Hourly billing: time for a rethink - Barreau du Québec · 6HOURLY BILLING: TIME FOR A RETHINK ... have a good knowledge of the rudiments of business and are apt to provide as many

HOURLY BILLING:TIME FOR A RETHINKReport adopted by the Barreau du Québec’s Board of DirectorsFebruary 2016

THE BARREAU’S MISSIONTo ensure the protection of the public, the Barreau du Québec oversees professional legal practice, promotes the rule of law, enhances the image of the profession and supports members in their practice.

Published in October 2016 by the Barreau du Québec

ISBN (print): 978-2-923840-68-0 ISBN (PDF): 978-2-923840-69-7 (Original edition: 978-2-923840-57-4 978-2-923840-58-1)

Legal deposit– Bibliothèque et Archives nationales du Québec, 2016 Legal deposit – Library and Archives Canada, 2016

Please note: Where necessary, the masculine form has been used in this leaflet to include the feminine, solely for easier reading.

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Table of Contents

INTRODUCTION 61.1 Background 61.2 Objectives 81.3 Chosen methodology 9

2 BILLING FOR LEGAL SERVICES 102.1 The Cravath system: a model from the early 20th century 102.2 History of billing models 102.3 Hourly billing as a model for structuring lawyers’ offer of services 12

2.3.1 The attraction of hourly billing for lawyers 132.3.2 The attraction of hourly billing for clients 132.3.3 Impacts for lawyers 142.3.4 Impacts for clients 16

2.4 The hourly billing model – some observations 172.5 Why is hourly billing still predominant in the legal services industry? 18

3 ALTERNATIVE BILLING METHODS –ABM s 193.1 The concept of ABMs 193.2 Explanation of the different ABMs 19

3.2.1 Package price or fixed price 203.2.2 Not-to-exceed ceiling price 203.2.3 Project management 203.2.4 DMAIC –Six Sigma methodology 223.2.5 Success-dependent billing 243.2.6 Performance-dependent billing 243.2.7 Retainer (fixed monthly fee) 243.2.8 Added-value billing 243.2.9 Hybrid billing 25

3.3 ABMs within the legal services industry 253.4 A long history of low ABM use by lawyers in private practice 26 3.5 Could ABMs improve access to justice? 27

4 DIFFERENT WAYS OF PROCURING LEGAL SERVICES 274.1 Call for tenders 274.2 Legal service brokers 274.3 Unbundling of legal services (limited-scope mandates) 284.4 Contracting out of legal services 284.5 Online markets for supply and demand of services 28

5 SUMMARY OF STUDY RESULTS 295.1 Remuneration of lawyers in Quebec 295.2 Billing models used in Quebec 305.3 Company budgets for legal services 315.4 What lawyers think of ABMs: efficiency and profitability 325.5 Considerations and obstacles in adopting ABMs 335.6 Management of legal projects and research and development (R & D) 35

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Table of Contents

6 TRENDS OBSERVED DURING THE MEMBER CONSULTATION PROCESS 366.1 Pressure on prices and costs 366.2 Balance of forces in the market 366.3 The billable hour – Much more than a billing model, it’s a business model 366.4 Predictability 376.5 Risk 386.6 Using statistics 386.7 Types of clients 396.8 Innovative billing 406.9 Expenses 406.10 Lawyers’ training 416.11 The value of a service 416.12 Sub-contracting and relocation 426.13 The specialization of work 426.14 Poor understanding of alternatives (ABMs) 426.15 Ethical considerations 43

7 FEATURES OF FOCUS GROUPS 437.1 Law firms 43

7.1.1 Sole practitioners or small firms 437.1.2 Medium-sized firms 457.1.3 Boutique firms 457.1.4 Large firms 46

7.2 Clients 477.2.1 Individuals 477.2.2 Litigation lawyers in SMEs 477.2.3 Litigation lawyers in large companies 48

7.3 Two different visions 48

8 ESTABLISHING THE VALUE OF A LEGAL SERVICE 508.1 Creating added value 50

8.1.1 Added value 508.1.2 The value chain 518.1.3 The business model 53

8.2 New functions for producing legal services 558.3 Added value for client and communications 568.4 Client needs 568.5 Service quality and cost control 578.6 Statistics and determining the cost price 578.7 Management skills and operational efficiency 578.8 Technologies 58

8.8.1 Improving processes and measuring performance 588.8.2 Models for providing legal services 58

8.9 Managing profitability 60

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Table of Contents

9 TURNING HOURLY BILLING UPSIDE DOWN WITH DISRUPTIVE TECHNOLOGIES 609.1 Disruptive technologies – McKinsey 609.2 Disruptive technologies and the arrival of new players 629.3 Risks of disruption in the legal services industry 63

9.3.1 Legal services market in a state of flux 639.4 Lawyers’ inevitable migration to a new business model 64

10 ISSUES REL ATING TO THE BUSINESS MODEL 65

CONCLUSION 66

ANNEX 1 – SAMPLE SELF-EVALUATION QUESTIONNAIRE (diagnostic) 67

ANNEX 2 – MARKET STUDY 69

ANNEX 3 – COST STRUCTURE 71

ANNEX 4 – QUESTIONS SUBMIT TED TO FOCUS GROUPS 72

ANNEX 5 – BARREAU DU QUÉBEC’S ONLINE SURVEYS ON BILLING FOR LEGAL SERVICES 74Lawyers in private practice 74In-house lawyers 78

Tables 82Figures 82Graphs 82Tables 82

ACKNOWLEDGEMENTS 83

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INTRODUCTION

1.1 BackgroundIn a report published by the Barreau du Québec in June 2011, the Committee on Current Issues in Private Practice and the Future of the Profession, which was given a mandate for “...targeting current issues in private practice, analyzing them and developing strategies for the future in order to respond to them adequately,” concluded that billing for legal services contributed to the public’s lack of interest in finding legal solutions1. The Committee felt that the hourly billing model no longer corresponded to the socioeconomic reality of the Quebec population, nor to clients’ ability to pay. The report, Lawyers in Private Practice in 20212, found that billing practices for legal services were part of a serious trend to diversification, value-added legal services and, in the long term, the development of new business methods such as management of legal projects3. The report painted a picture of lawyers in 2021 in the following terms (excerpt):

THE PRACTICE OF L AW4

OBJECTIVES FOR THE PRACTICE OF L AW • Bilingual/multilingual lawyers;

• Orientation toward another model of a profession in balance (quality of life);

• Revenues as a function of the added value of services.

STRATEGIES AND ACTIONS FOR THE BAR FOCUS

Future cohorts of lawyers are equipped with the latest technological tools and are perfectly bilingual. They have a good knowledge of the rudiments of business and are apt to provide as many commodity services as specialized services that command high prices. The Bar favours the values of the new generations and displays a spirit of openness.

All Bar authorities are contributing to this change of culture. A knock-on approach is developed to achieve a certain homogeneity in methods of functioning.

STRATEGIES AND ACTIONS FOR THE BAR FOCUS

A majority of lawyers adopt the contents and the prerequisites of new methods of providing legal services.

Atypical service provision methods are numerous and adapted to the needs of various situations. A constant search for value-added services distinguishes the lawyer from other potential providers of legal services.

1 COMMITTEE ON CURRENT ISSUES IN PRIVATE PRACTICE AND THE FUTURE OF THE PROFESSION, Lawyers in Private Practice in 2021, Montreal, Quebec, Barreau du Québec, 2011, p. 8, online: <http://www.barreau.qc.ca/pdf/publications/rapport-pratique-privee-2021.pdf>.

2 COMMITTEE ON CURRENT ISSUES IN PRIVATE PRACTICE AND THE FUTURE OF THE PROFESSION, see note 1.3 Id., p. 72.4 Id., p. 105.

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The Committee’s conclusions are part of a broader movement at both the provincial and international levels. In Quebec, the Ministry of the Economy, Innovation and Exports has identified some strategic trends and engines for growth, as well as issues for the legal services industry5:

• Strategic trends and engines for growth:

- Fusions and acquisitions - Outsourcing of legal processes - Virtual firms - Cloud computing

• Issues:

- Unbundling of legal services - End of lawyers’ monopoly over the law

In the United States, the American Bar Association (ABA) published a report in 2002, the ABA Commission on Billable Hours Report6, calling for an end to the monopoly of hourly billing and the emergence of alternative methods. The motivations and conclusions of this report have been revisited many times since then, but few changes on the ground were observed before the financial crisis that affected the U.S. in 2007-2008.

In addition to the major disruptions that the emergence of alternative billing methods (ABMs) could generate, a large proportion of Canadian lawyers have stated that they do not fully understand ABMs. Among other things, according to a cross-Canadian study conducted in 2013, 60% of litigation lawyers believe that alternative billing methods could make their legal services more efficient7. However, 61% say that they are not familiar with the various options for billing methods8 and 57% concede that they lack the knowledge required to choose the appropriate billing method9. They also say that their service providers do not generally use such methods: 49% of litigation lawyers believe that large firms do not promote the use of ABMs.10 Lawyers do not seem to agree on what role ABMs should play.

Billing for legal services is a topic that cannot be treated in isolation, as it is part of the broader problem of access to justice. A 2009 study conducted by the Department of Justice Canada, The Legal Problems of Everyday Life, revealed that only 11.7% of Canadians get legal advice to settle justiciable problems.11 44% handle the matter on their own, 22.1% find non-legal assistance, and 22.2% take no action. Based on available data, lawyers appear to have lost a large segment of the legal services market.

5 QUEBEC MINISTRY OF THE ECONOMY, INNOVATION AND EXPORT, “Tendances stratégiques et moteurs de croissance pour l’industrie – Services juridiques” (January 27, 2014), online: http://www.economie.gouv.qc.ca/objectifs/informer/par-secteur-dactivite/entreprises-de-services/services-professionnels-scientifiques-et-techniques/services-juridiques/page/le-secteur-18082 /?tx_igaffichagepages_ pi1[mode]=single&tx_igaffichagepages_ pi1[backPid]=18078 &tx_ igaffichagepages_ pi1[currentCat]=&cHash= d082d42c53b5ec 3 aa1f 8 da976fdd4514 (accessed October 9, 2015).

6 Jeffrey F. LISS, Anastasia D. KELLY, Mitchell A. ORPETT, Esther F. LARDENT, John J. CURTIN, Dennis CURTIS, Janet S. KLOENHAMER, Peter D. ZEUGHAUSER, Rees W. MORRISON and Michael ROSTER, ABA Commission on Billable Hours - Report 2001-2002, American Bar Association, 2002, online: http://ilta.personifycloud.com/webfiles/productfiles/914311/FMPG4_ABABillableHours2002.pdf (accessed November 12, 2013).

7 DAVIES WARD PHILLIPS & VINEBERG LLP, CANADIAN CORPORATE COUNSEL ASSOCIATION and CANADIAN BAR ASSOCIATION, In-House Counsel Barometer, 2013, p. 49.

8 Id.9 Id.10 Id.11 Ab CURRIE, The Legal Problems of Everyday Life – The Nature, Extent and Consequences of Justiciable Problems Experienced by Canadians, Department of Justice

Canada, 2009, online: http://www.justice.gc.ca/fra/pr-rp/sjc-csj/sjp-jsp/rr07_aj1-rr07_la1/

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CThe economic value of a legal service, i.e. its price (rate), has become a recurring source of questions from clients. As we will see below, payment for legal services on an hourly basis will no longer be viable in most situations for the industry in the immediate future. The fact that lawyers have lagged behind the waves of change leaves them vulnerable to fluctuations caused by various factors, such as clientele, technology, globalization and recessions. Lawyers feel the pressure of the market, but hypothesize that their practice monopoly (acts that are theirs exclusively) will continue to guarantee them automatic access to various clienteles. Some say that the shocks and the recession of 2007 were only fleeting and balance will soon be restored. A few decades ago, until the end of the last century, that was indeed the norm. Today, that approach seems like wishful thinking – Utopia.

1.2 Objectives The objectives of this report are nothing short of ambitious. Broadly speaking, the result of the study on billing for legal services goes beyond the framework of lawyers’ remuneration and honoraria billed to clients. There has been no shortage of discussion on this matter since the publication of the ABA report on hourly billing12. Since the report was published in 2002, most analyses have come to the conclusion that the business model based on hourly billing is obsolete. However, surveys of the profession conducted in various jurisdictions since then have all concurred that advances in alternative billing methods are marginal at best.

This report presents the results of the broadest consultation ever conducted on this matter with Quebec lawyers. The survey is in line with major socioeconomic trends and structural changes whose effects are being felt at an ever-increasing speed in lawyers’ daily lives.

