In a stinging indictment of the legal profession, the Competition and Markets Authority (CMA) reported in December 2016 that the legal services market is undermined by a lack of transparency on pricing and service quality. The CMA argued that this was due to the fact that the legal services sector is characterised by incomplete or asymmetric information, and information plays a direct role in driving competition. In contrast, a more competitive process would lead to lower prices, higher quality, and greater innovation.
Although the CMA's report was written in the context of consumers and very small businesses, in-house legal teams at large companies are often faced with exactly the same issues, that is:
- No clarity on price.
- No reviews on service by other clients.
- No real incentive for firms to innovate.
The root cause of this problem is the fact that most traditional firms are still set up to bill by the hour and rarely feel that they are in real competition. Even if they provide clients with a fee estimate or cap, internally matters are still administered on an hourly basis and success is measured by comparing the amount obtained under the cap with the amount they would have received if there had not been a cap. In other words, the billable hour remains the internal currency of the firm.
For lawyers, the billable hour creates perverse incentives to spend as long as possible on a particular task, as Parkinson's law goes: "work expands so as to fill the time available for its completion". The result is that, within a firm, those who work harder instead of smarter are rewarded.
Also, at law firms where the billable hour is the main unit, it is much harder to justify investments in technology which make the firm's lawyers more efficient. The firm will likely make less revenue instead of more.
In-house legal teams are very much aware of this. In fact, cost certainty and transparency is the primary reason that in-house lawyers tend to switch to using alternative legal providers like Lexoo or Axiom.
From the lawyer's perspective, it is notable that corporate lawyers regularly feature among the most depressed professionals in various surveys. It turns out that lawyers do not necessarily love accounting for their time in six-minute increments either. This is one of the main drivers for many lawyers to leave larger firms in order to work for alternative providers. The next generation of lawyers will continue that trend of not wanting to bill by the hour.
Unfortunately, it has proven hard for traditional law firms to make the switch from hourly billing to fixed or value-based billing. Perhaps this is due to the partnership structure, which makes it difficult for larger firms to make strategic decisions with short-term negative revenue results. This is a pity, given that there are now plenty of new legal providers like Lexoo, Axiom and Riverview law using technology to render high-quality legal services on a fixed-fee basis (see Know how article "Buying legal services: the time has never been better".
Competition fosters innovation
In its report, the CMA mentioned that competition increases innovation. This is not just true in theory: for example, Lexoo asks three or four lawyers to quote fixed fees for a given matter, allowing clients to compare rates on the Lexoo platform.
Lawyers are now investing in contract drafting tools and other technology to handle the more boring and repetitive parts of the job. Even though these tools require an upfront financial and time investment, it enables lawyers to be more efficient in the long run: they are able to quote more competitively due to the fact that the work will actually take less time and effort.
It is notable that it is the element of competition that is causing these lawyers to invest in efficiency. In other business sectors, investing in efficiency always made sense. In law, this is only starting to change now due to the increase in clients pressuring lawyers to offer fixed fees.
Reviews from clients
Another element that the CMA considered in its report was the lack of transparency over service quality, and particularly the lack of public reviews from a lawyer's clients. Although reviews have been a very valuable addition to other sectors, for example few people would now book a hotel without reading reviews, this has not yet taken hold in law.
Lexoo has experimented with reviews for over two years, asking all clients to review their lawyers based on quality of work, responsiveness and value for money. Initially, the idea of reviews was a bit of a tough sell to lawyers joining the Lexoo platform. Most lawyers were afraid of damaging reviews by unreasonable clients. However, Lexoo has now had nearly 1,000 reviews submitted and so far we've found that those fears were not justified.
We've found that lawyers typically get one objectively unreasonable review for every 20 good reviews. However, research has shown that having one bad review in every 10 to 15 reviews makes customers trust the provider more, when compared to not having the bad review at all. The occasional bad review increases trust in the entire system and, as a result, clients will attach more weight to the large majority of positive reviews.
From the client's perspective, there are obvious benefits for clients being able to access reviews, such as being able to compare lawyers upfront. Also, if lawyers know that they will be reviewed at the end of the job, this encourages them to come up with creative ways to further exceed a client's expectations, as they know they will get credit for it.
However, the review system is not only popular with clients. Many lawyers are starting to truly like the idea. It is quite rare as a lawyer to get public credit for a job well done. In addition, once lawyers have accumulated a large number of reviews, clients are often happy to pay slightly more than for a lawyer with less of a public reputation.
Evolution of the legal profession
Despite the CMA's warnings, the future is showing signs of promise. As a growing number of lawyers break rank by offering fixed quotes and firms begin to recalibrate their business models away from the billable hour, the steady evolution of the legal profession is heading in the right direction.
About the author: Daniel van Binsbergen is a recovering lawyer and the founder and CEO of Lexoo. Based in London, Lexoo is a legal technology company that enables businesses and in-house legal teams to tender legal work to Lexoo's global panel of pre-screened boutique lawyers. Find Daniel on twitter at @DvanBins.
This article originally appeared in Thompson Reuters' PLC Magazine: http://uk.practicallaw.com/9-639-3110