legal document review and up to 2 additional hours of legal advice each month.
Even though Firm 2 earns $500 less per client from selling the estate plan package, they have the potential to earn additional money each month from every client they acquire. The only added strain on their operations is providing consultations and document reviews on a periodic basis, which the majority of clients may not even take advantage of in any given month.
With this model, Firm 2 can potentially serve hundreds of clients every month without significantly increasing their staff or overhead. They can make $50,000 off the estate plan package with the same $10,000 in marketing expenses, and assuming they have 200 subscribers at each tier, they would make an additional $30,000 in subscription revenue with zero marketing required.
The only way for Firm 1 to scale is to add more staff so they can serve more clients, which clearly adds more overhead. Firm 2 can scale without adding more staff, simply by retaining more clients longterm on their subscription plans. Not to mention that Firm 2 charges $500 less for the same standard estate plan service, which has tremendous built-in value to incentivize new clients to sign up.
Putting It All Together
Clearly the example above is pure conjecture. The point is to help you see the inherent limitations in the hourly/flat fee business model, and to encourage you to think outside the box when it comes to growing your law firm. The possibilities for productized legal service packages are endless.
By productizing your services, you can be more systematic in your operations and focus on selling results instead of time. This will help you align more closely with clients’ interests, maximize the value you provide, and increase client satisfaction.
By implementing recurring billing models, you can create a predictable, ongoing revenue stream without the overhead of having to market and sell to a new customer every time. Unlike the hours in a day which are capped at 24, a product can be sold on a recurring monthly basis, offering unlimited growth potential.