This study comes in the wake of two reports by the Barreau du Quebec on the future of the profession stating that lawyers will need to adapt13. In reality, the legal profession is being overtaken by external events.

And so new avenues of thinking need to be identified. Right from the start, the following objectives were set:

• Paint a picture of the hourly billing model and the current business model of most law firms, based on hourly billing;

• Summarize the alternatives to hourly billing;

• Put into perspective the use of hourly billing alternatives;

• Paint a picture of the legal services market in Quebec;

• Identify the new production functions of legal services.

This document will discuss trends and innovations affecting the profession, and indirectly address billing for services.

The objective is to show lawyers the urgency of adapting to these changes and offer the public services more closely aligned to their needs.

12 J.F. LISS et al., note 6. COMMITTEE ON CURRENT ISSUES IN PRIVATE PRACTICE AND THE FUTURE OF THE PROFESSION, see note 1. 13 COMMITTEE ON CURRENT ISSUES IN PRIVATE PRACTICE AND THE FUTURE OF THE PROFESSION, see note 1. COMMITTEE ON THE FUTURE OF THE

PROFESSION, https://www.barreau.qc.ca/pdf/medias/positions/1996/199606-avenirprofession/pdf. (This report, available in French only, is better known as the “Singapore Report.”)

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1.3 Chosen methodologyThe methodology used in drafting this report includes the activities described in the diagram below.

Figure 1 - Diagr am – MEthodology – logical path

Gathering secondary information • Literature review • Inventory of studies/reports – Barreau du Québec

Gathering primary information• Focus group – constructing grid for analysis • Online surveys • Exchanges of information/emails – Sector experts

Model Analysis

• Framework for analyzing results • Production of report • Validation of content • Contribution of economists from the Observatoire des services

professionnels

Report• Summary of results • Approaches to prospective analysis • Recommendations

The Professional Development and Support department took charge of the study, and also supervised the focus groups and online surveys. To gauge the current status of billing practices from a practical point of view, six focus groups were formed and two surveys were conducted, one with lawyers in private practice and a second with in-house litigation lawyers.

The focus groups, which met on November 11 and December 9, 2014, included lawyers from all backgrounds and ages and all regions of Quebec. The groups were representative of the profession: sole practitioners, lawyers from small, medium and large firms, boutique firms, litigation lawyers from SMEs and large corporations. Several administrators from law firms, who are well aware of billing practices, also joined the discussions. A total of 42 participants answered five questions on their billing habits14 for legal services.

Between January 8 and 30, 2015, the Professional Development and Support department also conducted an online survey15 designed to elicit quantitative data on billing practices in the profession. The lawyers who were invited to respond were selected by type of practice; one survey was designed for lawyers in private practice (668 respondents) and the other for corporate lawyers – those in private firms, non-profit organizations (NPOs), union and professional order (274 respondents). The margins of error for these samples were respectively 3.64% and 5.68%, with a confidence level of 95%.

The forces that affect the development of the legal profession are, for many lawyers, beyond the legal system. The analysis of billing for legal services is therefore based on premises that are essentially socioeconomic in nature. From this perspective, the contribution to this report by economists from the Observatoire des services professionnels made it possible to orient the analysis according to these inescapable realities.

14 See Annex 4 – Questions submitted to focus groups.15 See Annex 5 – Online surveys on billing for legal services conducted by the Barreau du Québec.

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Part 1

2 BILLING FOR LEGAL SERVICES

2.1 The cravath system: An American model from the early 20 th centuryIn the early twentieth century, lawyers worked in small firms. Lawyers-to-be would serve an apprenticeship. Under the supervision of a mentor, they would acquire the experience needed to become a lawyer. Lawyers’ remuneration would reflect their ability to find and retain clients.

A young lawyer called Paul Cravath decided that this system was not efficient. He believed that the top graduates from the best law schools should be recruited by the firm. Going against the standards in the industry at the time, Cravath believed that all lawyers who were not associates should be on salary. Along with academic excellence, some attributes were also considered in the hiring process for new lawyers. To be chosen by Cravath, young lawyers were expected to show a passion for the profession, a desire to work hard, and a meticulous approach to the practice of law.

Lawyers work with a practice group. Once they have acquired a certain familiarity with the specialties of their group, they are attached to a different sector to broaden their range of skills. Only the most talented young lawyers will become “associates”16. Clients are first and foremost clients of the firm. All associates have access to clients depending on the needs expressed.

With some variations, the Cravath system became the norm, the reference in the legal services industry. The model spread beyond the borders of the United States to the rest of the industrial world. Clients, whose needs have become increasingly complex, appreciate the system.

Despite its venerable age – the firm was founded in 1819 – Cravath, Swaine & Moore LLP, with 500 lawyers, is not a large firm by current U.S. standards. Its head office is based in New York City, with an office in London. It is considered to be one of the most profitable law firms in the industry.

2.2 History of billing methodsThe younger generation of lawyers will be surprised to learn that the business model based on billable hours is a relatively recent phenomenon. In the first half of the twentieth century, monthly billing or “package prices” were the norm in the legal field. Fixed charges were sometimes negotiated; if not, they were set by the government or the professional order. At the time, the price would be based on the merits of the case, so knowing how to assess the cost of a given service was a large part of the lawyer’s work. In other cases, well-off clients would pay large monthly fees to ensure quality representation.

The change in billing methods started in the United States in the 1940s, with the gradual establishment of minimum fees for each act being set by state bar associations. Lawyers who charged less than the minimum rate could be fined. Studies conducted at the time show that lawyers who used hourly billing made more money17. Clients, in an attempt to understand the services provided, were requesting more detailed bills.

16 Apart from salaried lawyers – non-associates – the system developed by Cravath includes two types of associates: equity partners, who share the profits of the firm, and non-equity partners, who are on salary but considered promotable to partnership.

17 J.F. LISS et al., see note 6, p. 3.

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In 1958, a publication of the American Bar Association (membership in the ABA is voluntary; unlike a professional order, it has no power of coercion over its members) found that lawyers were earning less than physicians or dentists, who used detailed hourly billing. To boost its members’ incomes, the ABA suggested that lawyers should imitate their fellow professionals and provide details of various components of costs billed to clients.

In 1975, the Supreme Court of the United States ruled that price-setting by state bars contravened the antitrust laws. Fee schedules set by lawyers’ associations were deemed to be illegal, opening the door to hourly billing. The change, which was seen as positive by everyone involved, became inevitable.

In Canada, the practice of billing clients according to the number of hours worked began to spread throughout the industry in the mid-1960s18. Professional orders and associations across the country were in favour of setting hourly rates. It was not till the mid-1980s, however, that hourly billing became crystallized in the industry and goals were set for billable hours – around 1,800 hours a year.19 Over the next decade, other types of billing gradually began to disappear.

In Quebec, the monopoly of hourly billing was not called into question till the late 1980s. In the 1990s, with the advent of computerized time tracking, billing was integrated into a semi-automatic process that did not encourage either flexibility or innovation when it came to billing.

At the same time, the number of hours worked by lawyers skyrocketed.

Since clients’ resources are limited and there are only so many hours in the day, it was inevitable that questions would be asked. The ABA Commission on Billable Hours Report20 took an approach that focused on the quality of service for the client, proposing billing that would reflect value more than cost. The report concluded that hourly billing would eventually decline, to be replaced by more appropriate formulas21.

In the wake of that report, several initiatives were taken by various organizations and associations of lawyers to diversify billing methods for legal services22. These early initiatives had only mitigated success, however. Not until the financial crisis of 2007-2009 did we start to see a true transformation in the legal services market23.

A decline in demand for this type of service slowly shifted the lawyer’s economic power to dictate terms of agreement to the client side24. In the United States, two-thirds of alternative billing methods are offered at the client’s request25. To remain competitive, lawyers have had to adapt to clients’ needs and requirements by developing new commercial practices and new products and also reviewing their billing arrangements26.

Over the past five years, billing practices in North America have been in a state of evolution.

18 Edward POLL, “How to Develop Alternatives to the Billable Hour,” Can. Bar Assoc., online: http://www.cba.org/cba/practicelink/mf/billablehour.aspx (accessed November 11, 2013).

19 Lisa LERER, “The Scourge of the Billable Hour,” Slate (January 2, 2008), online: http://www.slate.com/articles/news_and_politics/jurisprudence/2008/01/the_ scourge_of_the_billable_hour.html (accessed February 5, 2014).

20 J.F. LISS et al., see note 6, p. 3.21 Id., p. 59.22 J.F. LISS et al., note 6; “Is Flat Fee Billing a Viable Alternative?” online: http://www.cba.org/Publications-Resources/CBA-Practice-Link/solo/2014/Is-Flat-Fee-Billing-

a-Viable-Alternative? (accessed October 4, 2013); “Create a Winning Client Retention Strategy in 5 Steps,” online: https://www.cba.org/Publications-Resources/CBA-Practice-Link/Young-Lawyers/2014/Create-a-Winning-Client-Retention-Strategy-in-5-Steps, (accessed October 4, 2013); COMMITTEE ON CURRENT ISSUES IN PRIVATE PRACTICE AND THE FUTURE OF THE PROFESSION, see note 1.

23 Jim HASSETT and Matt HASSETT, Legal pricing in transition: How client demands and alternative fees are changing the way that law firms price their services, LegalBizDev, 2012, online: http://www.legalbizdev.com/files/LegalBizDevPricingWhitePaperX.pdf (accessed November 12, 2013); Jim HASSETT and Matt HASSETT, “10 years later - A look back and ahead a decade after the ABA Commission on Billable Hours Report,” Association of Legal Administrators 31-7 (November 2012), p. 6.

24 Frederick PAULMANN and Susan HACKETT, “What do hours have to do with value?”, ACC Docket 2009, online: http://www.acc.com/advocacy/valuechallenge/toolkit/ loader.cfm?csModule=security/get le&pageid=778084&page=/legalresources/resource.cfm&qstring=show=778084&title=What%20Do%20Hours%20Have%20to%20 Do%20With%20Value%3F; Thomas S. CLAY and Daniel J. DILUCCHIO, “Alternative Fee Arrangements: The Time Finally Has Come,” (2010) 37-4 Rep. Leg. Manag., online http://www.altmanweil.com/dir_docs/resource/c4ef6aaa-cd19-4af4-a041-a2edc968d050_document.pdf; EVERSHEDS, Law firm of the 21st century - The clients’ revolution, 2010; STEVEN J. HARPER, “As Clients Speak, Are Law Firm Leaders Listening?”, The Am Law Daily (November 1, 2013), online: http://www.americanlawyer.com/PubArticleALD.jsp?id=1202626166506&slreturn=20131005174302 (accessed November 5, 2013); Jim CALLOWAY and Mark A. ROBERTSON, “Client-Directed Billing: Shifts in Who Defines the Value of Legal Services,” Law Practice Today (July 2010), online: http://apps.americanbar.org/lpm/lpt/articles/ftr07105.shtml (accessed November 11, 2013).

25 Thomas S. CLAY, Law Firms in Transition, coll. An Altman Weil Flash Survey, Pennsylvania, USA, Altman Weil Inc., 2013, online: http://www.altmanweil.com/ dir_docs/resource/2d831a80-8156-4947-9f0f-1d97eec632a5_document.pdf.

26 “Alternative fee arrangements grow in popularity,” Your ABA (April 2013), online: http://www.americanbar.org/newsletter/publications/youraba/201304article05.html (accessed October 3, 2013).

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CIn Quebec as elsewhere, major changes have been observed when it comes to billing habits. South of the border, 80% of lawyers surveyed in 2010 believed that there would be more alternative billing methods (ABMs) and that the changes would be permanent27. Recent disruptions show the importance of preparing to face these inevitable trends.

In 2008, lawyers in Quebec worked an average of 1,560 hours a year. In addition, according to a 2009 survey conducted by the Association du Jeune Barreau de Montréal (the Young Bar of Montreal), more than 50% of young lawyers in large firms were working more than 2,000 hours a year; the comparable figures were 19% in small and medium-sized firms, 17% for litigation lawyers, and 11% in the public and parapublic sector28. This year, the Young Bar of Montreal again examined the work situation of young lawyers in the province29, concluding that [Translation] “the average objective for billable hours was 1,500 hours a year and young lawyers average 1,490 hours of annual billings”30.

Regarding the reality in the United States, as of 2002 the ABA suggested an annual objective of 2,300 hours worked31 or 1,900 billable hours plus 400 hours for client development, management and pro bono work – 1,000 hours more than the suggested workload in the 1960s. Although these figures come from the U.S., where they may be slightly more meaningful, we have confirmed that the number of hours lawyers are required to work has also risen substantially in Quebec.

