Managing Legal
The Point
Many in the U.S. legal profession have long touted “pricing innovation”, promising corporate clients savings and cost certainty.
As of 2022 these promises remain largely empty.
Because in the U.S. corporate legal sector the billable hour continues to prevail. By a wide margin. So says the 2022 State of Corporate Law Departments Report issued by Thomson Reuters Institute, provider of information and technology to attorneys.
This Matters to Your Business
The report finds:
“The U.S. and Canada lag behind the global average in terms of use of AFAs [“alternative fee arrangements”, ones priced on a measure other than the billable hour]. In excess of 80% of matters in those countries were billed on hourly rates….”
So instead of savings, the report finds overruns in budgeting; and instead of cost certainty, nasty surprises contained in the eventual invoice:
“Persistent frustrations in achieving pricing innovation, experienced by both parties, may well account for waning efforts in this area, but with more than 50% of the matters we reviewed exceeding the estimated budget, (and in more than one-tenth of cases, the budget was exceeded by more than 50%) this issue warrants renewed focus.”
This remains the reality, despite much hype and happy talk relating to “pricing innovation”.
Because …
The U.S. legal system’s incentives continue to be skewed by its billable hour business model.
Sanjay Kamlani, lawyer, founder & CEO of legal tech company MAKER5, and co-founder of the iconic legal services outsourcer Pangea3, recently described how the legal profession’s prevailing billable hour business model disincentivizes the efficient allocation of law function resources when it comes to process efficiencies and related tech adoption:
“If you think about how most firms are focused 100% on the billable hour, and then you start thinking about what technology achieves … that ends up reducing billable hours, you immediately start to realize that there’s a big contradiction … Unless you have an incentive structure that is consistent with the notion of efficiency and better, faster, cheaper, you’re not going to get adoption. Everyone’s going to run in the opposite direction of that tool.”
“Show me the incentives and I will show you the outcome.”
Charlie Munger, Berkshire Hathaway