The Future-Proof Law Firm: What Lawyers Must Do to Stay Profitable

Hey, everybody. Welcome back to another episode of the Dominate Law Podcast, where we empower attorneys as entrepreneurs. I'm your host, Angie. Today we're tackling what it really takes to keep a law firm profitable as client expectations, pricing pressure, ai, and operational demands reshape the profession. Before we dive in, a quick shout out to our sponsor and growth partner, Equa Marketing,

Everything we'll cover today, pricing delegation, profitability starts with the right clients, finding your firm in the first place, and Equa builds the visibility systems that put your firm in front of them through SEO and Targeted Growth Strategies, their offering listeners, a complimentary 45 minute strategy session with a senior strategist who maps out a growth roadmap for your firm. No strings attached, no obligation, just real insights either way. So what do you have to lose? Go to www.dominantlaw.com/msm to book it now into today's deep dive. Joining us are three sharp practitioners, Ken Crutchfield, founder and CEO of Spring Forward Consulting with over 40 years of experience across legal, innovation and business transformation, having held leadership roles at Bloomberg, BNA, Thomson Reuters, LexiNexis, dun and Bradstreet, and CCH Walters Kleer, Mitch Koal in B Earth and House Real Estate and Commercial Counsel with more than 20 years, advising on major transactions and author of the Great Legal Reformation and Avoiding Extinction. And Paul Saunders, partner and chief strategy and innovation officer at Stuart McKelvy, who leads the Fortified Firm initiative, helping firms prepare for the AI era. Let's get into it.

Which market signal most clearly shows that hourly billing is losing credibility with clients under pricing pressure?

Well, it's funny you say that because I actually would be a little contrarian about this and say that I think the billable hour is gonna be around for quite a while, and it is the, it's how value is basically measured, and it's a good proxy for value. And unfortunately, even clients, especially I work more with big law, they are looking for an understanding. So they want to know how many hours it took and have a fixed fee or an alternate fee arrangement. Oftentimes, I'm even hearing, uh, just in this past week that there are some firms that are, uh, being asked to abandon an alternate fee arrangement to go back to billable for a while, just to be able to see how the metrics are changing with AI to see if AI is actually reducing the amount of time on key tasks and matters. So from that standpoint, if I go back to your, your question, um, I do think the signal itself is higher rates.

I think you're gonna see with outside council, uh, guidelines for larger corporations in particular, driving that feedback loop and expectations of what you can bill and you can't bill. It just forces rates up. And I do think there's a lot of movement with ai, native law firms, legal service providers, um, taking work in-house if you're a corporation that is changing the, those dynamics and that will put the pressure on if rates go too high. So I think that's the place. I do think that the market share of billable hours will shift, but I don't think it's going away.

And can I jump in just, sorry, Ken. We, we had a bit of a conversation about this before. Uh, I think what's, what's interesting about Ken's points is if, if the rates go up, at some point, clients will face traumatic sticker shock when you start to see a second year associate billing at 1400 bucks an hour, that I think that will dramatically shift us back to, guys, this, this is, this is a number I cannot live with. This is not a number I can sell to my CFO, uh, or the board. I, I think, you know, Ken, if you're right, rates will go up and then all of a sudden we'll hit a tipping point where clients will just say, I, I can't justify paying that much for a first or second or third year lawyer.

I I think you're right, especially for the first or second or third year. And there are corporations that won't pay for, for a first year attorney right now anyhow. And I do think that it will create a, a much more honest conversation about how does a, a law firm actually invest to build out the technologies that automate to reduce the hours. So I think it's gonna be a very interesting and frank conversation between clients and firm. Now, smaller firms, they've got a little different situation, um, especially if you're, you know, 2, 3, 4, um, you know, people in your firm or a handful of partners, uh, or if your work skews a little bit more consumer. But I'm sure I'll hit on that a little bit more as we go through this.

Mm-hmm <affirmative>. Yeah, that's, that's definitely really interesting. Uh, it also connects with maybe the operational pressure that is going on inside firms as well. So, Mitch, I'd love your perspective here, uh, from the client perspective. What behavior are you seeing that's forcing firms to prove value earlier in the relationship before the invoice even arrives?

Uh, well, I think in general, we've seen a trend where in-house, so look at, let's look at large law, large, uh, legal consumers. So corporations, you know, growth of in-house counsels has not abated. It continues to build, uh, in, in a lot of companies. Um, certainly there are a lot of companies who've just said, we want to spend more money on our inside attorneys than an outside attorney. So it really forces firms to show, especially if you're trying to break into that market to say, Hey, um, here's my value proposition, right? Here's what I'm going to do for you, and I'm not gonna charge you for this, and I'm not gonna charge you for that. I'm gonna offer you things that your in-house department can't have. You know, maybe I give you access to my precedent system that will help you because in-house for, uh, in-house lawyers have notoriously bad precedent systems, it will, will allow you to use various other things that we've developed in our firm on a, on a free basis, um, in, in return for your business. But the, the concept of, of a free for all clearly is over and has been over for some time, but it, I think it's just gonna start to accelerate. So prove your value immediately. Be very highly commercial with your advice. That's something most clients, uh, really value. They don't want things over lawyered. They just wanna get to the solutions, help me get there, help me manage the risk. Um, and then, and then we'll have a good relationship.