2.3 Hourly billing as a model for structuring l aw yers’ offer of services Hourly billing is the most common accounting and billing method used by lawyers in the western world. According to available data, lawyers in private practice in North America derive more than 84% of their income from this kind of billing model32. What started out as a unit of measure has now developed into a real management system that structures the practice of law overall. Calculations of billable hours are used to evaluate lawyers’ performance and to determine their incomes and objectives.

The billable hour is one of the determining factors used in sharing benefits among associates. In short, the billable hour is the very foundation of practice in a law firm.

Billing practices in the legal industry have not changed much since the 1970s, except for building the billable hour as a unit of measure into other allocations apart from billing. In 2002, the ABA warned the legal community that if nothing was done, billing by the hour would “kill the profession”33. Most respondents predicted that the hourly billing system, despite its prevalence, would crumble over the next few years34.

27 Thomas S. CLAY, note 25.28 COMITÉ DES ÉTATS GÉNÉRAUX DE L’ASSOCIATION DU JEUNE BARREAU DE MONTRÉAL and MARIANNE ST-PIERRE-PLAMONDON, Analyse des résultats du

sondage: Conciliation travail-famille, Association du Jeune Barreau de Montréal, 2009, p. 4, online: http:// www.ajbm.qc.ca/documents/ le/documents/ajbm-analyse-finale.pdf.

29 JEUNE BARREAU DE MONTRÉAL, Situation de l’emploi chez les jeunes avocats du Québec – Rapport intérimaire, Jeune Barreau de Montréal, 2015, online: http://www.ajbm.qc.ca/documents/ le/etats-generaux/rapport-interimaire-situation-de-l-emploi-chez-les-jeunes-lawyers-du-quebec.pdf.

30 Id., p. 31.31 In 2001, the ABA set the total at 2,300 hours as detailed above. See J.F. LISS et al., note 6.32 Client Advisory, Hildebrandt Institute and Citi Private Bank, 2012, online: https://peermonitor.thomsonreuters.com/ThomsonPeer/docs/2012_Client_Advisory.pdf.33 COMMITTEE ON CURRENT ISSUES IN PRIVATE PRACTICE AND THE FUTURE OF THE PROFESSION, see note 1, p. 69; Barreau du Québec, “Enquête socio-

économique auprès des membres” des différentes années.34 Darlene RICKER, “Greed, Ignorance and Overbilling,” (1994) 80 ABA J. 62; Lisa G. LERMAN, “Gross Profits: Questions about Lawyer Billing Practices,” (1993)

22 Hofstra Law Rev. 645; “Law firms: Killable hour,” The Economist (August 2008), online: http://www.economist.com/node/12010385 (accessed November 11, 2013); Robert E. HIRSHON, “The Billable Hour Is Dead. Long live...?” (2013) 30-1 Am. Bar Assoc., online: http://www.americanbar.org/publications/gp_solo/2013/ january_february/billable_hour_dead_long_live.html (accessed November 12. 2013); Steven J. HARPER, “The Tyranny of The Billable Hour,” The New York Times, sect. The Opinion Pages (March 28, 2013), online: http://www.nytimes.com/2013/03/29/opinion/the-case-against-the-law- firm-billable-hour.html?_r=0 (accessed November 12, 2013); “Time to Blow Up the Billable Hour Formula – ABA Journal” online: http://www.abajournal.com/legalrebels/article/time_to_blow_up_the_ formula/ (accessed September 16, 2013); “Why the Billable Hour Sucks (for Clients),” The Last Honest Lawyer (January 23, 2013),online: http://lasthonestlawyer. org/2013/01/23/why-the-billable-hour-sucks-for-clients/ (accessed November 11, 2013).

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2.3.1 The at traction of hourly billing for l aw yers

Like other professionals, lawyers want to improve their wellbeing, which is measured by their level of income and quality of life, among other factors. The adoption of hourly billing by most lawyers has coincided with a steady increase in lawyers’ average income over the past 20 years35.

Table 1 – L aw yers’ income

Year Average income ($) Fluctuation (%)Fluctuation in CPI* (per 5-yr. period)

1992 84 640 – –

1997 106 000 25 6,7

2003 122 819 16 6,3

2008 139 940 14 9,7

*CPI stands for the Consumer Price Index, which tracks changes in the average level of prices for goods and services consumed by households. It is based on the cost of a fixed “basket” of goods and services over time.

Lawyers’ position in the marketplace and the commercial practices in use appear to have borne fruit, as they have generated increasing revenues that are always higher than the rise in the CPI. That increase is a powerful argument for not changing the way they practice law.

Between 1992 and 2008, the increase in average income for lawyers in private practice abated, though the growth rate was still positive. Growth in lawyers’ incomes now seems to be running out of steam to some degree. Between 1992 and 2002, the increase in the number of lawyers was 1.6 times higher than the real growth in economic activity for the province. Between 2002 and 2010, the annual growth rate in the number of lawyers was only about 2.4%, while the GDP rose at the rate of 3.5%. We may be on the verge of seeing a reversal of that trend36.

In addition to constant income generated by this billing model, lawyers’ preference for the billable hour is based on its simplicity and certainty. It lets lawyers establish the relative importance of concerns arising from the risk for the client, profitability, potential for success and alternative options. Time is a simple tool for evaluating lawyers’ work, since it provides a straightforward way of measuring hours worked in numbers.

2.3.2 The at traction of hourly rates for clients

It is worth remembering that historically, billable hours were initially requested by clients. In the 1960s, hourly billing was a response to the expressed desire for transparency. The details gave clients information on how the work was progressing so that they had some control over the work themselves37. The details of work performed were credible because the lawyer was bound by the Code of Professional Conduct of Lawyers to give a true account of the work performed38.

This meant that the hourly billing model let the client see the costs arising from the purchase of legal services39. However, that advantage is nuanced: a good segment of the clientele does not have the expertise to interpret the connections between time, tasks and cost.

The hour is a simple and quantifiable indicator for clients, just as it is for lawyers. Considerations and legal language are frequently complex. It is easier for the client to validate the number of hours worked rather than attempt to qualify the work, procedures or legal research that has been performed.

35 COMMITTEE ON CURRENT ISSUES IN PRIVATE PRACTICE AND THE FUTURE OF THE PROFESSION, see note 1, p. 67.36 STEPHEN P. MAGEE, “Lawyers as Spam: Congressional Capture Explains Why Lawyers Exceed the Optimum,” in The American Illness: Essays on the Rule of Law, F.H. Buckley, Yale University Press, 2013, p. 100-117, online: http://www.jstor.org/stable/j.ctt32bwm6.37 STEVEN J. HARPER, “Why the Billable Hour Endures,” The Belly of the Beast (April 24, 2013), online: http://thelawyerbubble.com/tag/billable-hours/. 38 GOVERNMENT OF QUEBEC, Code of Professional Conduct of Lawyers (2015), sec. 38.39 ANN MACAULAY, “The Billable Hour – Here to Stay?”, CBA PracticeLink, online: https://www.cba.org/CBA/practicelink/mf/alternatives.aspx.

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CAnother far from negligible factor is that the billable hour is the standard for the legal services industry. It is a business language that is quickly understood and makes it possible to negotiate contract conditions quickly between lawyers and clients. Since the whole industry uses this way of doing things, time and money do not need to be spend agreeing on how to proceed. For individuals or small businesses, the billable hour is easier to understand than other options.

2.3.3 Impacts for l aw yers

> WORK-LIFE BALANCE

Lawyers’ work is generally evaluated according to the number of billable hours accounted for, the quality of their work, and the volume of business they generate. In the practice of law, devotion means promotion, and quantifying by the house is partly responsible for this. In a setting where promotion largely depends on the number of hours worked, work-life balance becomes an important issue for lawyers. How one allocates one’s time is a career choice. In major centres, choosing a career often means putting in extremely long hours. Lawyers’ heavy workload is notorious and thoroughly documented40. Not only is that obvious, but the role played by the billable hour in the current system exacerbates the phenomenon. There are still many baby boomers in the workforce who have lived with hourly billing for most of their years in practice and are comfortable with it.

On the other hand, 46% of young lawyers working for large firms in Quebec say that they have been unable to keep up with the numbers of hours they are expected to work for more than five years41.

The race means difficult choices need to be made between family, health and work. Over the long term, that dynamic can affect every sphere of the lawyer’s life. Some conditions are associated with overwork, such as burnout and depression. According to figures for 2012-2013 for the Programmed d’aide aux membres run by the Barreau du Québec (PAMBA)42, the leading reasons for referrals are family problems, depression and anxiety, in that order.

According to PAMBA figures for 2012-2013, the age group most likely to have recourse to their services (45 %) is the group that feels the most pressure to achieve objectives quantified in a number of hours, i.e. those between the ages of 22 and 35. Most indicators show that hourly billing is not adapted to the reality and expectations of the young generation of lawyers43. One study conducted by the Barreau du Québec on the experience of young professionals reached similar conclusions, including the fact that the number of hours worked is one of the main sources of stress and burnout for professionals44.

Paying junior lawyers based on the hours they put in may be detrimental to teamwork and the sharing of knowledge. It could also create competition for clients within the firm. The client may become the lawyer’s private preserve; sharing the client with others could mean fewer billable hours or, worse still, losing the client to another lawyer. Lawyers are remunerated more on the basis of what they accumulate for themselves rather than the result obtained by the team.

> THE FEMINIZATION OF THE PROFESSION

The current business model based on hourly billing was developed in an era when there were not many women in the legal profession. In 1990, only one-quarter of lawyers in Quebec were women. In 2013, for the first time in the history of the Barreau, women were in the majority, and today more than 51% of members are women. That proportion is over 60% for “young” members (in practice for up to ten years). The trend should continue over the years, as two-thirds of graduates from the École du Barreau are women.

And so it is timely to ask: are hourly billing, and its corollary, the business model based on hourly billing, methods conducive to meeting the needs of women and therefore fostering the future of the profession?

40 Brian Alexander LANGILLE, “The Overworked Canadian”, (1994) 70 Chic.-Kent Law Rev. 173; Ingo FORSTENLECHNER and Fiona LETTICE, “Well paid but undervalued and overworked: The highs and lows of being a junior lawyer in a leading law firm ,” (2008) 30-6 Empl. Relat. 640-652, DOI: 10.1108/01425450810910037; Susan Saab FORTNEY, The Billable Hours Derby: Empirical Data on the Problems and Pressure Points, SSRN Scholarly Paper, ID1452872, Rochester, NY, Social Science Research Network, 2005, online: http://papers.ssrn.com/abstract=1452872 (accessed November 12, 2013).

41 COMITÉ DES ÉTATS GÉNÉRAUX DE L’ASSOCIATION DU JEUNE BARREAU DE MONTRÉAL and MARIANNE ST-PIERRE-PLAMONDON, see note 28.42 See http://www.barreau.qc.ca/pamba/43 COMMITTEE ON CURRENT ISSUES IN PRIVATE PRACTICE AND THE FUTURE OF THE PROFESSION, note 1, p. 50.44 CANADA RESEARCH CHAIR IN THE MANAGEMENT OF EMPLOYEE COMMITMENT AND PERFORMANCE, Étude sur le vécu des jeunes professionnels,

Montreal, HEC, 2012.

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Bear in mind that only one-third of women lawyers are in private practice, compared to half of men lawyers. On the other hand, 60% of lawyers in corporate practice or public administration are women.

Various studies have identified the causes for the low rate of retention and advancement of women in private practice. The economic model based on billable hours seems to be a major obstacle to keeping women in law firms and seeing them progress45.

On average, women report billing fewer hours than their male counterparts: in 2008 in Quebec, women reported billing 1,115 hours in a year, compared to 1,208 hours for men. If we add “unbillable” hours for administration, pro bono work, business development and training, women report having worked an average of 1,486 hours in a year, compared to 1,609 hours for men46.

Much of the discrepancy can be explained by the desire for work-life balance, or the family responsibilities that are still mainly assumed by women. In theory, any business model based solely on time devoted to work as opposed to results achieved is likely to penalize those – men or women – who are caregivers for children or dependent relatives.

Women also set lower hourly rates then men: in 2015, the median hourly rate for women was $101 to $150, compared to $151 to $200 for men. The gap can be partly explained by the fact that on average, women have fewer years of experience than men, and also by the type of law they practice and the type of clientele they serve – in the case of women lawyers, mainly family law with individual clients.

> RESEARCH AND DEVELOPMENT

A further consequence of this dynamic is that few investments are made in research and development47. There is less incentive to commit funds to improve facilities that will also be used by colleagues/competitors.

