Is Your Firm an "Exemplar," Or Do You Bill by the Hour Instead?

I recently had the chance to interview Chris Marston, founder and CEO of Exemplar Law Partners, LLC, based in Boston, which has been open for business for all of about 90 days.  To say that Chris is embarked on an ambitious attempt to rethink the practice of law, down to its very roots, would be an understatement.   Just start with this, from "Our Approach":

"Exemplar is the first corporate law firm in the country to completely abandon the billable hour and exclusively adopt a fixed price business model. This progressive step forward in the legal industry is designed to better align our interest with our customers while enabling businesses to manage their legal budgets, and their expectations."

Certainly abandonment of the billable hour is the most attention-grabbing aspect of Exemplar's business model, but it's far from the entire story, nor is it even the most important part. Still, let's start there: When I asked Chris point-blank why he decided the billable hour had to go, he guffawed and said, "Did you ever Google 'billable hour'!?"   Well, if you haven't done it yourself lately, here are some of the top results:

• "The Tyranny of the Billable Hour"
• "Both reviled and ubiquitous, the billable hour is the cockroach of the legal industry..."
• The ABA Commission on the Billable  Hours Report (deeply critical of it)
• "The Billable Hour:  Putting a Wedge Between Client and Counsel"
• "The Curse of the Billable Hour"

...you get the idea.  In fact I've had some things to say about it myself, which also turn up in the results.

It probably won't surprise you to learn that Chris is a JD/MBA and comes at the challenge of how to re-engineer a corporate law firm from the perspective of an entrepreneur.  And he has some trenchant observations about why the billable hour has endured as long as it has:

• For starters, lawyers are risk-averse, look to precedent, and seek examples of proven success; as Chris puts it, these attitudes "don't really promote innovation and pioneering."  But he also has this to say about the motivations of those in a position to perhaps change things:
  • People who have the power to change it (partners in AmLaw 100 firms) "have a very high opportunity cost" of changing the status quo;
  • People in the middle, with mortgages and kids, don't have the wherewithal or the decisionmaking throw-weight to do it themselves; and lastly
  • Kids coming out of law school with debt north of $100,000 are in the poorest position of all to effect change.

Chris began by listening to all the complaints about the industry: nastiness, competitiveness, work/life [im]balance, lack of teamwork, and he decided you can trace many of those behaviors to the business model of the billable hour.   So out it goes.

He also asked another intriguing question:  Why do all the JD/MBA's who start their careers in law firms tend to leave?  And his answer (music to the ears of this economist):  "There's no economic value to the organization [the law firm] of a JD/MBA—they bill exactly the same hourly rate as a plain old JD.  But you know what:  This is crazy; that's a lot of talent leaving the industry who could contribute a lot."

Result:  Exemplar's lawyers will be expected to have serious business chops—if not JD/MBA's per se.  As they put it:

"Our entire team is comprised of experienced business people with advanced business degrees or significant business experience. We strive to be your strategic business partner, not just your legal counsel."

Many firms talk this talk; we'll see if Exemplar can deliver.

But back to billing, because that's where everyone's skepticism will focus:  How on earth can you set a fixed price for an engagement in advance?

The short answer is, if it's a large engagement, or litigation, you may not be able to fix a price for the entire matter (if you do, one side or the other will end up being burned, which is not a way to foster loyal, repeat clients). 

And Chris readily admits when asked that, "Managing scope of litigation is a real trick; you never know what your adversary or the judge will throw at you."  But, he continues, "the trick to fixed pricing isn’t about knowing everything that could be; it’s about knowing what’s certain. So you don’t price for everything that could conceivably happen; but you can price by the 'unit,' say, the cost for filing or replying to a motion, or taking or defending a deposition."

Further, Chris believes (as do I), that given a large enough "portfolio" of litigation—hypothetically, all of Home Depot's employment discrimination work in the Southeast for three years—that a firm with the wherewithal to  handle it (Exemplar isn't quite there yet...) could well quote a fixed price, perhaps with an escape clause for the litigation equivalent of an Act of God.  After all, the insurance industry has survived and profited for centuries on precisely this model, despite the occasional Katrina.

Does Chris see any room at Exemplar for hourly billing?  Say, for clients who ask for it?  Many of whom have been told by conventional firms, as Chris attests, that going off the hourly rate "is a way for you to get  hurt financially."  To the question of whether a fixed-fee will entail a built-in profit cushion for the law firm, to the client's disadvantage, Exemplar has this to say on their website:

"We are so confident we will deliver unmatched value in the services we provide that we encourage you to determine what the value of the service was worth to you based on your experience. If it was less than the price you paid, call us, articulate the shortcomings, and we will negotiate a fair price with you. What we ask in return is for you to define the unmet expectation, or explain how we could have better served you. In essence, you will be helping us make adjustments and improve our service.