Could I just jump in there quickly, Angie? I had a thought on that too. Mm-hmm <affirmative>. Um, I think what it, what what law firm leader law firm lawyers can do to differentiate themselves is they're just getting more reps in because they're working for a lot, many more clients. And so they have a added level of expertise that in-house counsel just won't be exposed to. So I think you really have to showcase that expertise early on and explain why it makes sense to send some work outside the, outside the organization, into the external council. Um, but you gotta show that early on to, to prove that value, because the risk is particularly with ai, that more and more that work will come in-house over time.

Yeah, a hundred percent. Like, because if the AI can give, if, if the AI really, uh, is the source of, of the knowledge of the law firm, then the in-house counsel are always gonna say, and and myself included, are gonna say, well, I can just prompt my system to give me a pretty good answer on this for the cost of, of my tokens or the, the cost per desk or whatever I'm going to do. And I will manage that risk myself. Mm-hmm <affirmative>. So a hundred percent Paul, I agree with you.

All right. That's really interesting. Now, Paul, uh, let me bring you in here. Uh, how should firms think about balancing pricing certainty versus flexibility when the scope of work still isn't fully clear?

Yeah, it's a huge challenge when you're dealing with trying to have certainty while scope is unclear, right? Yeah. And I think the focus shouldn't be on absolute price certainty in terms of the dollar amount, but certainty in the mechanism to determine what the price will ultimately be based upon any of those scope changes, right? So, so for example, you could have a fee structure, like contingency fee, that's a percentage of a settlement amount. It could be a percentage of, of the purchase price of, of a transaction. Um, and if those numbers aren't clear, the price is unclear, but at least the mechanism is clear. So the client owes, ultimately, if this settles at this amount, I know how much I'm gonna have to pay. Uh, the law firm, other pricing structures that I really like that kind of work with that, uh, would be like a fee caller kind of structure.

So you could have a, rather than a fixed fee, uh, or hourly billing, kind of have a hybrid where we expect it's gonna cost $10,000 and if it comes in below the 10,000, we split the difference with the client. Or if it goes over, you split that excess. So you've got aligned incentives in place so that if you do have an unclear scope and the scope of work ends up being far lower, well, the law firm benefits because they can bill at a premium, the client benefits because they're paying less than if it was a fixed fee price. And if that scope becomes far beyond what was anticipated, the law firm still covers its cost past that threshold, but at a lower percentage. And the client doesn't have to pay quite as much if they run an hourly billing structure. So what it does is it both the, the law firm and the client have incentives in place to be as efficient as possible, where if you use these other tools like the fixed fee or the billable hour model, the incentives are misaligned and you're not necessarily paddling in the same direction.

So that is, that is one of the strategies that we would use when you've got an unclear scope of work. Um, I think you can also, um, it's important to clearly document what is included in the work, what is excluded, have mechanisms in place to change the pricing if the scope changes. And that's just, you know, solid project management rigor, that's clear scopes of work, um, that's proactive communication when those scope changes happen. So you can have that informed conversation with the client, listen, we thought this was gonna close on this date, it's gonna close next month, and it's way complicated now. So let's talk about what the implication on the price would be. So I think it's about proactive communication, and I would err on the side of flexibility, but with a pricing structure that's still clear.

Mm-hmm <affirmative>. Yeah, let me, let me just jump in there. Sorry, <laugh>, but those are, there's, uh, from a client perspective, and this harks back to the question you just asked me. Yeah. Angie, is that if I see a firm demonstrating that kind of, um, creative way to manage a file that impresses me a lot more than I'm the smartest person in the room, and therefore just hire me, 'cause I'm a really great lawyer, right? If I could see that they've really thought this through and understand that they're going to take some of that risk, and yes, if they do really well, I'm, I'm more than happy to give a bonus. Like I'm, I think there are a lot of companies out there in-house legal departments who are willing to pay more for if, for certain results, if it's shared on the other side, so that if things go crazy, everybody shares the pain. And that, that's a signal to the market that your law firm really understands the client perspective and is willing to share in, in the good and the bad.

Hmm. And I think it's so important, Mitch, that, that we develop the expertise within our lawyers to not just be good lawyers, but to be good business people too, and to understand pricing and understand profitability and understand the costs, and understand different pricing mechanisms and project management rigor. Um, and I think as we enter into this era of constant change with ai, it becomes even more important that we double down on those business skills and not just focus on the practice of law, but on the business tools and clients like that, because they're business people too. They understand their cost, they understand the idea that you have to have a, a solid margin to do the work. And so showing that sophistication, uh, I think you're right. It's a, it's a real way to differentiate yourself as a service provider.

Yeah. From our, from our perspective, we, we want our lawyers to be successful, you know, otherwise your firm won't be around. And that's not good for anybody. But y you know, if demonstrating the good intake, uh, the give and take and, and training lawyers to understand that and not just say, well, I spent a lot of time on this file, therefore you should just pay me whatever, you know, x times the hourly rate is you, you're spot on. That's, that's brilliant.

Uh, Ken, let me come back to you. Uh, what separates genuinely useful innovation from expensive distraction when firms are trying to improve profitability?

I think did, did we lose Ken?

Uh, uh, I believe Ken is having a power cut. So, uh, maybe, uh, Mitch or Paul could answer that question. Would you want me to repeat the question?

Yeah, repeat the question.

<laugh>, if you could. Yeah, I was, I was kind of zoned out 'cause it was Ken's question. <laugh>.