Objectives for hours to be worked each year also compel lawyers to devote all their time to “billable” work. This means that unbillable tasks, such as training, client development, skills acquisition, streamlining procedures and learning new technologies, may fall by the wayside48, even though they have the potential to make lawyers’ work more efficient. This situation creates an environment that is not conducive to innovation.

Finally, many lawyers feel that they’re held hostage by the everyday administrative function of hourly billing. There are many anecdotes about lawyers who feel imprisoned by this day-to-day structuring of their work49. The task is time-consuming and has no added value for either the lawyer or the client. The obligation to account for hours can become so invasive that it intrudes on work and on the lawyer’s quality of life.

45 M. Virginia MACLEAN, Fashioning the Economic Model to Prevent Marginalization of Women and Minorities – Looking at the Economic Model Impacts on Women Lawyers, University of Ottawa, Tenth Colloquium on the Legal Profession - Professionalism: Ideals, Challenges, Myths and Realities, March 28, 2008, online: http://www.lsuc.on.ca/media/tenth_colloquium_maclean.pdf; Judith S. KAYE and Anne C. REDDY, “The Progress of Women Lawyers at Big Firms: Steadied or Simply Studied?”, Fordham Law Review 76-4 (2008), online: http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=4343&context=flr.

46 Claude MONTMARQUETTE and Nathalie VIENNOT-BRIOT. Étude socio-économique du Barreau du Québec, Barreau du Québec, May 2009.47 FTI CONSULTING, “ Innovation Index – The Role of Innovation in the Professional Services Industry,” online: http://www.fticonsulting.com/global2/critical-thinking/

reports/the-innovation-index.aspx (accessed February 3, 2014); Ray Worthy CAMPBELL, “Rethinking Regulation and Innovation in the U.S. Legal Services Market”, New York University Journal of Law & Business, ed. Vol. 9, No. 1 (Fall 2012), p. 70; F. Leary DAVIS, “Back to the Future: The Buyer’s Market and the Need for Law Firm Leadership, Creativity and Innovation,” (1994) 16-2 Campbell Law Rev. 147.

48 S.S. FORTNEY, see note 40, p. 179.49 S.S. FORTNEY, see note 40; D. RICKER, see note 34; L.G. LERMAN, see note 34; Catherine HO, “Is time running out on the billable hour ?”, The Washington Post,

Business section (January 15, 2012), online: http://articles.washingtonpost.com/2012-01-15/business/35440090_1_law-firms- 800-lawyer-firm-client-billings (accessed December 16, 2013); note 34; R.E. HIRSHON, see note 34; S.J. HARPER, see note 34.

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2.3.4 Impacts for clients

The inconvenience most frequently mentioned in the literature on hourly billing is that the billable hour pits the client’s financial interest against the lawyer’s interest50. A passage from a Court of Appeal for Ontario judgment speaks eloquently on this subject:

[35] [ ] However, in actual practice, time spent, that is, hours spent times hourly rate, has tended to be the predominant factor in determining the quantum of legal fees.

[36] There is a certain irony associated with this dichotomy. A person requiring legal advice does not set out to buy time. Rather, the object of the exercise is to buy services. Moreover, there is something inherently troubling about a billing system that pits a lawyer’s financial interest against that of its client and that has built-in incentives for

inefficiency. The billable hour model has both of these undesirable features51.

A direct effect of this clash seems to be that in the short term, a lawyer who works quickly and efficiently could be penalized by having a lower number of hours to bill, and as a corollary, would earn less income.

Billing is an important communications vehicle for service suppliers and clients. Hourly billing details the hours worked by the lawyer, but gives the client very little information on performance or results obtained. In other words, matching services with clients’ objectives is not a natural way for this billing model to work.

For those who are familiar with the legal profession, it is interesting to understand the details of hours worked. However, most consumers of legal services don’t really understand. For an individual or a small company with no basis for comparison, it is often difficult to criticize or control legal fees.

While hourly billing has boosted lawyers’ incomes, it has also raised costs for their clients.

Although there is no way to prove a cause-and-effect relationship beyond all doubt, the literature does show a historical correlation between the billing model and increased costs for clients52. One reason for this is that billable hours do not translate the value of services rendered. Lawyers have no value to maximize or costs to reduce from the standpoint of improving their practice. As hourly billing does not generate comparatives, it is difficult to set objectives for optimizing and improving efficiency using this billing model.

Finally, a further irritant is the client’s perception of having to pay for the training of young lawyers. In the United States, 54% of lawyers report that at least one client has refused to pay that part of the bill over the past year53. The hourly billing model promotes the delegation of work and the training of junior lawyers, giving the firm a way to evaluate performance.

50 Susan Saab FORTNEY, I Don’t Have Time to Be Ethical: Addressing the Effects of Billable Hour Pressure, SSRN Scholarly Paper, ID 1505612, Rochester, NY, Social Science Research Network, 2003, online: http://papers.ssrn.com/abstract=1505612 (accessed November 8, 2013); Kevin HOPKINS, “Law Firms, Technology, and the Double-Billing Dilemma,” (1998) 12 Georget. J. Leg. Ethics 95; Larry E. RIBSTEIN, “Ethical Rules, Agency Costs, and Law Firm Structure,” (1998) 84-8 Va. Law Rev. 1707, DOI: 10.2307/1 073 795; William G. ROSS, “Kicking the Unethical Billing Habit,” (1997) 50 Rutgers Law Rev. 2199; Richard E SUSSKIND, The end of lawyers?: rethinking the nature of legal services, Oxford; New York, Oxford University Press, 2010; S. J. HARPER, see note 34; S. S. FORTNEY, see note 40.

51 COURT OF APPEAL FOR ONTARIO, Bank of Nova Scotia v. Diemer, ONCA 23 (2014), C58381, online: http.//www.ontariocourts.ca/decisions/2014/2014ONCA0851.htm.

52 Russ HASKIN and Daniel RONESI, Planning Alternative Fees, 2012 Redwood Analytics User Conference, September 11, 2012, online: http://www.lexisnexis.com/doc/intelligence/Planning-Alternative-Fees.pdf.

53 Daniel RONESI, Evaluating the Profitability of Alternative Fee Arrangements, LexisNexis, online: http://www.lexisnexis.com/pdf/intelligence/Redwood%20Analytics/PwC%20NYC%20final%200612.pdf (accessed November 11, 2013)

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2.4 The hourly billing model – some observations The ABA’s 2002 report was highly significant in terms of pinning down the perverse effects of the hourly billing mode. The report included an exhaustive list of behaviours that explain the inadequacy of this business model – the gap between lawyers’ practice and needs expressed by clients. Table 2 summarizes the observations made in the ABA report.

Table 2 - Negative consequences of hourly billing – ABA

T YPES OF BEHAVIOURS RESULTS Gradual disappearance of the spirit of cooperative interaction among colleagues

Competition among lawyers with regard to the objectives of billable hours.

Discourages “pro bono” work Lawyers’ remuneration is correlated with the number of hours billed.

Doesn’t encourage project management Hourly billing doesn’t prompt strict management of budgets.

Lack of predictability of costs The billable hours budget requires optimizing the hours in each mandate.

Demonstration of the value of the service rendered

The hours don’t match the value, in the client’s eyes.

Penalizes efficient lawyers Lawyers have no incentive to quickly close a case.

Discourages communication with the client Discussions with the lawyer incur charges assessed in “fractions of hours.”

Encourages taking shortcuts Lawyers tend to take on the most lucrative tasks in a mandate.

Duplication and excessive procedures Lawyers carry out procedures that are often needless.

Eliminates the concept of risks/ benefits The client is faced with bearing all the risk, without the lawyer being under obligation to succeed.

Hinders increased use of technology Technology improves efficiency and reduces costs – not desired by lawyers.

Lawyer/client conflicts of interest Clients want services at the best cost. Lawyers maximize their time.

Uselessness of certain costs for the client

Obvious risks of footing the bill for incompetence, training and exaggerated billing.

Doesn’t evaluate the nature of the progress achieved

Optimization of time doesn’t correspond to obtaining rapid progress.

Competition on the basis of the hourly rate

Lawyers compete with one another on the basis of costs rather than on competence.

Source: American Bar Association, « ABA Commission on the Billable Hour Report », 2002.

The ABA report made headlines in legal circles more than a decade ago, and many articles published since then have supported its conclusions. Most analyses of hourly billing are, so to speak, hard-hitting for the legal profession. Apart from strengthening the observations made by the ABA, it is clear that the practice of law is intended to provide legal services to clients rather than promote lawyers’ social status54.

54 Katherine L. BROWN and Kristin A. MENDOZA, “ Ending the Tyranny of the Billable Hour: A Mandate for Change for the 21st Century Law Firm,” New Hampshire Bar Journal 51-1, online: https://www.nhbar.org/uploads/pdf/bj-summer2010-vol51-no1-pg66.pdf.

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2.5 Why is hourly billing still predominant in the legal services industry55 ?

Despite all the disadvantages, hourly billing is still the main feature of the current billing system. There are two main reasons for this:

1) Until very recently, it suited both lawyers and clients56;

2) Hourly billing was erected as a simple system that provided a structure.

In addition, alternatives to hourly billing are frequently considered onerous, and according to a recent survey57, clients do not seem to feel confident that they fully understand these alternatives. Changing the system requires a considerable investment of time and money from those concerned. And so, without external pressures, the hourly billing system has remained the predominant model (see sidebar58).

Today, since hourly billing is the model that provides a structure for the services lawyers offer, the standard hour has infiltrated into several spheres of lawyers’ work. Apart from billing, the hour is the basis for calculating the profitability of objectives that have been set, and it structure promotion and performance evaluations. It is the basic unit that is used to managing private law firms. It is also the measure the government uses when assigning external legal mandates.

We must remember that the legal community is far from monolithic59. For example, small and large firms have substantially different interests; the reality of a large centre differs considerably from the reality of smaller places. So, despite strong pressure, the legal community does not present a common front in demanding a change in paradigms.

However, the Act respecting the Barreau du Québec does give lawyers a monopoly over certain exclusive acts in economic terms.

That monopoly gives a false perception of protection from potential competitors who are not lawyers. From an economic viewpoint, that protection has substantially limited innovation in legal circles. Only rarely, and in restricted legal circles, has technology been considered a tool for improving legal services offered and giving SMEs and households greater access to justice.

55 Mark A. ROBERTSON and James A. CALLOWAY, Winning Alternatives to the Billable Hour: Strategies that Work, American Bar Association, 2008; ALAN COHEN, “ 2013 Am Law Tech Survey: Firms’ Data Security Fears Rise ,” The American Lawyer (November 10, 2013), online: http://www.americanlawyer.com/id=1202473327555/2013-Am-Law-Tech-Survey:-Firms’-Data-Security-Fears-Rise?slreturn=20150916135222; Steven J. HARPER, see note 37.

56 J. HASSETT and M. HASSETT, see note 23; J. HASSETT and M. HASSETT, see note 23; EVERSHEDS, see note 24.57 DAVIES WARD PHILLIPS & VINEBERG LLP, CANADIAN CORPORATE COUNSEL ASSOCIATION and CANADIAN BAR ASSOCIATION, see note 7, p. 49.58 Ann MACAULAY, see note 39; M.A. ROBERTSON and J.A. CALLOWAY, see note 55.59 COMITÉ DES ÉTATS GÉNÉRAUX DE L’ASSOCIATION DU JEUNE BARREAU DE MONTRÉAL and MARIANNE ST-PIERRE-PLAMONDON, see note 28; Susan

Saab FORTNEY, Cynthia L. SPANHEL, Paula A. PATTON and NALP Foundation for Research & Education In pursuit of attorney work-life balance: best practices in management: a report on a cross-profession national study of attorneys, The NALP Foundation for Law Career Research and Education, 2005; COMMITTEE ON CURRENT ISSUES IN PRIVATE PRACTICE AND THE FUTURE OF THE PROFESSION, see note 1, p. 50

Factors that expl ain the predominance of hourly billing

• The alternatives to billable hours are not appropriate for all kinds of mandates.

• Not all clients are asking for alternative billing methods (ABMs) – some are even resisting the alternatives.

• The benefits of changing billing practices will only be felt over the long term.

• Hourly billing gives clients some control over evolving costs.

• The unit based on hours worked is simple and objective.

• Quantifying the value of work with a client can be a complex process.

• Hourly billing means that the lawyer assumes little if any risk.

• If they depart from hourly billing, lawyers will have to learn to think ahead, budget and manage part of the risk.

• The hourly billing system is institutionalized and has been in place for several decades.

