Published on 8/25/08
A constant theme in these columns has been the growing business client dissatisfaction with the current model (especially at large firms) of hourly rate billing, a high hourly rate structure and the apparent overstaffing necessary to generate fees to support the model.
The client perception is that this law firm model discourages efficiency (in use of everything from time to technology), predictability and consistency. The sum of these objections is that the model reflects neither the costs that go into the provision of legal services, nor the value that clients perceive from them.
Firms have in part responded by adopting "alternative billing" approaches that essentially preserve the current model while applying superficial changes. But two recent news stories suggest that real, substantial change is in the offing — change that has been created by demand at the client level.
The Wall Street Journal recently reported on New York-based Axiom Global, Inc. Axiom caters to corporate clients by having more than 200 lawyers on staff, many of them from the top tier of Wall Street firms that traditionally have high billing rates. Companies hire these lawyers as needed, often at discounted rates. The rates are less because the lawyers often work from home or at a client's location, keeping overhead costs to a minimum; and, of course, the lawyers have already put in their apprenticeship at a top-tier firm, so there are no training costs.
The lawyers are employed full-time by Axiom and receive benefits (but no pay) between assignments. The firm estimates that clients can save up to 50 percent on their legal costs by using such an arrangement, and corporate giants like Morgan Stanley, Xerox, Cisco Systems, General Electric and Google have already become Axiom clients.
Meanwhile, the American Bar Association Journal has described how a group of lawyer-entrepreneurs are starting a new legal venture called Virtual Law Partners. The firm will employ lawyers who work at home, saving on overhead and costing clients less in legal fees, and eventually hopes to employ hundreds of lawyers working from home doing all kinds of legal work for companies, except for litigation.
The CEO of the new firm estimates that the average billing rate will be about $400 an hour, with no billable-hour requirements, and says lawyers will get 85 percent of what they bill.
What's apparent in both examples is that the lawyers involved have a direct financial stake in achieving the desired results, and their clients are in control so far as choosing what lawyers to hire and what assignments to give them.
While the billable hour still lives, the cost to the client is reduced significantly. The real bottom line here for the innovative firms is that there are two ways to address an economic model: look at your revenue and figure out what your cost structure should be so you can turn a profit, or look at your costs and determine how much revenue you need to cover them and make a profit.
In either model, the question becomes: "Can I sell enough services to cover all my costs and have something left over?" In these two models the answer is "yes," because the firms give clients what they want.
