Monday, November 29, 2010

The Business of Law

The billable hour may or may not be doomed but the debate on its fate misses one glaring point. Law Firms are not in the hours business; they’re in the matters business. All companies differentiate themselves on the quality of the product and the relative value of the product versus its cost. Law firms in fact compete on the quality of their matters and, to a growing extent, the efficiency with which those matters are produced. Lawyers may not like to think this way, but the delivery of legal services is not immune to the same economic realities experienced by manufacturing. It has just taken their customers longer to wake up to the fact. Pressures to source matter activities differently (e.g. e-discovery) are akin to looking for less expensive sources for certain components necessary to the completion of a tangible product.

I know of any number of law firms which have goals of being excellent businesses. As an industry, we all need to help them get there. If you start with the premise that Law Firms are matter manufacturers, we can see just how much work there is to do. As an industry, we have a dreadful understanding of how matters are produced. We cannot disaggregate matters into their component parts, and if we could, we cannot easily tell the cost of production for any of those components. We have no core understanding of how lawyers work. Initiatives like project management and process improvement would be obvious imperatives. Our systems would all be matter-centric (as opposed to lawyer-centric, client-centric, billing centric, etc.). Spend just 30 minutes thinking about it, and you’ll have a list as long as your arm!

In the end, the conundrum around alternative fees is easily understood in these terms. Customers are thinking in terms of matters – how to find the highest quality at the best (lowest, most predictable) price. The actual pricing mechanism is really just a question of structure. Law firms get this. They really do. Yet, they struggle because their business models and their supporting systems have all been built to deliver hours. Some firms have figured this out; those that do so best, first will have the rest of the market’s lunch. Don’t believe me? Think the Japanese auto industry of the 1970’s.

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