Rafi Mohammed

Lawyers: Here's a Pricing Strategy that Will Better Satisfy Current Clients, Attract New Clients, and Make You More Money...Interested?

Posted on March 29th, 2007 (1 Comments)

I admit that I’m not a fan of uncertainty. Even taking a taxi from LaGuardia Airport to Manhattan brings me anxiety – I fret over whether we are taking the right bridge (or tunnel) and whether the “special route” is really going to save me money…all as the meter ticks away at 30 cents every 1/5 of a mile. So you can imagine how unpleasant it is for me to work with my lawyer, where the meter clicks at $100 every 15 minutes. I have nothing against my lawyer – he’s great & smart – I just hate paying by the hour. And it’s not just me, one of the biggest complaints of in-house corporate law departments is having to pay outside counsel by the hour.

If clients hate this pricing practice, why do lawyers continue to bill by the hour? Because it’s easy and that’s the way it’s always been done. Besides, since few firms offer different pricing strategies, law firms dreamily believe that clients have little choice but to accept hourly billing.

Let me retell my favorite story that illustrates the power of offering a new pricing strategy. A friend of mine’s father, Fred, was taking his entire family (kids/grandkids) to the Caribbean to celebrate his 70th birthday. Given that I love the Caribbean, I enquired “what island are you going to?” Fred’s answer was intriguing: “I’m going to an all-inclusive resort Rafi. It’d just kill me to see those grandkids drinking $5 sodas on the beach.” What I found fascinating is that of all the islands and resorts in the Caribbean to choose from, Fred’s primary decision factor was based on the resort’s pricing policy. And just to be clear, all-inclusive resorts are not cheap – they charge a premium to eliminate financial uncertainty. This is a great example of how new pricing policies can “activate” dormant customers.

So what’s the pricing strategy that will activate new customers and bring higher profits to a law firm? Drum roll please…charge a fixed price for each case. Whoa…I can feel your disappointment in my answer. Work with me on this one…please.

The key argument against charging a fixed price for a case is, of course, cases are so variable. Some garden variety civil cases settle early while others become protracted paper-laden battles. There’s a high variance in how many billable hours it will take to resolve most legal cases.

Why can’t an outside insurance company, with legal expertise, insure cases? Here’s how this insurance could work: corporation has a legal problem, its preferred law firm prepares a detailed case price estimate, insurance company reviews estimate, underwriters create a policy to cover the case (perhaps adding “just in case” legal hours as well as a risk premium). The client can then decide whether to take the fixed price (paying the insurance company) or pay the law firm by the hour. Just like any insurance company, legal insurers would benefit from the law of large numbers by underwriting many cases. And just like regular insurance companies, they’ll make money from some cases and lose on others.

You’re probably thinking, “it’d be hard to gauge the risk of a case.” Perhaps…but if companies can make money from issuing medical, life, and car insurance policies – my bet is if they put their minds to it, they can profitably gauge legal risk. And perhaps this insurance is only offered for certain types of "less risky" cases.Talk about unpredictable, Warren Buffett makes billions by issuing super catastrophe insurance policies to protect against hurricane damage (even after paying out $2.5 billion in Hurricane Katrina claims). Consumers are screaming for certainty in their legal bills…a sure sign they’d willingly pay an insurance premium.

Three tangential ideas:

First, insurance companies may offer a lower priced version. Clients would still use their preferred lawyer(s), but the insurance company would be more involved with legal strategy decisions – sort of a “managed care” legal approach.

Second, if law firms are big enough, why not cut out the middle man and self-insure?

Finally, another business model involves insurance companies marketing direct to consumers. You bring in your case, underwriters review it, and then you’re offered a fixed legal price. If you accept the price, the insurance company provides you with a list of lawyers to pick from to handle your case. Your lawyer would bill their actual hours to the insurance company (probably at a lower rate since the case was brought to them) and again, the insurance company would make money from some cases and lose on others. Many of you are thinking “but picking a lawyer is such a personal decision.” Well…talk about a personal decision, most of us select our medical doctors from a HMO list of approved providers. It’s very similar.

I’d especially love to hear your comments on this blog! I update this blog two to three times a week – please consider signing up to be notified by e-mail of a new blog post. Thanks for taking the time to read my blog.

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Readers' Comments on This Blog Entry

From Robert G. Cross on April 3th, 2007
Rafi, very insightful. Actually, most of the lawyers I know don't like billing by the hour, either. They are frustrated that it severely limits their ability to get "fair value" for their service. Except for lawyers who work on a contingency, lawyers are typically overpaid or underpaid based on the value of the services they actually deliver. Take a lawyer who facilitates a merger...yes they may get a decent fee, but it is a tiny fraction of the fees the investment banker gets...and the lawyers may actually put in far more hours. And that bugs the hell out of many of my lawyer friends. So why do they continue to charge based on an hourly rate? You said it. They are THE most risk-averse profession. Insurance companies and financial institutions (also risk-averse) are, as you point out, comfortable with assessing risk and reward. Lawyers are trained, not to assess the probability of risk, but to avoid it altogether. Businesspeople take risks, lawyers just don't. Who knows…maybe you'll spark a revolution in thinking. But I won't bet on it!