• Completing a mandate can sometimes be difficult when limited by a preestablished number of hours.

• The baby boomers generation are resistant to making the change.

• Courts of justice and the public service use the hour as a tool for evaluating legal fees and costs.

• Setting up an ABM can be an onerous process.

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3 ALTERNATIVE BILLING METHODS (ABM s)

3.1 The concept of ABM s

In the United States, clients have repeatedly been requesting alternative billing methods (ABMs, also known as alternative fee arrangements) since 2007. Clients’ requests for ABMs initially came as a shock to the profession and the generation of lawyers who were trained to use the hourly billing business model.

This table summarizes various ABMs.

Table 3 - Alternative billing methods ( ABM s)

TYPE OF BILLING HOW IT WORKS

Package price Value of the fixed price correlated with the legal services whose parameters involved in carrying out that service are known.

Not-to-exceed ceiling price Hourly rate until the not-to-exceed ceiling price (maximum price) set with the client has been reached.

Project management A proven management formula that consists of setting a price for all the activities involved in handling a case.

Success-dependent billing Price set on the basis of the results obtained (billing often tied to an agreement on out-of-pocket expenses).

Retainer Agreement to pay fees according to a fixed period of time – monthly.

Single hourly rate One single rate regardless of who is working on the client’s case.

Added-value billing Depends on what the client perceives as the actual value of the service.

Hybrid Price that takes various forms, depending on types of services provided.

Some of the ABMs that appear in the table above only really translate into a change in legal services based on a calculation at the hourly rate, which only creates more confusion in the market.

It is essential to draw a distinction between billing derived from the hourly model and billing that reflects ABMs in their very essence – as an innovation on the billing front. It is understood here that an ABM in the economic sense of the term is less closely linked with billing for work measured in hours.

3.2 Expl anation of the different ABM s There are two ways of defining alternative billing methods: a narrow definition and a broader definition60.

The broader definition includes all modulations of pure hourly billing. Based on that definition, a lawyer who offers some discounts or accommodates a client for certain details would be using ABMs. This would amount to saying that nearly all lawyers practice “alternative” billing methods. Based on that broader vision, the distinction between billing methods would lose all meaning.

Based on the narrower definition, discounts offered to clients do not constitute an alternative billing model. Only billing methods that differ substantially from billing by the hour can be considered according to this definition. The importance of making that distinction comes from a confusion in the English-speaking world61. Since the other acronym, AFA (alternative fee arrangements), also includes the word “alternative,” there is widespread confusion regarding the proper definition. As soon as a model becomes the “pure” billing model, some call their practice alternative, which has falsified data in many surveys. To avoid any confusion, we propose that the narrower definition be used.

60 J. HASSETT and M. HASSETT, see note 23, p. 69.61 Id.

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3.2.1 Pack age price or fixed price62

With this ABM, the lawyer performs predetermined work up to a predetermined price. The value of the package price is correlated with a legal service with known parameters. In other words, this is generally the practice for mandates of predictable complexity or when the lawyer is disposed to assume the financial risk. This billing method is particularly well suited to legal services that can be “standardized” or performed on a repeated basis or that do not require in-depth legal analysis by the lawyer.

The use of this ABM could tend to accelerate the phenomenon of standardizing legal services. Not every task performed by lawyers brings added value, which would require a high price. This type of service could lead to a product being placed on the market as a “commodity.”

Fixed-price billing is the alternative to hourly billing that is most commonly used in Canada: 77% of litigation lawyers who use alternatives to hourly billing opt for this model63. According to available information64, clients are the ones who are pushing lawyers to use this model. From this viewpoint, lawyers are being flexible in “designing” prices rather than using prices that come from a business strategy or market study. ABMs are generally used in certain specific areas of the law.

For those who use this ABM, the issue is understanding the structure of costs and competition in this market. To evaluate the structure of costs, lawyers need to fully understand the work they are being asked to do. This is often a matter of lawyers with advanced expertise. The value-added aspect of using this ABM lies in its predictability and reduction of risk for the client.

3.2.2 Not-to-exceed ceiling price

This practice involves the lawyer working at the hourly rate until the ceiling or maximum price set with the client is reached. A ceiling has no effect unless it is reached. In cases where the ceiling is not reached, this type of billing has the same features as hourly billing. This ABM is the second most commonly used (44%) by litigation lawyers who use alternatives to hourly billing65.

In order to make this ABM an innovative and positive model, the ceiling price should not be too high; if it is, there is no incentive for lawyers to change their case management method. If the ceiling is set too low, it amounts to a package price; if it is too high, it is, in practical terms, traditional hourly billing. This approach is sometimes part of a renegotiable package price, where further negotiation will take place if the ceiling is reached.

3.2.3 Project management 6 6

Definition: Project management is based on meeting clients’ needs, analyzing unstable procedures, and improving those procedures using a verifiable, systematic method.

> WHAT IS THE CONNECTION BETWEEN PROJECT MANAGEMENT AND BILLING FOR LEGAL SERVICES?

First of all, project management is a way of managing change and constantly optimizing the way things are done. Project management is based on standardization and systematization using statistics, with a view to minimizing risks, improving predictability and ultimately raising value as perceived by clients.

62 For further information: Jordan FURLONG, “Will 2010 be the year of the fixed fee?”, The Lawyers Weekly (January 15, 2010), online: http://www.lawyersweekly.ca/index.php?section=article&articleid=1075; Michael SHERMAN, “Fixed-Fee Engagements in Litigation Cases: Why and How”, Law Practice Today (July 2010), online: http://apps.americanbar.org/lpm/lpt/articles/ftr07104.shtml (accessed November 11, 2013); J. Benjamin STEVENS, “Make Time Work for You: Handling Cases on a Fixed-Fee Basis”, Law Practice Today (July 2010), online: http://apps.americanbar.org/lpm/lpt/articles/ftr07103.shtml (accessed November 11, 2013); “Quality Solicitors bids to ditch all hourly billing for fixed fees”, LEGAL FUTURES, online: http://www.legalfutures.co.uk/latest-news/qualitysolicitors-bids-ditch-hourly-billing-fixed-fees (accessed December 6, 2013

63 DAVIES WARD PHILLIPS & VINEBERG LLP, CANADIAN CORPORATE COUNSEL ASSOCIATION and CANADIAN BAR ASSOCIATION, see note 7, p. 114.64 Id., p. 49.65 Id., p. 11466 For an example, see Lex Fund Management: http.//www.lexfund.ca.

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The term “best practice,” which comes from management science, refers to a practice model designed to standardize and optimize procedures. Project management is a tool that can help with developing best practices for the organization. It quantifies and keeps statistics on steps in the production process to minimize unpredictable events and risks. To some extent, the more unpredictable events there are to minimize (as is frequently the case in law), the more useful project management will be.

With some adjustments, project management can be performed with a view to improving procedures both for litigation lawyers and for law firms. The project management we suggest here is inspired by project management from the Six Sigma method, which suggests performing this exercise for each procedure carried out in the company or firm.

The broad principles of project management: • Understand the value perceived by the client;

• Adopt predictable, standardized processes;

• Minimize waste and eliminate tasks with a low cost/benefit ratio;

• Align the organization’s processes with those of your clients;

• Manage the organization with verifiable indicators, not just intuition;

• Approach change in a systematic, continuous way;

• DMAIC (Define, Measure, Analyze, Improve, Control).

“Lean” six sigma distinguishes among three t ypes of activities:

1) Added-value – activities the client would be willing to pay for, which add perceived value to the final product.

2) No added value, but essential – activities that need to be performed, but do not add any perceived value for the client.

3) Waste activities – activities that add no perceived value for the client and are not essential to producing services.

The potential benefits are:

1) Cost reduction;

2) Reduction in time worked for each service provided;

3) Improved timelines;

4) Risk reduction;

5) Minimization of unprofitable tasks;

6) Minimization of time for processes;

7) Highest level of productivity for staff;

8) Improved client satisfaction;

9) Higher profits.

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3.2.4 DMAIC – Six sigma methodology

1. DEFINE

Mission

• The motivation behind the implementation: What efficiency problems were tackled, or what strategic position did the organization plan to take? Besides being a tool for boosting efficiency, project management is a business model that’s part of a broader strategy. This tool will affect the relationship with the client, marketing and the management of the organization. Managers and employees should be included in the process of transforming the company, and they should be given the necessary training.

• The scope of the implementation: The first step is establishing the desired scope for the use of project management. Project management can apply to any offer of services or it may be concentrated on certain types of mandates or areas of the law. Note that project management can be used in all areas of the law, including areas that have low predictability, such as litigation.

• The objectives to be achieved: The idea is to have a complete vision of the changes to come and communicate clearly why the changes will be made.

Clientele

• Define the nature of the clientele: This is a matter of defining resources, needs, and the environment in which clients operate, as well as the client’s strategic positioning.

• Define the interest of the clientele: This means understanding what each type of clientele really values and understanding the issues involved.

• Categorize the clientele by their most typical feature. Generally, this classification will be based on what is really valued or on the nature of the client.

Processes

• Define the processes and sub-processes: This step involves tracking work flow and understanding the connections between suppliers, the work environment, information provided by the client, how information is gathered, how it is processed and by whom, what research is done, drafting opinions, teams that work on opinions, and communications with the client.

• Make sure the processes are aligned with client needs: Evaluate whether the processes in place balance incentives for lawyers with incentives for clients served by the process. In this step, it is important to apply what is known about the clientele to see whether the processes are consistent with what is required as a service and what is desired as an objective.

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2. MEASURE

• Identify key indicators: Indicators should provide information on the efficiency of processes, tasks and sub-tasks. In the context of this report, added value could be an example of an indicator.

• List and categorize the data: This should follow a hierarchical system and be reviewed over the long term to make sure that the chosen indicators are still relevant and are matched with significant comparable information.

• Monitor process flow: This involves illustrating and monitoring processes to identify problematic and strong links in the process chain.

• Use measurement tools: Software, databases, feedback from clients.

3. ANALYZE

• Describe any problems that emerged in the processes.

• List the causes of failures or inefficiencies: For example, it may be of interest to analyze cause-and-effect relationships for the value products, time allotted to each tasks, the resources needed for each stage of the project, or down time in the production process. This step involves seeking the real cause of the problem.

• Determine the correlations between data and indicators: Here again, the objective is to list the real problems that are slowing down the process, or find areas that cause waste.

• Organize the collection of data to learn more about these problems: This means changing data collection methods if necessary, but also analyzing the evolution of data available over time and according to the other data to find correlations.

4. IMPROVE

• Come up with solutions to the problems that have been identified.

• Choose solutions on the basis of how feasible they are given the resources that are potentially available.

• Draw up an action plan for implementing these solutions.

• Test the plan prior to implementation in the organization: To avoid errors, it is useful to have employees participate at this stage or proceed with a small-scale test.

• Draw up a list of indicators: This is to check whether the improvement plan is efficient and find out whether employees are participating in implementation in a positive spirit.

5. CONTROL/MASTER

• Draft documents that spell out best practices: The documents need to be circulated to update staff on changes in processes.

• Provide staff training: This involves training related to the implementation of project management as such, and then sessions on improving the process, which need to be given regularly within the organization.

• Communicate with the client.

• Monitor progress: This involves progress made by staff, and also overall gains in efficiency.

• Circulate information on progress and gains made: Project management means teamwork. It’s important to let people know about progress and the good things that have been accomplished. Change also requires effort. To motivate the team, it’s necessary to show them that their efforts have not been in vain.

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3.2.5 SUCCESS-DEPENDENT BILLING

In this case, billing is based on results or outcome. Generally, when the case is won a percentage goes to the lawyers. To make this form of billing a success, the lawyer needs to have a good idea of the odds of winning.

There is every reason to believe that in the very near future, electronic prediction tools will enable lawyers to adopt practices that were previously considered too risky. By providing more precise information on the chance of winning a case, these tools will minimize uncertainty and thus risk, making it possible for lawyers to use some riskier commercial practices.

This ABM is more recognized for its use in litigation, such as class action suits. There are companies in Canada that specialize in financing third-party ligation cases67.

3.2.6 Performance-dependent billing

Here, billing is based on a so-called neutral result. If the results obtained go over a certain level, the lawyer receives a bonus; if the results are below the line, a certain sum is subtracted and the client benefits. This ABM may also be based on a percentage. A certain amount of expertise is required to align the lawyer’s and client’s interests to create the desired synergies. The effectiveness of the ABM depends on the quality of the agreement and the assessment of the situation by the lawyer and the client.