"Providing and improving value to our customers is the primary measure of our success."

But second, pay attention to this:   The billable hour is premised on an inverse relationship between efficiency and profits; and fixed price billing is premised on a direct correlation between efficiency and profits.  Chris fundamentally believes that there’s no way to blend or alternate between the two. 

For starters, the technology infrastructure of billable-hour firms is designed to reduce only nonbillable time, not billable time.  For example, if you can retrieve a "model document" in five minutes through your KM system rather than in two hours through walking around and asking, we all know the five minutes is billable whereas much of the two hours would end up a write-off.

But conventional firms' technology does not, by and large, exist to economize on billable time.   And consider:   In a "blended" environment of fixed-rate work and billable work, where would your incentives lie?  To ask the question is to answer it:  The incentive would be to spend all your time on the billable matters and be done with the fixed price matter ASAP.  

Finally, there's the not-inconsequential issue of compensastion and incentives.  With a mixed bag billable- and fixed-price work, there’s no way to manage profitability because the workforce can’t think and behave in two different ways at once.   And benchmarks that tie rewards to one model cannot be grafted on to the other one.  Given human psychology, this means the firm would all but inevitably self-select into two camps, those pursuing billable work and those pursuing fixed-price work.

And if you don't think that would lead the Mother of All Wars at bonus season,...

You may have already surmised the answer to my next question for Chris:  "So there's no such thing as a partner or an associate?"  No, was the short answer; "everyone's a revenue partner."  But the longer answer was more revealing:  Exemplar is built on a corporate model, with a CEO, COO, CMO, and soon-to-be CLO, CFO, and "HCL" (Human Capital Leader). 

Moreover, the entire partnership superstructure has been ditched:   Because the problem with a partnership model is that it assumes equity, power, and profit share, are joined at the hip.  But the best management learning instructs that it's optimal to disaggregate equity (to the founders), power (to those who’ve earned it), and profits (to those who’ve earned it).

Who, then, can you recruit to buy into the Exemplar Law model?

People who:

• have entrepreneurial spirit;
• have business degrees, and/or business experience;
• believe in what they’re doing;
• have outstanding social skills;
• put character and values first and foremost—not just in the larger perspective of integrity, but in what kind of person you are:  How do you treat the waiter over drinks? Do you do fun things with your life?  Are you an optimist?

Is Exemplar the most unorthodox law firm I've ever encountered?  Are a passel of the ills besieging our profession to be laid directly at the doorstep of the billable hour?  Do a large cohort of clients prefer fixed fees?  Can, in fact, high-end legal services be priced that way?  Has Chris Marston drawn a line in the sand?   Yes, in spades, to all.

After ending my conversation with Chris, I was reminded of one of the more famous epiphanies in business history, when Intel, in the late '70's as a maker of the becoming-commoditized D-RAM chips, was having its lunch eaten by the Japanese, alternately petitioning Washington for trade barriers and frantically trying to chase the vanishing hare of accelerating cost reductions for the sake of survival.  Andy Grove—and this story helps one understand why he's Andy Grove—brought his three key people together in his office, closed the door, and said:

"If we don't fix this, we're all going to be fired by the Board.  And they will bring in new people who will start by questioning why Intel is in the D-RAM business.  So before the Board does it for us, let's walk out of this office and walk back in again as those new people.  Let's see what they would decide." 

The moral is not only that this is why Andy Grove is Andy Grove and you and I are you and I, but it's a story about not being afraid to break a little, or a lot, of china. 

As I said earlier, the Exemplar Law model poses several radical questions the the conventional model, the answers to which I believe are all resolutely in the affirmative.

Will Exemplar Law fly?  That, of course, is the only question on which the jury is well and truly out.

Thanks to an astute reader for pointing me to this more accurate reconstruction of the epiphanic moment at Intel:

Despite Intel's efforts, the Japanese producers kept gaining ground. "Their principal weapon was the availability of high-quality product priced astonishingly low," Grove wrote. By the mid-1980s, Intel's memory chip business continued to head south, with steadily declining sales and rising inventories. Grove felt that he and his colleagues at Intel had lost their bearings and were floundering for direction. In the middle of 1985 came a watershed moment. As Grove explains in a frequently quoted passage from Only the Paranoid Survive, he was sitting in his office with Moore, then Intel's chairman and CEO, discussing their situation. "Our mood was downbeat. I looked out the window at the Ferris wheel of the Great America amusement park revolving in the distance, then I turned back to Gordon and I asked, 'If we got kicked out and the board brought in a new CEO, what do you think he would do?' Gordon answered without hesitation, 'He would get us out of memories.' I stared at him, numb, then said, 'Why shouldn't you and I walk out the door, come back, and do it ourselves?'"

Courtesy of Prentice-Hall Publishing.