Why The Law Firm Business Model Is All Wrong

Lawyers pretty much base their billing on one thing: time. Even for flat fee matters, the cost is usually dependent on the hours of work required. Lawyers tend to be incredibly busy because, the more hours they work, the more they can bill clients, and the more money they can make. This is the way the law firm model has functioned for centuries. However, clients’ needs are changing, and they want pricing that’s more predictable and transparent. Legal services are also changing, becoming more standardized and driven by technology. As a result of this transformation, the current law firm business model is becoming obsolete. Here’s why the law firm business model is all wrong.

Why Is Time-Based Billing Wrong? Because It Doesn’t Scale

There are only 24 hours in a day. Even if you earn your full hourly billing rate of $300/hour for every single hour of every single day (which clearly wouldn’t be sustainable for long), you’d only make $7200 per day.

But $7200 is a lot of money, right? Yes, it is a lot of money. That’s not the point. The point is that your time doesn’t scale. Even if you’re operating at your absolute max capacity, working 24/7/365, your potential revenue is always capped by your time.

This means the only way to increase a law firm’s revenue is to increase the amount of time it can bill. In other words, hire more lawyers to create more billable time. But each lawyer comes with the exact same time constraints as everyone else.

That’s why time based billing doesn’t scale. The growth curve is linear, with each increase in billable time equating to a corresponding increase in revenue: 1 + 1 = 2.

Ok. Who Cares?

The reason this matters is because legal services are becoming more automated and standardized, and as this happens, time based billing makes less and less sense.

Time based billing has worked forever because law has always been a service industry. Lawyers spend their time doing research and coming up with solutions to legal issues. People pay them for this time because they’re the experts.

Since devoting your time to a particular legal matter inevitably comes with an opportunity cost, your time is the primary unit of value in the transaction. And because time is finite, it also tends to be expensive.

But, with greater standardization comes more opportunities for automation. Automation starts breaking down time constraints because time is no longer the sole input required to produce value for a client. As a result, legal services become a whole lot more scalable.

1+1 = 5

Scalability means that each additional unit of input can produce a disproportionately larger output. Unlike the time of a human lawyer, which is finite, technology-driven legal services can be scaled to deliver exponentially more client results per unit of time spent by lawyers. 

The reason the shift toward standardization and process automation is so disruptive to the current law firm business model is that it makes legal services more like a commodity, and less like a service. When you purchase a commodity, you tend to be far more sensitive to price.

This trend has only just begun, but it’s shaping up to be one of the most important attributes of the legal industry of the future. Law firms must adapt their business model to one that is based on value and scalability, as opposed to time.

The Law Firm Business Model of the Future

Focus on Scalability

The cost of technology-enabled legal services will be substantially lower than today’s typical billing rates, and it won’t make sense to pay for a lawyer’s time when the same solution can be delivered for half the cost.

As a result, law firms need to find ways to scale, and that means cutting down the time required to fulfill each service for a client. Your goal should be to leverage technology to create more work product in less time.

While this might mean earning less money for each matter in today’s hourly billing world, in the future it’s going to be your only option.

Product Thinking

Unlike services which have a lot of variance, products are developed through systematic processes and repeatable workflows. They can be produced and sold at greater scale.

Think about what LegalZoom does. They have online forms for capturing all the necessary information, and the drafting work is all automated. They can sell documents for under $100 because everything is streamlined. It’s a product, not a service.

We all know LegalZoom is not a sufficient solution to most legal issues, but law firms can benefit from finding ways to “productize” their services in this same way.

The difference is, because you actually are a law firm, you can add in the necessary customization to tailor your products perfectly for the needs of each client.

Law Firm as a Platform

A platform is a new type of business model powered by technology. Platform companies focus on providing the infrastructure for interactions and transactions to occur between producers and consumers, rather than managing all the aspects of developing and delivering a product or service internally.

For instance, Uber and taxi companies both provide transportation from A to B. But they operate very differently.

Taxi companies provide all aspects of the service, from taking reservations, to dispatching drivers, to picking up and dropping off passengers, to maintaining a fleet of cabs. It’s tough to scale that type of business.

Uber’s sole function is maintaining it’s app and providing the logistical layer to efficiently connect drivers and passengers and process payments. It doesn’t provide the actual transportation from A to B or have to deal with any of the burdens from managing a fleet of vehicles.

Uber is a platform. A taxi company is not. The platform approach is why Uber has scaled so rapidly and is now valued at over $50B.

Imagine a law firm that was built on a similar model. It would look something like LegalZoom with its efficient data collection and automated document prep, combined with Avvo’s attorney profiles, legal content, and Q&A platform.

Clients could access the content and services themselves with minimal intervention from attorneys. But the key differentiator would be that a law firm could step in to provide actual, substantive legal advice to clients, unlike LegalZoom and Avvo.

One way or another, law firms in the future will be in the software business. Platforms are the future, and platforms will transform the legal industry just like they are doing to many others right now.

The question is, will today’s law firms become tech savvy enough to create a business model with a platform approach? Or will the ethical rules change and open the door for a software company to crush today’s law firms like Uber did to the taxi industry?

That will be up to today’s lawyers to decide.

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