How We Abandoned Billing by the Hour
Welcome to this month's article of Let’s Be Frank, a monthly newsletter series hosted on LinkedIn and authored by our founder Digby. If you are interested in following along pop over to the Let’s Be Frank LinkedIn page here and hit the subscribe button to have these articles sent straight to your inbox.
That Airplane Trip Back to Vancouver in March, 2020
As I discussed in my first article, it was clear on that flight that moving away from hourly billing was the path for us, but where was the textbook that told us how to do it? There wasn’t one, so we just had to try to figure it out (as most entrepreneurs tend to do). The big challenge was trying to price in advance when the amount of work was uncertain. This article will start to dig into HOW we moved away from hourly billing.
Where We Started
In most law firms, work is segregated into practice areas such as Insolvency, Corporate Commercial or Real Estate etc. To price, it was important to break this down further into types of projects, such as incorporations, tax driven reorganizations or M&A transactions. In our firm this resulted in the creation of about 40 different types of projects. We also adjusted our client intake and accounting system to line up with the new categories (more about that in the next article).
When you start to think about the types of projects, you will see that all projects lie somewhere on a continuum that runs from very predictable work required to complete the project to very unpredictable. For the purpose of this article I am going to consider examples at both ends of the range as well as a middle category.
- Incorporations – With this type of project, the amount of work required is highly predictable. Accordingly, there is a market price for this type of work and it is fairly easy to determine a price.
- Tax Driven Reorganizations – With this type of project, there will likely be a number of stages, but it will still be fairly predictable as to the work required with a broader market range of prices. To flush it out, there might be an incorporation, a capital alteration, share redemption or dividend issuance. Each step has a fairly predictable amount of work, but every project has different components.
- M&A Transactions – This type of project is very unpredictable and daunting to price in advance as the project can take so many twists and turns. A lot of the more complex legal work can fall into this category and this is where there is considerable resistance to moving away from hourly billing.
Factors
Each type of project will have a number of factors that will affect the work to be done or the value being delivered to clients. A simple example is under incorporations; the jurisdiction of incorporation could impact the project, the number of shareholders or the customization of the share structure. Tax Driven Reorganizations have a number of potential steps so pricing will vary based on what steps are involved in that project. M&A Transactions have extraneous factors to consider such as the presence of other advisors (accountant and M&A agent) which can really affect the flow of important information.
Before starting with Frank Fee, DL&Co., invested the time to really understand the various factors based on historical experiences which resulted in each of the 40 projects having different variables. Some factors result in a very predictable amount of work, for which a specific amount can be attributed to this type of factor. There are other factors which are simply considerations in scoping and pricing – more like a checklist.
Pricing M&A Transactions
This deserves a separate article as it is the stickiest challenge (stay tuned) if you want to fully convert away from hourly billing. Here are some thoughts:
- Break the project into segments and price those individually. As an example, price the LOI on its own.
- At the outset, just price the initial work such as “obtaining background and creating a strategy”. This can be very helpful as it allows trust between the lawyer and client to build without a significant commitment on either of you, and can give you good information that will allow you to better price the bulk of the project.
- Provide options to the client, such as:
the traditional lump sum for the entire project, or
a monthly working fee and success fee for completion of the transaction.
What comes next
I will continue exploring HOW to convert away from hourly billing by focusing on the continuous learning that is necessary to improve your pricing over time. This is so important as what we have discussed in this article only gets you to the starting line. Your success will come from how you build off your initial pricing approach.
Please contribute your thoughts and experiences in the comments, and let’s see if we can lead positive change together.
Until next time,