<laugh>,

Okay. So what separates genuinely useful innovation from expensive distraction when firms are trying to improve profitability?

I'm happy to take, take, take this one, Mitch,

Start that off and then I'll chime in. Sure. Yeah.

I, I think it comes back to a, a goal, a strong goal. What are you, what are you trying to accomplish? Don't, don't, don't jump to what's shiny and new jump to something that's gonna solve a real problem. So I think you start with articulating what is our goal? What do we wanna accomplish? What does success look like? What are the mo the simplest things that we can do with the biggest amount of benefit to achieve that goal? And that might end up being some innovative solution, might be some AI platform or tool. Um, but it might also be just getting a bunch of people into a room with a whiteboard and sticky notes and mapping out a, a process and figuring out what's the simplest thing we could do. So I, I think there's a tendency now with AI to jump on, jump to those solutions and to kind of embrace this technology because it's interesting and it's shiny, but oftentimes that leads to wasted time and effort, and it's better to focus on what makes sense, build a foundation of sense, success, and then iterate from that particular point on.

Yeah, this, I, I mean, really understand what, what your pain points are in your practice and, and really what part of your practice makes you the most money. Let, let's, let's just be blunt about this. Okay. So is it real estate? Is it family law? Is it corporate? And say, okay, that's 50% of my work, or 45%. And okay. And really look at, as Paul said, is what are the, what are the problems that we're having with this? Or are we too slow? Are we miss making errors? Is it you, you know, all these sorts of things. And then focus on how to solve that without technology. Look through the, like a process driven approach, as Paul said, and then start to think if we've done all that we can with what we have now, okay, now we look to see what else is out there that'll help us in this area. And that might also carry over to our second largest area of practice so we can, you know, build some synergies. But yeah, shiny, shiny object syndrome is, is a bad thing.

Uh, all right. So Mitch, let's jump back into the conversation, uh, at the, at the very first budget conversation. What boundary needs to be made clear before client expectations start drifting?

Yeah, we <laugh> I think staffing, uh, staffing and understanding that we don't have an unlimited budget. I think that law firms often assume that when they're hired for work, that budget is unlimited and it, and we're willing to pay anything there is. And so therefore they will, uh, staff it to, to the max, um, for the purposes of just generating as much revenue as possible. So, you know, it is for me, a a a real sort of, um, hard conversation that you just have to have and say, look, I don't want three people on this call. Why are there three people gonna be on calls? Who's actually gonna do the work on this? Um, here's what I'm not gonna pay for. And, and so on and so forth. So that we really set out the rules. It's really much better for the relationship to set out the rules right from the get go as to what our expectations are from a billing perspective, um, so that, uh, the law firm's not surprised and, and more importantly, we're not surprised when we get a bill.

Could I just ask Mitch a question on that? Angie, do you mind? Of course, Mitch, I'm curious, like in those early discussions with clients, and, you know, scope is uncertain, price is uncertain, would, would, would in-house counsel want the law firm to say, what budget are we working with here? What can we do to conform within that budget? Like is that a good way in some cases, to start the conversation? Because I think oftentimes it's, here's the work, you tell us how much it's gonna cost. But you know, the way I often describe it is if, if a, if, um, a person wants to buy a car, they say, I wanna buy a, you know, a, a Volkswagen, uh, Jetta, but oh, well, the, the law firm sells them a Porsche, they're not gonna be very happy. You gotta deliver what the client is prepared to purchase. And that means you might not be getting everything, but that's a dialogue in a conversation. So is that, is that a useful step early on to ask that question? What's the number that we're looking at here and we'll conform to that

A hundred percent. Yeah. And nobody, and nobody starts that way. Everybody starts with, sure, we can do it. We're super good, you know, we'll do this. We'll hire, you know, we have this person who's really good, we'll put her on the file, we'll put her on the file and, and, you know, blah, blah, blah. And then it's like, hold on. Um, so yeah, please ask for the budget upfront and then let's talk about how we can manage this, assuming, and, you know, it's a different conversation. Well, it should be the same conversation if it's a consumer law practice as well. It's like, you know, I'm buying a, I'm buying a seven 11. How much, what's your budget? What's your, what were you thinking of for legal fees? And they're, if they say, you know, thousand bucks, you'll say, well, <laugh> not even happening, but you, you know, and then you manage that before you even start going down the road. Um, because it's, it's just, it's way worse to deal with that after the fact. And, and I'm unhappy, you're unhappy, um, than, you know, I give you bad reviews and, you know, et cetera, et cetera. So a hundred percent please have that right on day one.

Hmm. I think it's that, it's that law lawyers just hate talking about money. They think it's icky. They want to talk about the law, they want to talk about, they get excited about this new case. Like, oh, we want to talk about that. That's just, eh, but then what ends up happening is you send out a bill and then it gets way ickier at the end of the day. Yeah. You, you tick off the client. They don't go back to you. There's an awkward conversation. You gotta write off all your fees or a good chunk of it. And that doesn't benefit anybody. But how do we get lawyers past this idea of not being able to have those frank conversations at the outset, clear scope of work, clear pricing mechanisms, and have that as a conversation, as as business people, right? Yeah.

Well, it would be helpful to, to, to stand in my shoes, <laugh>.

Yeah, yeah.