The use of new technologies may facilitate the use of this ABM. New analytical tools use a large amount of data, searching for similar situations in order to predict the chances of success68. Some statistical methods make it possible to establish the desired performance (with a margin for error)69.

3.2.7 Retainer (fixed monthly fee)

This ABM was widely used up to the 1970s. It involves setting an amount that is payable at regular intervals, generally every month. Some methods may be independent of the number of hours spent on the file, while in others, hours are tracked and unused time is carried over to the next month.

This ABM seems to be tailor-made for clients who expect advanced expertise in a particular area of the law. It is based on close ties between the lawyer and client – cooperation on a daily basis.

Rather than having different hourly rates based on who is in charge of the file, a rate is set that applies to all hours spent working on the file, regardless of which lawyer is working on the file. Costs are allocated to tasks rather than to specific lawyers who perform them.

Having a fixed hourly rate requires the lawyer to set up a structured offer of service that accurately predicts the time. A plan needs to be made to decide who will work on the file and the number of hours to set aside for the mandate.

3.2.8 Added-value billing70

This form of billing is calculated on the basis of services provided by lawyers. Each component of the service is divided up and assigned a value or a multiplication factor. The value is set according to what the service brings to the client.

Here again, the key lies in the assessed value of the legal service. It is crucial for the value to coincide with the value as perceived by the client. A good understanding of the client and the industry in question is necessary. Added-value billing is inextricably entwined with project management and keeping accurate statistics.

67 For an example, see Lex Fund Management: http.//www.lexfund.ca/.68 Rachel KAUFMAN, “Big Data And Law: A Start-Up Disrupting Patent Litigation “ (November 4, 2013), online: http://blogs.sap.com/innovation/big-data/big-data-law-

start-disrupting-patent-litigation-0932582 (accessed February 3, 2014); “When e-discovery meets big data, can case analytics be far behind?”, online: http://www.canadianlawyermag.com/4799/When-e-discovery-meets-big-data-can-case-analytics-be-far-behind.html (accessed February 3, 2014).

69 Andy DAWS, Silvia HODGES, Renee Newman KNAKE et James PETERS, Even in a digital, data-driven world, we still need travel agents ... and lawyers, prepared for the Georgetown Law Symposium on The Shrinking Pyramid: Implications for Law Practice and the Legal Profession, April 12, 2013, n. 73, online: https://www.law.georgetown.edu/academics/centers-institutes/legal-profession/upload/Draft-4-10-13-Georgetown-Paper-Daws-Hodges-Knake-Peters.pdf (accessed December 16, 2013)

70 DAVIES WARD PHILLIPS & VINEBERG LLP, CANADIAN CORPORATE COUNSEL ASSOCIATION and CANADIAN BAR ASSOCIATION, see note 7, p. 49.

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3.2.9 Hybrid billing

There are all sorts of possible combinations when it comes to billing methods, with various ABMs. The main idea is to align incentives for the parties and build a custom-made agreement.

To choose the right combination of ABMs, it’s necessary to fully understand the various billing methods in order to adapt them to particular situations. The assessment needs to take the following into account:

1) The applicable law;

2) The particularities of the client;

3) The objectives to be achieved;

4) The particularities of the industry involved;

5) The lawyer’s skills and abilities.

3.3 ABM s within the legal services industry Lawyers frequently carry out mandates that involve assessing their clients’ exposure to risk. They never really have to assess their own exposure to risk in carrying out mandates. In the economic sense of a production function, income attached to the sale of a legal service was, until very recently, guaranteed, with no obligation as to risk– perhaps no way of measuring quality. As previously noted, the climate in the legal services industry is changing the whole game.

In the new business environment that emerged in the painful aftermath of the recession of 2008, this is precisely what clients are asking their lawyers to do via ABMs: manage their own levels of risk regarding services rendered. Until very recently, the main risk for lawyers was delayed payment of their fees or losing a client to a competitor.

The ABM concept has been present in legal circles for at least two decades71. What is new is clients’ insistence on negotiating not only rates, but the total legal fees for a given mandate. Hence the timid intrusion in Quebec of the Legal Project Management (LPM) model designed to control costs. LPM applies management methods from the 1970s that have been in effect in most economic sectors72. Clients are now demanding more and more information from their lawyers so that they can grasp and fully understand the dynamics of how costs are established for a legal mandate. In terms of company management, litigation lawyers need to build the cost of legal services into tight budgets and make sure that costs are respected.

71 Jeffrey CARR, Edwin B. REESER, Patrick LAMB and Patrick J. MCKENNA, “The Disruptive But Inevitable Move To Alternative Fees,” The Los Angeles Daily Journal (2009), online: http://www.patrickmckenna.com/pdfs/Inevitable%20Move%20To%20AFA.pdf.

72 Historically, the original contemporary model for project management is attributed to Martin Barnes, Ph.D., who in 1968 developed a program called FORTRAN, which for the first time brought together time, cost and output involved in projects. His work was commercialized as a COBOL version called Project Cost Model (PCM). The Barnes model made it possible to devise a proper plan for a given project, broken down into activities with a timeline and costs for each. We are forced to conclude that project management is a relative newcomer in legal circles.

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CIt would not be appropriate to state categorically that clients would like to eliminate the hourly rate. Rather, what clients are now rejecting is the “model of the hourly rate,” the fact that the time allocated to a file does not fall within the predetermined financial limits. For managers, the hourly rate and return on “investment in an hourly cost” are two different things73. In everyday business life, the managerial functions of production, human resource management, marketing and accounting are subject to strict budget constraints. The same is true for household budget, which includes expenses and the inevitable unforeseen items. Lawyers will need to proceed with an advanced analysis of costs for services offered. The reality is that not all services rendered by lawyers have an identical value74 – a single hourly rate.

Partners in the industry need to understand the subtleties of alternatives to production of services – hence the indispensable technology that a growing number of lawyers and non-lawyers alike offer clients as a substitute for their services. Lawyers can no longer simply add hours at a fixed hourly rate or raise the rate to make their operations profitable. And so we see the concept of “risk management” for lawyers – a concept that is totally foreign to the hourly billing model. A precise way to measure budget estimates and the efficiency of legal services will now become the norm.

The time allotted based on the hourly rate model will no longer be “infinite” in the conception of revenue generated by lawyers – a neoclassical function. Some methods will be highly lucrative, others less so, and some will be free of charge. This approach corresponds to the logic of the Susskind model75, where the marginal cost of producing legal services determines the price to the client.

3.4 A long history of low abm use by l aw yers in private practiceEvery five years between 1981 and 2008, the Barreau du Québec conducted socioeconomic surveys of the members of the Bar. The use of hourly billing in private practice was of course included in the surveys. The percentage of private-practice lawyers using hourly rates over that period was 75% in 1981 and 65% in 2008 – in other words, the proportion of lawyers using hourly billing has changed very little. This observation is in line with the situation elsewhere in Canada and in the United States – this model of remuneration remains dominant.

In Quebec, the ABM penetration rate remains relatively low. In 2008, the usage rates for some of these practices were as follows: fixed hourly rate – 15%, overall fee set in advance – 11%, variable rate based on tasks and lawyers performing them – 5%, success-dependent billing – 2.5%, and hourly rate that decline with volume of business – 1%. These replies to the 2008 survey cover only some of the ABMs discussed in section 3.2.

The years since 2008 could be described as a transition period. Since ABMs are now more frequently requested by clients, lawyers will be forced to get over the reflex of referring to hourly rates and translate them into “ABMs.”

Many experts believe that the forces for changes are now in place to substantially modify hourly remuneration, but the market continues to move at a snail’s pace.

73 Julius MELNITZER, “Pricing Legal Services: the alternative fee arrangement tipping point,” LEXPERT Business of Law (March 16, 2015), online: http://www.lexpert.ca/article/pricing-legal-services-1/.

74 Richard SUSSKIND, Tomorrow’s Lawyers: An Introduction to Your Future, Oxford University Press, 2013, online: http://www.amazon.com/Tomorrows-Lawyers-Introduction-Your-Future/dp/019966806X.

75 Id.

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3.5 Could abm s improve access to justice? Law and the justice system were designed to protect the interests of all citizens, whatever their income, sex, religion or race. The reality is very different, however.

Many reports have noted the growing gap in access to justice for certain groups. While well-to-do Quebecers and, at the other end of the spectrum, our poorest citizens, have access to justice, the situation is quite different for middle-income households76.

In recent years, various initiatives have borne witness to efforts in legal circles to broaden access to justice. However, the needs of certain citizens are still not being satisfied, and many simply renounce their rights out of sheer frustration77. This is simply not acceptable in a rich country where the rule of law is the foundation of the economy and the base for social organization.

A growing number of analysts of the justice system and the issue of access to justice are advancing possible solutions that go beyond litigation and hourly billing. ABMs seem to be a basic component of improvements to the situation78. The conclusions reached in reports by the Canadian Bar Association (CBA) and the Royal Melbourne Institute of Technology (RMIT UNIVERSITY) are heading in the same direction. Both agree that it is time to abandon the cost structure that is currently in effect and adopt innovative practices. ABMs are one of those avenues. Apart from new alternative billing methods, analysts suggest growth in competition, as noted above – as a substitute for the offer of services.

4 DIFFERENT WAYS OF PROCURING LEGAL SERVICES There are some phenomena that are not, properly speaking, alternative billing methods (ABMs), but at the end of the line do have the effect of changing not only billing but also the purchasing process. The objective of these emerging alternatives is to avoid certain negative effects of hourly billing. They put pressure on prices, divide the risk between client and lawyer, and foster a sense of competition in the legal market. Below is a list (not exhaustive) of six phenomena that are transforming ways of procuring legal services, and incidentally, billing for legal services.

4.1 Call for tenders Some litigation lawyers are now finding suppliers of legal services through calls for tenders. This way of proceeding has the direct effect of placing firms that can offer a service in competition by exerting pressure on prices. The ultimate objective for clients is to get more for their money. This also means that they can dictate the terms of the agreement, and therefore the billing model as well.

4.2 Legal service brokers79 In legal services, brokerage involves using a third party (the broker) to administer decisions concerning the provision of legal services. Serving an individual or a litigation lawyer, the broker will zero in on client needs and features of suppliers. In a way, the broker is an expert on supply and demand for legal services.

76 COMMITTEE ON CURRENT ISSUES IN PRIVATE PRACTICE AND THE FUTURE OF THE PROFESSION, see note 1; Michael TREBILCOCK, Anthony DUGGAN and Lorne SOSSIN, Middle Income Access to Justice, Scholarly Publishing Division, University of Toronto Press, 2012;CANADIAN BAR ASSOCIATION – ACCESS TO JUSTICE COMMITTEE, Equal Justice: Balancing the Scales, Ottawa, Canadian Bar Association, 2013, online: http://www.cba.org/CBA/equaljustice/secure_pdf/EqualJusticeFinalReport-eng.pdf.

77 CANADIAN BAR ASSOCIATION – ACCESS TO JUSTICE COMMITTEE, see note 76.78 Rob Hulls, “Billable hours must be dumped ,” The Australian (March 8, 2013), online: http://mams.rmit.edu.au/4h5jt7zlt99r.pdf.79 We have found individuals offering this type of service in Quebec, but very few specialized companies. For further information, see the following examples from English

Canada and France: see www.lawbroker.ca or “Le courtage juridique, les prémices d’une nouvelle relation entre les avocats et les PME?”, online: http://www.village-justice.com/articles/courtage-juridique-avocats-notaires,3199.html.

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CFor example, certain parts of a mandate requiring more advanced expertise can be given to a law firm and other more routine matters to another firm where the bill will probably be lower. The expertise of the legal services broker is based on his or her understanding of lawyers’ strengths and weaknesses and fees charged by various suppliers. There are three potential advantages to this:

1) It helps clients find exactly what they are looking for;

2) It helps clients save money by not hiring expensive expertise when it is not necessary;

3) It lets clients find, through the broker, a service supplier who is able to meet their needs efficiently.

4.3 Unbundling of legal services (limited-scope mandates) This is a direct result of the democratization of electronic tools and the vast amount of information that is now available to clients. To keep down the cost of legal services, clients can now do part of the work themselves. As with brokerage, clients unbundle tasks to benefit from the specific skills of different lawyers, distinguish between costs on their bill, or take on part of the work. This type of service is generally better suited to an offer of legal services in which the client has a certain understanding of the law and is in a position to recognize the legal services he or she is not able to perform. The effect is to tie billing more to the task than to the time.

