Champagne Is Turning Into Water – Why The Billable-Hour Model Won’t Last

The following comment inspired this blog post and helped me think of some new and convincing reasons why the billable hour will cease to be the predominant business model in the legal services industry within the next five to ten years:

Who here can’t wait to leave this conference, run to their mail box, open and read through their direct-mail [i.e. junk mail] carefully? Who here loves navigating through the internet and clicking on banner ads? . . . we’re marketing in a way that we would never want to experience as a customer but we’re set in the ways we have always story told and spent our money. Gary Vaynerchuk – ElevateNYC at 6:58.

The legal services industry has outgrown the billable-hour, it just doesn’t realize it yet.

Gary Vaynerchuk was discussing the advertising industry when he made that comment. But the same sentiment applies to the legal services industry. The vast majority of law firms sell their services in a way that is completely divorced from what their customers currently want and what they will want in the future. We bill by the hour because of institutional inertia, not because we would want to consume legal services in that manner.

But if the billable-hour mentality is so deeply entrenched within the legal profession then why would it ever, let alone suddenly, change? It will change because of what it is, a mentality. The dominant logic of an industry can change rapidly and in unison. This is especially true when the prevailing beliefs about a particular aspect of the industry are based on nothing more than tradition and the opinion of key stakeholders.

To succeed in business, one has to be willing to bet on an outcome when the majority of people believe that the outcome will never happen. Most people believe the billable-hour model will continue to be the predominant business model in the legal services industry for the foreseeable future. I believe it will cease to be the predominant model for two reasons. First, in industrialized countries, legal advice is becoming as essential as water. Second, the forthcoming generation of legal practitioners and their clients will prefer SAAS-type business models.

Reason 1: Legal advice is turning from champagne into water.

It is difficult to charge a high price for legal advice because it is a precious commodity. This is based on the counterintuitive, but true, notion that the more important something becomes the less people are willing to pay for it. I will use the following example to illustrate my point. What would happen if every grocery store began charging exorbitant prices for bottled of water – say $17,000 per bottle? There would be massive riots and regulatory authorities would force the grocery stores to sell bottled water at a reasonable price. But what would happen if every winery began charging $17,000 per bottle of champagne? The answer is that nothing would happen. In fact, the Dom Perignon Vintage 1995 White Gold Jeroboam does cost $17,000 per bottle. What is the difference between water and vintage champagne? Necessity. We need to drink water every day to survive but we can live without high-end champagne.

The same logic applies to legal services. Legal advice was not essential to every day life when the billable-hour model was created. Therefore, it did not matter that the billable-hour business model was only workable for the wealthiest individuals and corporations. At that time, legal advice was champagne. Over the past 20 years, the need for legal advice has exploded. Almost every aspect of our professional and personal lives is now highly regulated. Everyone needs legal advice all of the time. But even corporations that generate billions of dollars in revenue cannot afford to pay for every piece of legal advice they need on an hourly basis. This explains why law firms continue to experience hourly rate pressure even though clients need their advice more than ever. Legal advice is water and law firms have to act accordingly. It is no longer feasible for them to charge $17,000 per bottle.

Reason 2: Demographics – GCs of the future will want to deal with legal service providers that offer SAAS-type business models.

The GCs of the future will not tolerate paying for legal services on an hourly basis. Business strategy is about the future and the future customers of legal services will have grown-up patronizing companies that use SAAS-type business models. Almost every modern service you can think of is delivered through a software platform and charges a fixed monthly fee. Is it reasonable to expect that the next generation of legal executives will randomly change behavior patterns when it comes to purchasing legal services? No! The behavioral disconnect of paying by the hour will be more pronounced for them than it currently is for my generation.

“The quickest way to go out of business is to be romantic about how you make your money.” See Elevate NYC 2013 Keynote – Gary Vaynerchuk at 6:22. The legal profession has been romantic about the way it makes money for way too long. Economics and customer behavior will overpower tradition every time. That is why I believe the billable hour will cease to be the dominant business-model in the legal services industry within the next five to ten years.

Disruptive Legal

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