You know, getting the bill, because, 'cause you know, the lawyers are pushing the bills out and never, you know, not always, but a lot of times they're not thinking, man, would I pay this bill? Mm-hmm <affirmative>. What, how would I react if I just got this bill for this amount of work? Right. What would my reaction be? And so the, the more you can stand in the client's shoes and go, yeah, I, I wouldn't pay 10 grand for this <laugh>. Uh, it would be helpful. But

Yeah, I think it's, it's so important to kind of put yourself in the other, other side and, and to, and, and try to align those incentives and, and, and empathize with the other, with other perspective.

So where does delegation usually break down when junior lawyers receive work without clear review expectations?

Yeah, I, I think it, it breaks down at the very beginning. I think you have to start delegation, um, uh, right? If you're gonna get the right outcome, right? So I think, uh, and this becomes even more important in this era we're entering into now with AI uncertainty, right? I mean the, the, the dynamics of the market are changing how we price our services, um, how, how legal services are valued. It's so important. Uh, but you know, when, when we're training our lawyers on this, you need to be really clear what is the expectation in terms of the work product, um, uh, how much time is it gonna take to get that work done? Make it really clear, come back if there's any questions or, uh, clarifications, uh, that are required. Um, and I think this is so important too. I think, uh, there's this issue we, that we struggle with is like what I call the AI training conundrum.

This idea that the more our junior lawyers become reliant upon ai, uh, that's gonna deprive them of valuable learning opportunities. Uh, like I learned to be, you know, a corporate lawyer through reviewing hundreds of leases and due diligence and, and, and, you know, reviewing material contracts and to, to draft my own contracts, litigators learn how to persuade a judge or a jury by reading cases and writing research memos and doing a lot of that grunt work that you build yourself into those higher levels. And with ai, we're depriving people of some of those necessary learning opportunities. That doesn't mean to say don't use ai. I think you have to, but we need to mitigate those risks. And I think we need to, when we delegate, uh, we need to double down on mentorship and we need to say, it's not just do this task and report back three weeks and it better be perfect.

And then I will mark it all up and give you a terrible review. It should be an ongoing discussion and dialogue where, when I'm doing the work, let's work together. Let's collaborate in real time. Let's try to fill those gaps and, and knowledge that are gonna get gonna arise as a result of over reliance upon ai. So I think delegation, to answer your question, has to start from the very beginning, but it has to continue throughout that engagement showing their juniors exactly what they need to do to develop those necessary skills that I'm afraid they're gonna be deprived of in this, in this era we're in now.

Hey Paul, just a couple of thoughts on that too. One is, I, I find it ironic because in order to get a good prompt, you have to provide good direction. So I feel like some of what AI actually provides is the opportunity to learn how to communicate effectively. Um, which oftentimes, you know, whether it's medical community or law, it's kind of just go figure it out, let chaos fill, fill the vacuum, and the smart attorneys will figure it out and come back with the right answer. And there's still an element of that we have to get, um, you know, have to embrace to make sure that there's resourcefulness. But at the end of the day, I think that aspect of learning how to be a better communicator is gonna be important. The other point that I was gonna make, um, what was the other point? Oh, is calculators, you know, calculate. We've been through this before with calculators. So I do think there are ways to find harmony and balance between using the new technology and not having to just go do everything raw by hand over and over and over again. Brute force, there's a value in that in the experiential, but there's a balance.

Hmm. I love that first point. You may the second one too. But this idea that can AI teach us to be better at delegating? Because I think what happens is you're delegating to a junior lawyer and you forget that they don't know anything. You forget that they just got outta law school, they've never done this before. And all these words, all these terms. I remember being a junior lawyer sitting in a meeting and being told what to do by a senior partner and not understanding half of the words that were just throwing at me. And I was too embarrassed to say, I didn't know. But we assume AI knows nothing 'cause it's a computer. And so we have to give that context. We have to say, you are this and I am this, and this is this document, and I want this output, and I want you to do this, and I want it to be done this way. And it's, it's a way, it's like this silver lining of over reliance on AI is that it might actually make us, in part, become better delegators, <laugh>. So I, I like that, that spin on it.

Rich, would you have any thoughts on the question?

No, I, I'm, I'm with the, I I think there is, and there will, you'll see over time. 'cause we're still very early days in terms of seeing AI as a tool for learning and developing lawyers. Nobody, you know, we haven't quite figured that out yet. But I mean, this, this is a good example what Paul and Kim were just talking about, just teaching you how to prompt better or makes you a better communicator. So, so what else can we use ai? Can we, can we use AI to train our lawyers, um, to be better drafters? Can we, can we have, can we create an agent that gives crappy drafting advice? And, and we ask the, the juniors to say, okay, is does this really make sense to you? Are you sure the AI spit it out? But you know, what about this? What about that?

And get them to train in that way. Um, and you know, quite frankly, as, as I think Paul mentioned as well, it's like training in law firms is pretty crap as it is. Like, let's, let's be real brutally honest. My training was horrible. It was, as Paul said, here you go, good luck. And, and somehow magically by osmosis, you know, some people pick it up, uh, some people don't. But I think the opportunity of AI is, it will give, um, the potential to really be thoughtful about how to train our lawyers, because now we have to be thoughtful and diligent about it. We just can't say, follow me around and magically you'll pick stuff up. Those days are gone. Mm-hmm <affirmative>. So I'm, I'm hopeful that that's the way it'll go.

Really, really interesting. I mean, great insights over here. Uh, Ken, I'd love your thoughts, uh, during intake, what decision point usually reveals whether a firm can realistically handle new work, profitability or profitably?

