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The problems of not pricing knowledge

by Jay Shepherd. Average Reading Time: about a minute.

Law firms don’t know how to price their knowledge, which is the actual thing they sell. Instead, they end up billing for their activity after the fact. They charge for the few hours of activity instead of the years it took to gain the knowledge and experience. This causes enormous problems for both firm and client.

The problem for the firm is that there’s no real way to differentiate clients, projects, and time spent; it’s all covered by the same rate, depending only on which timekeeper is doing the work. This means that the firm has no way to ensure that its lawyers focus on the more-profitable, higher-margin work. Instead, the current business model (created in 1919 by Hale and Dorr) bluntly rewards lawyers for the sheer mass of hours worked, without regard to the profitability (or even quality) of the work.

Professionals don't sell time. They sell knowledge. But how do you know what that knowledge is worth?The old model also creates perverse incentives: associates are encouraged to bill more hours in total, while partners are often responsible for keeping clients’ bills limited to a certain amount. Staffing decisions also fall prey to this. Where it might the right decision to have three lawyers on a particular call, that often doesn’t happen because the particular client won’t pay to be “triple-billed.”

The problem for the client is that the old model creates uncertainty and distrust. Uncertainty because the client doesn’t know what it’s going to be charged to have its problem solved; it has to rely on estimates that are often optimistic. Distrust because it shifts the focus to the time spent, and encourages clients to scrutinize bills instead of focusing on the real value of the knowledge they buy.

Advanced legal pricing solves these problems. Prefix teaches you how.

One comment on ‘The problems of not pricing knowledge’

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