4.4 Contracting out of legal services This is an economic business strategy that involves having goods and services performed and produced by external providers instead of producing or developing them in-house. The phenomenon became much more common in the United States between 2010 and 2013, growing from $500 million in 2010 to $1 billion in 201380. Some law firms and large litigation firms now contract out legal services to countries where the hourly rate is a fraction of the rate charged here for the same task. The lawyers may even have been trained in the national law of the country from which the services are being delegated overseas. For example, Rio Tinto Alcan has contracted out a large segment of its legal services to India. The company expects to save $90 million dollars Canadian, or up to 20% of its legal costs over the next year81.

4.5 Online markets for supply and demand of services Thanks to the Internet, it’s easy to collect and compare offers of legal services on the basis of price, location, expertise, etc. Not only is the information available, but there are now powerful tools that give clients access in real time to price fluctuations, hourly rates charged by various lawyers, billing methods offered, expertise and many other variables82. In addition, this type of tool makes it possible to cross-reference available information, giving clients an idea of what is available on the market so they can choose the least expensive offer and the one best suited to their needs. While these tools are still rather cumbersome, we can expect prices to fall over the next few years as this information becomes more and more public.

There are other forms of competition (or virtual marketing) as well. Some sites use automated systems to connect clients with legal needs and lawyers who are available on the market83. This is an innovative way of finding legal services.

All the tools available on the Internet are changing the lawyer/client relationship essentially based on reputation and personal referrals.

80 ReInvent Law NYC 2014, online: http://www.reinventlawnyc.com81 See http://www.prnewswire.co.uk/news-releases/rio-tinto-signs-legal-services-outsourcing-agreement-with-cpa-global-154890605.html82 See https://www.valeopartners.com/legal/valeo-database.83 In Quebec, the site www.selexion.com used to offer this type of service.

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5 SUMMARY OF STUDY RESULTS To get a picture of the current state of billing for legal services in Quebec, the Barreau du Québec collected data via two methods - focus groups and online surveys.

In this section, we look at the highlights of two online surveys conducted between January 8 and 30, 201584 with lawyers in private practice (668 respondents) and corporate lawyers: those working in private companies, non-profit organizations (NGOs), unions and the professional order (274 respondents). As noted above in section 1.3 (Methodology), the margins of error for these samplings are respectively 3.64% and 5.68%, with a confidence level of 95%.

5.1 Remuneration of l aw yers in quebec The survey results confirm that hourly billing is the basis for remuneration of lawyers in private practice. Among the factors considered in determining remuneration, “number of hours billed” was mentioned most often (39%), followed by “number of hours worked” (14%).

Not surprisingly, the situation is very different for lawyers working in companies: their remuneration is mainly determined by salary scales (43%).

Gr aph 1 – complete the following sentence with the answer that applies to you: “my remuner ation is mainly determined by…”

L AW FIRMS

L AW YERS WORKING IN COMPANIES Salary scale (43 %)

Results of annual evaluation (23 %)

Budget for the company (16 %)

Number of hours worked (4 %)

Predetermined objectives (10 %)

Other (4 %)

Salary scale (7 %)

Results of annual evaluation (11 %)

Budget for the firm (9 %)

Number of hours worked (14 %)

Number of hours billed (39 %)

Predetermined objectives (7 %)

Other (13 %)

13% 7%11%

9%

14%39%

7%

10%

4%

4%

43%16%

23%

84 See Annex 5 – Online surveys on billing for legal services conducted by the Barreau du Québec.

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5.2 Billing methods used in quebec Hourly billing still plays a predominant role in practice: both lawyers in law firms and those working in companies report that this billing model is used in 70% of files.

Package pricing is the second most frequently used model – about 20% of files. Other billing methods are seldom used in lawyers’ everyday practice.

However, it should be noted that 71% of lawyers in private practice and 42% of lawyers who work in companies have used at least one other billing method apart from t he hourly rate.

Gr aphs 2, 3 and 4 – “what billing method(s) do you use, estimating the percentage of each in your daily pr actice?”

L AW YERS IN L AW FIRMS

IN-HOUSE L AW YERS BILLING FOR OUTSIDE WORK

Hourly billing (70 %)

Package (fixed) price determined in advance (64 %)

Sliding hourly rate based on guaranteed volume (12 %)

Fixed monthly or weekly rate (10 %)

Set hourly rate regardless of lawyer involved (5 %)

Variable task-dependent rate (4 %)

Success -dependent or per formance -dependent billing (4 %)

Hourly billing (70%)

Package (fixed) price determined in advance (61%)

Success -dependent or per formance -dependent billing (15%)

Variable task-dependent rate (12%)

Fixed hourly rate regardless of the professional involved (6%)

Sliding hourly rate based on guaranteed volume (3%)

Fixed monthly or weekly rate (2%)

61%70%

70%64% 12%

10%

5%4%

4%

15%

12%

6%

3%2%

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4%

4%

2%

1%

1%

18%

70%70%

1%

1%

1%

3%

4%

19%

Success-dependent or performance-dependent billing

Variable task-dependent rate

Fixed hourly rate regardless of the professional involved

Fixed monthly or weekly rate

Sliding hourly rate based on guaranteed volume

Package (fixed) price billing determined in advance

Hourly billing

BILLING METHODS USED

0% 10% 20% 30% 40% 50% 60% 70% 80%

Law firm

Company

Note: in private practice, the use of ABMs is more widespread among sole practitioners or those working in an office with 25 or fewer lawyers. In companies, it’s the reverse: the use of ABMs is more widespread in large organizations with 100 or more lawyers.

5.3 Company budgets for legal services Contrary to reports in the literature from the U.S. and the rest of Canada, the amounts Quebec lawyers working in companies have outsourced have risen by 6% over the past few years. Note that the annualized increase remains low at about 1%. This is in line with the replies from law firms stating that their revenue has risen by 11% over five years – an annualized increase of just under 2%.

Finally, 29% of budgets for in-house legal departments are used to pay outside lawyers, the rest of the work being performed internally for the most part.

L aw firmPrivate-practice lawyers’ incomes have risen by an average of 11% over the past five years – an annualized increase of under 2%.

However, the average increase in income varies according to the type of client: lawyers whose incomes mainly come from corporate clients report an average increase of 12.6% over the past five years, while lawyers whose incomes come mainly from individuals, with or without legal-aid mandates, report an average increase of just 6% for the same period.

COMPANIESBudgets for in-house legal departments have risen by an average of 13.2% over the past five years.

Amounts outsourced by lawyers have risen by an average of 6% over the past five years.

On average, 29% of the budget for in-house legal departments is outsourced, i.e. sent to lawyers in private practice.

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5.4 What l aw yers think of abm s: efficiency and profitabilit y The opinions of the two groups of lawyers who were surveyed on the efficiency of ABMs were diametrically opposed: while 8% of in-house lawyers believe that ABMs can improve the efficiency of legal services offered, only 57% of lawyers in law firms share that opinion.

Gr aph 5 – “do you believe that alternative billing methods can improve the efficiency of legal services offered?”

0% 20% 40% 60% 80% 100%

Law Firm

CompanyYes

No

57%

84%

43%

16%

The under-35 age group, those who work in law firms and in-house legal department alike, are more likely to believe that ABMs are efficient than are their older colleagues.

In-house lawyers’ experience with ABMs is also much more positive: 51% of this group feel that projects billed other than by hourly billing are “just as efficient,” and up to 30% believe that they are “more efficient.”

On the other hand, 36% of lawyers working in law firms believe that these projects were “less profitable,” 28% deemed them “just as profitable,” and only 12% felt they were “more profitable.” For 25% of this category, the profitability of this type of project is uncertain; their skepticism is only shared by 16% of in-house lawyers.

Gr aph 6 – “where applicable, projects that were billed other than by hourly billing were…”

IN COMPANIES:

0% 20% 40% 60%

Just as eff ic ient

More eff ic ient

Uncertain as to eff ic iency

Less eff ic ient

51%

30%

16%

2%

IN L AW FIRMS:

-20% 0% 20% 40% 60%

Less prof i table

Just as prof i table

Uncertain as to prof i tabi l i ty

More prof i table

36%

28%

25%

12%

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5.5 Considerations and obstacles in adopting abm s When asked who originated the initiative for adopting ABMs in a given file, both in-house lawyers and those in private practice all said they had in the vast majority of cases initiated these practices. One explanation for this is that alternatives to hourly billing are not part of a formal, planned offer by law firms, rather coming from the lawyer/client interaction.

Gr aph 7 – “most of the time, where did the initiative to adop t an alternative billing method come from?”

IN L AW FIRMS, THE INITIATIVE TO ADOP T AN ABM CAME FROM:

0% 20% 40% 60% 80%

0% 20% 40% 60% 80%

A lawyer in the f i rm

Business pract ice establ ished by the f i rm

Client ’s l i t igat ion lawyer

Company acquisi t ion pol icy (c l ient)

64%

21%

8%

7%

IN COMPANIES, THE INITIATIVE TO ADOP T AN ABM CAME FROM:

A lawyer in the company

Acquisi t ion pol icy in your company

The outside lawyer

Business pol icy establ ished by outside lawyer ’s f i rm

68%

18%

9%

5%

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CGr aph 8 – “what made you interested in choosing one abm over another?”

Aligning your interes ts with those of the client /outside lawyer

Building las ting relationships

Other

Simplif ying management

Sharing risk with client /outside lawyer

Boosting profit s / reducing costs

Handling case more quickly

Improving communication

0% 10% 20% 30% 40% 50% 60% 70%

Law firm

Company 31%

6%

19%4%

16%10%

11%

10%6%

9%59%

3%3%

2%1%

10%

Gr aph 9 – “in your opinion, what was the most important consider ation in choosing one billing method over another?”

Qualit y of legal ser vices

Relationship with client / outside lawyer

Less uncer taint y re costs

Minimizing cost of ser vices

Sharing risk with client / outside lawyer

Reputation of client /outside lawyer

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

36%28%

32%8%

16%18%

12%

4%3%

1%1%

42%

Law firm

Company

For in-house lawyers, “reducing costs” is the main point of interest in adopting an ABM (59 % of respondents. For private-practice lawyers, the main point is to align the interests of the two parties (31 %) and “building lasting relationships” (19%).

When the time comes to choose a billing method, the most important consideration for in-house lawyers is “minimizing the cost of services” (42%), followed by “quality of legal services” (28%). For private-practice lawyers, “quality of services” is the main consideration (36 %) in choosing a billing method, followed by “relationship with the client (32 %).

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Gr aph 10 – “what is the main obstacle that stops you from choosing a billing method other than hourly billing?”

Billable hour is modus operandi fo r the industr y

Client /outside lawyer

Poor unders tanding of ABMs

Other

Cost

Complexit y of using / managing ABM

0% 5% 10% 15% 20% 25% 30% 35%

23%32%

21%21%

10%18%

16%

15%9%

15%8%

12%

Law firm

Company

When asked about obstacles to choosing an ABM, the opinions of private-practice lawyers differed markedly from those of their in-house confrères: private-practice lawyers reported “costs” and “complexity of using/managing ABMs” more often, while in-house lawyers stated unequivocally that “billable hours are the modus operandi in the industry” as being the main obstacle to using ABMs.

Note: among the obstacles raised under “other” by private-practice lawyers were uncertainty, lack of predictability, the risk associated with choosing an ABM, the difficulty of estimating time and scope of project, and “predicting the unpredictable.”

One participant in the focus group told us:

« Whenever I have a set fee for services, most clients use much, much more of my time ».

5.6 Management of legal projects and research and development (R&D)While law firms don’t make much use of project management, the practice is more widespread in companies.

Less than 10% of revenue is allocated to research and development – and that holds true for both law firms and companies.

L AW FIRMS COMPANY

10%Using a program to manage

legal projects16%

8%Revenue allocated to research

and development9%

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6 TRENDS OBSERVED DURING THE MEMBER CONSULTATION PROCESS This section provides further information collected in the online surveys and focus groups conducted by the Barreau du Québec. These are the issues and trends noted by all the groups of lawyers who were involved.

6.1 Pressures on prices and costs According to the comments that were collected, private-practice lawyers are subjected to financial pressure from their clients. Individuals and small businesses apply pressure by doing the work themselves or by simply not using the services of a lawyer at all. In-house lawyers will apply pressure on prices by minimizing the number of mandates sent outside the company in order to respect the budget for legal fees. Two trends emerge: either the company hires more lawyers to do the work internally or, when mandates are outsourced, the company tightens control over the work done, the scope of the mandate and the modalities of the file, and the number of lawyers assigned to the file. It may also outsource services overseas, or simply send the work to a smaller urban centre where hourly rates are lower.

There are also reports that clients are better informed than they used to be, and they are making lawyers compete for contracts. One current manifestation of this is that calls for tenders are becoming increasingly commonplace.