So I've got a couple of thoughts on this one. One is, um, it depends on the size of the firm. So, uh, a big law firm is going to be looking at things maybe differently because those, uh, steps of intake are spread out. It's about, you know, targeting and marketing and business development and, uh, a whole process qualifying as you are walking through that. And that could take a couple of days. Uh, it could be a conversation after, uh, a dinner or something, or it could take tenure. Um, it can be that, that broad. So I think tying it back to what you do as a smaller firm or a mid-tier firm is really focused on what is your profitability? Know what your profitability is, what are the things that are, are good engagements for you? Uh, focus on a strategy of how you're going to reach the clients that get that profile and can value what you can provide.

And you can do it profitably. So I think of that and say for, you know, a personal injury firm, uh, intake may come in at the same time that your marketing and business development all play out because you got a phone call and you've gotta work through it. And I know of a friend of mine from high school, personal injury, uh, lawyer, and he is more inclined to take cases where there is, um, you know, a medical, actual medical, uh, diagnosis, a broken bone, something like that, that's tangible as opposed to soft tissue damage. And, you know, a chiropractor said this, and I, now, there's an ethical aspect to this too, that, you know, uh, each, each state and jurisdiction and, and province and Canada all have, um, you know, laws and ethics. So you've gotta go through both the ethics of the practice, but also your own personal ethics and morality and how you do this.

An extreme case would be bankruptcy where, uh, maybe you target your marketing to certain zip codes that are more fluent or would be, um, better, uh, and more profitable. There's an ethical aspect to doing something like that. Um, but I'd ultimately kind of take it back and say, uh, Fisher Phillips Law Firm is a, you know, a large labor and employment firm in the US and they've done a great job at collecting, organizing their data, which by the way, is one of the first things I would do before I go off and build a technology, get your data together, and they marry that with the public docket of information in the United States. And in doing so, they can identify the metrics that mean when a client comes in, I, you know, you've got a good case, but I'd settle. Um, versus, oh, you've got a case. And I would take that to court and I would go all the way to court if you don't get a good settlement. And they know the metrics very well, and I think that's the standard that we can aspire to, uh, as law firms across the board.

But what about, sorry to jump in guys, but, so Ken and Paul, this is a good question for you too, is, but lawyers are afraid. They all think that the file they have now is the last file they'll ever get. So, so everything that walks in the door, they're, they better take that work. 'cause they never know when the, you know, they'll ever get work again. And so there does not fear drive a lot of poor decisions on taking on files that maybe you can't manage or stuff just because you're, you're afraid you need the money, you gotta make rent this month, you gotta make payroll this month.

I'm sure that can, that can play in. But I think this gets back into, uh, the s word sales, which is something that I think lawyers tend to kind of shy away from. But understanding how sales works in, in a more traditional business where, you know, you are actually working on multiple time horizons at the same time. So you may have some work now, but you've gotta devote a certain amount of time, effort, and thought to how do you get that next set of clients in. So whether that's, uh, sending, uh, sending holiday cards or, you know, reaching out and making phone calls during some of those slower times, if you have slower times, are all things you need to be doing to work this, the, the time horizon. So that work comes in, especially work that is a better fit and match for you. Paul, do you have anything to add? Yeah,

No, I mean, Mitch, you make a good point. I do think that it is, it's true that, you know, lawyers want to be busy and when there's an opportunity to do work, even if that might be at a lower rate or a lower price, there's this desire to take that on. And I think we need to resist that urge. Um, 'cause I think not all revenue is treated equal, should be treated equal. You have to factor in the associated costs that go along with it, right? You have to think about what's the price? We're, we're, we're gonna charge here, what are the costs associated with every hour? And I think you, you mentioned Ken, about profitability, and I think law firms need to develop profitability models. They need to understand the costs for, even if you're not working, you're really working on a fixed fee or a contingency fee, you still need to know your costs.

You still need to predict how much time it's gonna take, what the hourly rates are for your timekeeper, so much revenue. You're gonna generate what the cost is associated with each one of those hours, what's the margin? And look thoughtfully at the potential engagements that are coming in to maximize the net profit for the law firm. And not all revenue is good. You could have two engagements with the same price tag, but one of them is wake more costly because it's, it's serviced by higher cost timekeepers. Like if a senior partner is doing work for $10,000 versus a junior associate for $10,000, the firm isn't making nearly as much money on that $10,000 that the partner is doing because they're taking the vast majority of that, that price home in the form of their income. So the firm collectively is not benefiting. So I think we need to factor that in.

And I think, Mitch, you're absolutely right, it's a concern and a lot of law firm lawyers want to take that work and be busy, but we have to resist the urge to jump to all the work because that, that can, uh, diminish, uh, uh, our value. It could kind of diminish our expertise. It could change how we're perceived in the market if we're a race to the bottom on the lowest hourly rates. And it also deprives us of those great opportunities that do come along that are higher profit. So I think it's a really important dilemma. And it also goes back to that issue that we talked about before about, um, not only training our lawyers to be good lawyers, but to be good business people and understand the economics of the practice and understand cost, and understand pricing and be thoughtful in project management rigor so that you don't have those situations that compromise your margins just for the sake of being busy.

How should firms decide which transparency practices actually build trust with clients under fee pressure?

