In theory, legal practices are good businesses because subject to utilisation, there is the opportunity for a 300-400% markup, most work is done at your premises, it can be allocated over a period of time and work is completed out of sight of the client. However, the major challenge today is that there are an increasing number of smaller firms. It is no longer possible to put up a shingle and to expect to do well. Running a legal practice requires systems, discipline and strategy as well as expertise in marketing, client care and the law.
The financial goal for a successful legal practice is often thought to be a 25% to 35% profit margin, but it is important to deduct from profit calculations the work done by the owners in a legal practice, that is to deduct a fair market salary from drawings before calculating margins. Many partners in smaller firms recognise that lifestyle and personal development goals are an important part of their remuneration, and that even if they could earn more in a bigger firm or as in-house counsel, the day to day freedoms of running a smaller firm, together with the opportunity to build something lasting, are themselves valuable. But freedom and profitability are not mutually exclusive if you are able to put in place the basics of running a business.
Law is by nature a risk averse profession. We seek to protect clients from risk, and there is a useful dynamic by which entrepreneurial clients balance their enthusiasm with their lawyers experience of what can go wrong. However, in the current market, there is a path to success for law firms by being just a little bit more creative with technology than the mainstream. Clients want to know that their lawyers are efficient and part of well run firms, that they use technology to cut costs and to increase accountability.
Time billing is currently being maligned as a mechanism for rewarding the inefficient and the unethical. But in the hands of an efficient and ethical lawyer, time billing is actually the charging mechanism most likely to deliver a lower bill to a client. Other mechanisms inevitable carry larger quoting, accounting and risk overheads. Time billing can disadvantage efficient lawyers because it does not fully reward us for investing in systems, for having gained experience, for taking calculated risks or for delegating work to junior staff. Moves to increase the proportion of work done under fixed fee agreements could advantage ethical and efficient lawyers, could increase the cost of legal services to clients and could therefore have the opposite of the effect intended.
On the other hand, there is a risk that advertised fixed fees will generate an increase in price based competition, as happened when domestic conveyancing was deregulated twenty years ago. However, as our society develops increasing transparency of knowledge, price-based competition will be supplanted in key areas by value based competition – people will balance price, quality, experience and other factors. Over time, clients will have more information available on these factors to help them to make informed choices.
The real issue with time billing is not that it is unfair per se, it is that it is too easy for legal bills to increase once a matter has started. The risk of fee increases lies with the client, but one way or another, on average, it must always be so. Fixed fee billing in complex areas requires project management and requires a thorough knowledge of the area being billed. Otherwise you run the risk of being uncompetitive or undercharging.
In complex areas, we believe fixed fee billing benefits from time recording, if only because it enables you to calculate your cost price and to compare the profitability of various areas of legal practice. At BHL Software we have developed our practice management software to permit the management of matter budgets and to provide the ability to define project plans, known as workflows. In effect we have developed project management software for law firms, but lawyers must still understand the skills of project management if they are to effectively run fixed price matters.