Uh, I think be a hundred percent transparent, just a hundred percent. Like I, I don't, I don't see any reason to not be fully open and honest with what you're dealing with at the firm, whether it's staffing pressures, whether you, you know, your level of business or, or, or whatever. Um, I think, uh, I look at it as a relationship. I'm looking for a partner, uh, in my work. I'm not looking to be a cop. I'm looking to, to build a relationship. And building a relationship means we're open and honest with each other on exactly what we can do, what we can't do, and why. And if you, if, and if you really lay it out and are being, uh, honest and open about it, uh, I think that re that resonates with me and I think it resonates with a lot of clients. And so, uh, I would just say, just don't, don't be afraid to be honest about the situation. You know, one thing I

Gonna mention here, go ahead, Ken. Yeah, sorry. Uh,

No, no.

One, one thing that I was gonna mention here is, is the whole discussion of value and making sure that you're clear in terms of the things that you're doing that you're not billing for, for example. Uh, that's another means of transparency. Um, that could be initiatives that are going on that have benefited or if it's been done where you've already written it down and said, no, I'm not charging for this. I think those things are, are really important. Uh, just a personal experience that's not law. But when I took over a business, uh, about 15 years ago, they had been giving away like $25,000 worth of work with every software purchase that they, um, sold. And then they couldn't get to that work. And we ended up switching it around and it said, this is $25,000 worth of work, let them market down to zero. Um, but we doubled the price of the, of the, of the average deal by changing that, that metric around, because the, the amount of discount was so significant relative to what the value was. And once we did that, we got a higher average deal size, which allowed us to then hire a few people to actually do the work that we were having a hard time, um, you know, servicing that we were quote giving away.

Mm-hmm <affirmative>.

I had, um, I had a question just, just for, um, for Mitch on the, the transparency answer because I, I, to kind of a, a slight counterpoint, I wanted to see what you think about it, Mitch, because there's this concept of shadow billing, right? So say if you're, say if you're working under a fixed fee pricing structure, right? Um, as opposed to a billable hour approach where you would share all your time entries, you would share your narratives, you would know exactly the hourly rates, you'd multiply those by the hours you get the full amount when you're dealing with a fixed fee, um, shadow billing or showing the narratives and the time entries when you're under that fixed fee discloses things like, how close did you get to that fixed fee amount? Did you go over, did you go under, is the firm getting a big premium on this work because they were efficient?

So in some ways, that transparency can actually deprive the firm of the incentives and the rewards to be efficient. And if you're showing and disclosing the narratives and the time entries all under a fixed fee, it might drive the opposite behaviors that might be against the client's interest, which is being inefficient. So I'm, I'm curious if, if there is an, is a, a limit to transparency, or if it is, do you think in all cases just share all that information, the time entries, the narratives, and even if there is a big premium, trust, the, the client to just say it's okay that the law firm gets a premium on that one?

Well, I, I guess there's two ways that there's a way to look at it is when I think about value billing, I'm not doing the math on the hours because it is, the value to me as a client is, yeah, I'm willing to pay you 10 grand to do this piece of work for me. And, and maybe I'm, I'm an outlier in the, in the client world, but it's like 10 grand, that's great. You do it in, you know, four hours, good for you, don't care. I agreed to, you know, we all agreed to this. We're, we're adults, we're contracting parties, we're equal parties, we agreed to 10,000, I give you 10,000. That's sort of where, where my mind starts, but it stops. So shadow billing to me just is, is a pointless exercise. But I know that if, if you view value billing as a mathematical equation, then then you start having that problem.

And I think if, if I'm a lawyer in private practice pushing value billings, I, I'm not doing the math on that. I'm just saying, and when I was, when I had my own practice, I would just set fees. It's like, okay, your lease is 3000 square feet, the price is this, it's 10,000 square feet. It's this, because I know it's gonna be a little bit more complicated. And I never had clients, my leasing clients ever come back to me and say, okay, but how many hours did you really spend on that? Right? So I think if you, if you have the conversation at the beginning and we're all on the same page, then I don't think you go down that road of, of having a mathematical equation to it. Yeah. Um, makes sense. I mean, let's, there, there's another story that I like to tell, it's a little bit off topic, but sort of similar is, uh, many years ago there was a, there was a client who was doing some kind of corporate transaction and late on Thursday night, the transaction was supposed to close on the Monday they found some kind of problem and they, they talked to the law firm and the law firm put, you know, four associates and two partners on it, you know, Friday, Saturday, Sunday solved the problem, closed on Monday, and they gave the bill to the client and the client said, you know, the amount of time that you guys billed the value of that to me was way more than your billing, right?

He said, you, you, you, you should have just told me it was half a million dollars. I would've agreed to it. Instead, you send me a bill for two 50 because you did your hourlys rate. So, so that's to me is let's have the value discussion and not go down the road of, of doing the math.

Yeah, agree. Yeah. I, one, um, quick point here is I think you, there are some firms that do work for like insurance claims and or, or healthcare. And oftentimes those are, are substantial and they're, they're very commodity oriented. So it's, it's a different animal. And so I just want to observe that, that there are different dimensions where, where it is a true relationship, I think the more transparency makes a a lot of sense. But if it's commodity work, that's gonna be, if you can't do it for this price and going somewhere else, um, that may change that dynamic a little bit.

Yep. Good point.

Robert Fuchs, uh, said on this topic of costing, what are you guys basing the quote on? Where does the budget come from? I think our value, and therefore our cost should be, uh, common rate with the amount of risk mitigation and, uh, transaction consulting, but I rarely see fee codes tied more to value off risk mitigation and transaction value.

I, I've got some thoughts. I'm happy to share start, kick things off, Angie. That works.

Yeah, please.

I, I think Robert asks a great question. 'cause I think, I think you have to tackle it multiple different ways. Like, I think you need to start with understanding what your costs are. Even if you're not billing by the hour, you still need to know what your costs are. And that means having tools like work breakdown structures where you list the tasks that are gonna be completed. You develop your scope of work, you identify the hourly rate that's being proposed for all timekeepers, you estimate the number of hours in light of that scope of work, you come up with an estimate in terms of what the, what the price might be if billing by the hour and what the cost would be under a a profitability model. So that's one input into the equation. But I think you also need to think about what's the value that the client is getting from this particular work.

A conver the conversation that Mitch and I had, um, asked the client, what is the budget we're working within here? What is your willingness to pay, what's the timelines like? That's, that's project management 1 0 1, that's that you have to manage the triple constraints of time, cost and scope. If it takes longer, it's gonna cost more. If there's more scope, it's gonna cost more, it's gonna take more time. You can't optimize all three things simultaneously. So I think Robert, I would tackle it that way, understand the cost under, understand the value that the client gets, uh, understand the expectations in terms of the price, and try to develop a pricing structure that aligns the incentives to get the client what they want, which is still profitable for the law firm.

Yeah, and, and I think you look at it, the, the value equation, not the the value that you're giving, but the value that the client perceives, right? Because that, those are gonna be two different things. The, the, the client is looking at it and saying, you know, this, this isn't that, you know, it's important, but it's not earth shattering to me. So I'm not willing to spend a zillion dollars on this. I'm willing to spend this. And really, and, and it's, it's asking questions, just ask a lot of questions. Okay, so what are we doing here? So what happens if it doesn't get done? How does that affect you? Well, you know, do don't, don't you think there's some value to that? If it gets done faster, is there some value to that? And then, you know, build it along, uh, along those methods, those, uh, lines as well.

Mitch, I love that comment because I think too often what happens is an email comes in and like, how much is this gonna cost? And then the expectation is a document comes back, it should be a dialogue, it should be a conversation, right? Uh, couldn't agree more. Sorry, Ken.

Oh, no, that's fine. Um, I was just gonna say with, you know, larger things like, uh, mergers and acquisitions and everything, some of that value that you're, you're receiving is insurance, uh, because you, you have a trusted relationship and that's, that's part of, of what, uh, what you get out of the, uh, the relationship with the firm, that you're gonna get the deal done or you're gonna figure it out and know why you can't get it done, um, which is unusual. So I think there's, there's that aspect of it, but I also wanted to just highlight that there is room there, you know, the, the latham's, the, you know, the Kirkland analysis, the skadden's, you know, they, they get a premium that's pretty high because of their reputation and there are a lot of fixed fee and boutique firms that can do just as well on a, on an engagement and get a deal done for half price and still make a ton of money. Um, so I, I think there's a lot of different ways to go about it, but at the end of the day, um, nobody's gonna, you know, pat you on the back for saving a little bit of money when the deal doesn't go through. So that's really, I think the, the tie back to the insurance angle too, in thinking about it from that perspective also.

Alright. Uh, we also have a few registering questions. Uh, we've got John, we who had asked, uh, with a fast pace at which AI forces industries to change their workflow. Will the standard legal business model thrive? Paul, maybe a good start with this.

Um, I, I think it will, but I don't think all firms will thrive in this environment, right? I, I'm a strong believer in this idea that we're, we're entering into a new era in human history. I think this is equivalent to moving from the agricultural era into the industrial era, I think, but it's happening far quicker. And I think the most important skill that law firms can develop in this era is the ability to adapt to change. And the law firms that are staying in the old way of doing things, not looking at alternate pricing structures, not looking at their compensation, the system's not thinking strategically, not understanding their costs. They're gonna suffer in this new environment, and I think they are not going to thrive. But if there are law firms that are forward thinking, the future proof law firm, the nature of this, of this, this discussion looking forward, thinking about the systems they need to develop methodically and systematically building up the capabilities to thrive in that environment and never stopping that process, like developing that capability to continuously improve themselves. Like no one's got a crystal ball and can predict exactly what the future brings. The law firms that will thrive in this environment are the ones that adapt to change that exists now, but continue to adapt to it as the world changes around us. So, uh, the answer is some of them will do better, I think, and some of them will fade away if they can't adapt to these changes.

Mm-hmm <affirmative>. Mm-hmm <affirmative>. Mitch, uh, or Ken, do you have anything to add?

Okay, so let me jump in. I, I think it's a very interesting time from a small solos and small perspective and that you will see those firms do very well because a, that's kind of how they're wired because they have to be more entrepreneurial, they have to be more business minded, because if they don't, they don't, they don't stick around. And I think the, the, uh, uh, hyper AI world that we're living in will only help them do higher level work and do more work before multipliers for them to be able to do more work and manage their costs a lot better. So I, I think that end of the market will really start to explode over the next few years. I'm, I'm worried about big, big law firms because at some point you are only gonna need a certain number of lawyers with AI and law clerks to do the same amount of work that you're doing with, you know, 80 associates. And so I, I think that we'll see how that plays out. I just think that's an interesting dynamic is if you start to think about what your associates do every day and whether or not you can do the same amount of work with less associates.

I just,

I, I'll just mention very briefly that AI native law firms are something to watch, uh, ones that are going through and defining agents that will actually do things. So you have AI actually performing some of those tasks, uh, when they're able to, I think this is the signal of it when they start to take some work away from big firms and that gets noticed. That's gonna drive the, the behavior changes that need to happen in, in big law and big law. You know, some big law will be able to make, turn the corner and other big law firms might not. Um, you know, maybe they have to go out and buy an AI native law firm to do that and, and work through that to be able to, to make the changes.

All right. We have, uh, another question from Robert. Uh, he said, I'd be interested to hear how firms are actually defining and measuring a profitability these days beyond the traditional metrics like revenue per lawyer or realization rates. What are you using to determine whether the firm and individual practices are truly profitable? And more importantly, once you have that definition, how are you aligning individual lawyers incentives and behavior with the overall profitability of the firm? In other words, how do you make sure that what's good for the lawyer is also good for the firm, especially as AI starts changing the economics of how we deliver legal work? Paul touched on this when he mentioned shadow billing. How can you determine profitability if lawyers are just putting time in when they haven't even spent that much time, but they want to show time to build up, uh, build up to the court.

I've got some thoughts on this one. I'm, I should jump in there too. That sec. That last point's a really good one. Um, uh, uh, how do law firms define profitability? I think you look at a hundred law firms, you're probably gonna have a hundred different ways to do it. It's very personal to the firm. Um, we, we embarked on this journey probably six or seven years ago and developed a profitability model. We canvassed all the ones that were available. Um, there's lots of cost accounting principles that you can apply. You look at what, what, what's the overhead you're attributing to every timekeeper? What's the amount of compensation you're paying them? Divide that by their billable hours, that's their cost per hour. Compare that to the effective rate on an engagement to look at the margin. That's one way of doing it. We found what that was doing was actually leading to unintended consequences that ran counter to our strategy.

So, for example, could be, in that case, the busiest person could be your cheapest person, um, uh, and or most profitable person I should say. So give all the work to the most profitable, busy person and take a work away from the people that need the work the most. So you're not optimizing for the utilization of all your timekeepers. So we ended up doing, as we developed a model that was more fluid and aligned with our strategy, we want to delegate work to lower cost timekeepers. We want to still, um, uh, remunerate and see the value in some of our areas where have slightly reduced rates. We wanted to have our lawyers partners buy in to the profitability model. Um, so we actually calibrated it in a way to optimize it for achieving higher realization, but delegating appropriately to lower cost timekeepers. And then we tie that into our compensation criteria.

So at the end of the year, we're looking back at the, the billings of a partner and the revenue that they've generated as a billing or responsible lawyer. And we look at the profit margin that results from, it's not just the top line revenue amount, it's the profit that's been generated as a result. And that's not the only factor, but is one of the factors that we consider when we're assessing our partners and compensating them. Um, that last question, I don't know how you deal with that because the way, the way that you are calculating the cost is the amount of hours that have been written down on the file. And so if people are fudging their hours and not truly spending that time, they're getting compensated for that. So the firm is incurring the cost, but it is skewing the accuracy of the numbers. So what is the true profit? It's difficult to say. So people will game the system. I think what you're, I think what you need to do is ask, have incentives in place so people don't have incentives to game the system. Compensate people less for their personal productivity, but more for the profitability of the overall matter that results. So if you're putting in incorrect hours, you're diminishing the profit. If you compensate them for the margin and the profit, hopefully the behaviors are aligned. So, but really good question.

Mm-hmm <affirmative>. Yeah, for sure. Uh, Ken, um, uh, Mitch, would you have anything that you'd like to add?

No, I, I think Paul, Paul nailed it.

Yeah. I just say if you have a hundred firms, you're gonna have more than a hundred different ways

To do it. Yeah. Agreed.

And that brings us to the end of one of the most practical conversations we have hosted on this show. A heartfelt thank you to Ken Crutchfield, Mitch Kowalski and Paul Saunders for the candor and the real world experience they brought to this discussion. Ken reminded us that the billable hour isn't going away anytime soon, but that the smartest firms are already getting their data organized and learning what AI can and can't change about how work gets done. Mitch pushed us to think like the client on the other side of the invoice asking whether we'd actually pay the bill we're about to send, and Paul gave us the through line for the whole episode. Not all revenue is created equal, and the firms that survive this shift will be the ones that understand their true costs, align incentives, and build the discipline of good business people. Not just good lawyers.

The big takeaway tonight is this future proofing a law firm isn't about getting more clients or billing more hours. It's about building better systems, sharpening delegation, strengthening pricing strategy, protecting team capacity, and growing in a way that's sustainable for the long haul. If tonight's conversation got you, thinking about where your firm stands, the obvious next question is how those changes actually get put into practice, and that's exactly where Equa comes in. Their team works specifically with firms going through this kind of shift, helping translate strategy into the kind of online presence and growth systems that bring it to life. They're offering listeners a complimentary 45 minutes session where a senior strategist looks at your firm and lays out where the opportunities are. No strings attached, just a conversation worth having. Book it at www.dominantlaw.com/msm before we go follow the Dominate Law podcast and share this episode with one law firm leader who's thinking hard about profitability right now. I'm Angie. Thank you for the work you do. We'll see you in the next episode.