“Clients are shopping around now… which means we often have to commit to a price.”

As shown in Graph 8, the figures collected in the surveys show that for 59% of in-house lawyers, the main interest in using alternatives to hourly billing is to “reduce costs,” while private-practice lawyers’ main motivation is to “align their interests with the client’s” (31%).

There seems to be a consensus that increasingly, in-house lawyers are requiring outside lawyers to present more detailed invoices.

“The client wants to manage your efficiency. He wants to see the work you’re doing ‘in real time’ and the time entered in your files.”

6.2 Bal ance of forces in the market The legal services market, long dominated by service offers, is now in a state of flux. Since the economic crisis of 2008, legal observers in the U.S. have been saying that the client now holds the balance of power, and can dictate the commercial relationship with the outside lawyer.

Our focus groups added some nuance to that statement. Private-practice lawyers have the impression that clients have more bargaining power, and curiously, in-house lawyers also have the same impression.

6.3 The bill able hour – much more than a billing model, it’s a business model The hour is an integral part of the culture and business model of law firms; it is the way that these firms are managed. It is used to determine income, evaluate lawyers’ performance, and pin down agreements on honorariums. It has been the default setting billing model for 40 years. Whether lawyers are working in law firms or companies, the business model is reproduced, since most in-house lawyers acquired their experience working in law firms. Even at the start of their careers, young lawyers expect their work to be managed on the basis of the billable hour.

“Even after we got rid of objectives in terms of billable hours, young [lawyers] were asking how many hours they should put in.”

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Despite all its flaws, hourly billing remains a way of doing things that is time-tasted and easy to understand. Lawyers’ general education is still based on known billing methods (hourly billing, fixed prices and percentages). Lack of knowledge, coupled with the complexity of cases, means it might seem imprudent for a lawyer to act differently. When we asked lawyers in law firms what was the greatest obstacle that was preventing them from offering an alternative billing model, they replied that the billable hour was the business model in the industry (see Graph 10).

“Unfortunately, it’s easy to sell hours. We would like to do it differently, but it’s not always easy.”

However, many in-house lawyers do give priority to this way of doing things. Since that’s the case, the desired changes are limited to details of billing.

The hour is the standard measure, found everywhere. It’s the basis for our business model. We noticed during our discussions that there may be a certain resistance to change and that it will take more than a cosmetic change in billing practices to bring about real change.

We have observed that this resistance is so deeply rooted that even clients are wary of trying other solutions.

“Our clients aren’t always happy when we offer fixed rates. If we finish the case quickly, they have the impression that they’ve overpaid. If we decide to take that route, the client needs to be warned that if we close the case

quickly, we could be very well paid.”

6.4 Predictabilit yWhen we asked private-practice lawyers during our discussions what was the major obstacle preventing them from offering alternatives to the billable hour, the most frequent answer was “lack of predictability.”

“So many things are unpredictable; we don’t know what will take a lot of time on this type of case… it’s risky for us to give fixed prices.”

So, according to our consultations, the choice of billing model appears to depend on the ability to evaluate the number of hours that will be needed to complete the task. Here is a list of types of cases and the use of alternatives to the billable hour in each area of the law:

Table 4 – areas of pr actice and use of ABM s

Areas of l aw pr acticed by private-pr actice l aw yers % using ABM s

Criminal 66%

Business law 28%

Families and individuals 24%

Litigation 18%

Work, employment, workplace health and safety 20%

Not surprisingly, litigation cases are generally invoiced with hourly billing, while a package price is given for most criminal law cases (66 %). We were also told that package pricing is commonly offered for a company incorporation or to handle a patent or intellectual property file.

Predictability depends not only on the nature of the case, but also on the lawyer’s expertise in a specific area of the law, which is acquired by handling similar cases on a recurring basis. Therefore, a lawyer who always performs the same tasks will feel more at ease offering a wide array of ABMs.

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CThe top four factors mentioned by focus group participants as having effects on predictability were:

1) The vagaries of the justice system;

2) The number of actions to be taken in a file;

3) The complexity of the law;

4) The attitude of the opposing party.

6.5 RiskOffering a predictable price means evaluating the cost price of the case and assuming part of the risks. For the lawyer, this implies taking the risk that a case could take more time or incur more costs. The hourly billing model involves little or no risk for the lawyers. In our focus groups with private-practice lawyers, participants brought up two conditions that could justify setting a fixed price despite the risk involved: using the fixed price as a marketing tool or as a response to demands made by a client. We have observed that in most cases, the second reason is more frequently mentioned.

The in-house counsel we consulted appreciate the fact that the risk is shared with the private-practice lawyer. On the other hand, most of the lawyers we spoke to who work for law firms mentioned that they could not assume a great part of the risk.

“You can evaluate costs at each step in the process, but the question remains: who’s going to take the risk?”

What in-house lawyers want is not only to minimize risk, but to manage it as well. They would like to decide on the level of risk they are prepared to incur when they send a mandate to an outside lawyer. In other words, they would like to stay in control of deciding on the timeliness (cost/benefit) of determining when enough time and money have been invested in a particular file.

6.6 Using statisticsNot surprisingly, the number of hours worked and billed is generally recorded by law firms. The same is true for statistics on the volume of clients and the data needed for tax and accounting purposes. According to our surveys, other statistics are also kept on costs incurred and profitability.

Gr aph 11 – “in your l aw firm, do you keep statistics on….”

Costs incurred in various cases

Profitability of various types of cases

Profitability of various steps in a case

0% 5% 10% 15% 20% 25% 30% 35% 40%

39%

23%

10%

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It also emerged from the focus groups that in general, lawyers had few or no details on the costs and profitability of the services rendered. This make it difficult for a lawyer to compare the profitability of various acts performed or to offer alternatives to the billable hour without taking too much risk. Without statistics on files that were handled, it is difficult to evaluate the value a legal service may represent for a client. The discipline of information management is not part of lawyers’ expertise.

“We don’t have the training, tools or reflexes to evaluate our services. We rely on experience to estimate what it’s worth.”

Without accurate data or statistics, lawyers rely on their experience to evaluate the value of services. The calculation is generally based on maximizing the hourly rate in relation to the number of hours they hope to sell.

The in-house lawyers in the survey stated that they did not feel properly equipped to record statistics on the cost prices of the various files they handle.

Gr aph 12 – “does the company or organization where you work keep statistics on….”

The cost of various cases handled externally

The cost of various cases handled internally

0% 5% 10% 15% 20% 25% 30% 35%

32%

26%

The in-house lawyers in the focus groups noted that their managers were not really inclined to invest in a department that is considered an expense item. They are generally only aware of their budget and the financial pressure they are under to reduce their expenses. Apart from services consumed on a very regular basis, for which they often hire someone outside the company, in-house lawyers also trust to their experience when the time comes to assess the value of a legal service.

6.7 T ypes of clients

Gr aph 13 – t ypes of clients seen in private pr actice

Federal government (public and parapublic)

Provincial government (public and parapublic)

Unions

Associations (professionals or companies)

Municipalities

Non-profit organizations

Individuals with legal aid mandates

Corporations and SMEs

Private individuals

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

1%

2%

2%

2%

3%

3%

32%

10%

45%

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CThe type of clientele indirectly influences the type of ABM that will be used. In-house lawyer clients are more likely to be informed about available ABM options. Some clients are also more risk-sensitive. For example, in-house lawyers will want to control costs to satisfy their responsibilities to their employer and respect their ethical obligations. Individuals are directly affected in terms of their finances and personal lives.

6.8 Innovative billing According to the survey, 30% of files handled by private-practice lawyers are billed using a different model than hourly billing. However, this varies a great deal depending on the size of the firm. As shown in the table below, lawyers working in smaller offices are more flexible and will use more alternatives to billable hours.

Table 5 – size of firm and use of ABM s

size of firm % who use abm s

Sole practitioners or small firms 32%

Medium-sized firms 19%

Large firms 16%

Very few of the lawyers in the focus groups say that they use alternative billing methods; when they do, it is as part of a strategic planning exercise or planned offer of service. In general, other billing methods seem to be used at the client’s request.

However, several innovative practices for billing for legal services were mentioned in the focus group, primarily for small law firms. The few firms that have had the most success with ABMs are the ones that have built them into their business model. They report no problems – in fact, they have had great success with their clientele. The motivation most frequently mentioned to justify using ABMs is the desire to improve client satisfaction and thus boost sales. In addition to meeting a need, these firms say that mandates that are billed in a different way are seldom disputed, which simplifies file management and reduces administrative costs.

The results of the survey of members showed an apparent inconsistency. Private-practice lawyers and their in-house clients all said that they were the ones who suggested alternative billing methods (see Graph 7). This apparent dichotomy, which is seen in various reactions and responses to the survey, can be explained by three phenomena that also emerged from responses to the surveys:

1) The use of alternative billing methods frequently appears to be improvised.

2) Communication between lawyers and clients regarding billing is neither structured not effective.

3) Many don’t know what ABM means.

6.9 Expenses One noteworthy change in billing habits: clients are increasingly refusing to pay certain expenses and indirect costs incurred by lawyers. At focus groups for in-house lawyers, they refuse to pay “fake fees” (photocopies, travel costs for the lawyer, parking), which they feel should be covered by the firm itself.

In turn, medium and large law firms are less and less likely to give details of costs for travel, research, photocopies, etc. It is now common practice to simply offer an hourly rate that includes all incidental costs incurred by the lawyer.

This change in habits has not been observed on the part of lawyers from small firms or those who work alone. They generally continue to provide details of costs and expenses incurred by the lawyer to the client.

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6.10 L aw yers’ training Just as they refuse to pay expenses, more and more clients are resisting the idea of paying for the training of young lawyers. Some in-house lawyers explain that they will even go so far as to refuse to let young lawyers work on their files. Even those clients who do not take such a radical position have expressed their discomfort at being billed for hours put in by junior lawyers on the file. Here again, many firms respond to these pressures by proposing a weighted average hourly rate for the entire mandate to their clients.

“Why should I pay to train a lawyer?”

To avoid these inconveniences in training young lawyers, some boutique firms have made it a policy not to hire lawyers who have been practicing for fewer than five years. This being said, some clients, though they are in the minority, are happy to see some tasks given to [younger] lawyers at a lower hourly rate.

On another note, many young lawyers are attracted to the practice of in-house counsel, despite the fact that salaries are lower than in large law firms. The in-house lawyers in our focus groups said that young lawyers no long see themselves in the model proposed by large firms.

“The irony is that young lawyers don’t want the high salaries offered by the big firms. In fact, they don’t want all this to be detrimental to their quality of life.”

6.11 The value of a service One of the questions put to the focus groups was, “Which elements do you believe create value in your discussions with clients on billing?” The most frequent responses were: the details on the bill, the relationship of trust, expertise, and communication with the client. However, explaining the perceived value and the economic value for the client proved to be difficult. The lawyers had trouble putting a name to the service that was being sold. Not surprisingly, they also had trouble expressing what value the service could have. The fact that the details on the bill are based on hours, not value to the client, reinforces this problem.

“We sell time. It’s unfortunate. I would like to say that we sell solutions, but we sell time.”

Most of the lawyers who offer package prices said that they calculated the value of the package by multiplying the number of hours required by their hourly rate and adding a contingency fee to cover risk. They generally explained that the client had nothing to gain from this. Reducing uncertainty for the client did not seem to have any value as such.

“It comes to the same thing. Whether we set a package price or we bill by the hour, the client’s bill will be the same.”

Paradoxically, clients did mention that on the contrary, they would in future like to have more predictability as to costs, and that this was of some value in and of itself. It was further mentioned that, for both individuals and companies, it is crucial to understand the client’s particular situation in order to be able to demonstrate the added value of services rendered to the client.

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6.12 Subcontracting and relocation Subcontracting and relocation are used to bring down the cost of legal services for lawyers in private practice and to reduce the honoraria paid by the client. According to the survey of Quebec-based lawyers, this practice is well known but seldom used. Some lawyers indicated that they took advantage of the geographic situation of the office to evaluate the usefulness of farming out a mandate at a lower hourly rate. The relocation could be regional or international. In-house lawyers are aware of these practices and are asking their suppliers of legal services to relocate their routine work to reduce costs.

6.13 The specialization of work When asked about the future of law, in-house lawyers in the focus groups predicted a higher level of specialization in the profession and said that there would be more and more “boutique” firms.

“You want to call someone who already knows the answer – an expert.”

In-house lawyers echo that prediction. They do the work for which they have the given skills, only hiring outside help for advanced expertise or in extraordinary cases. This saves them time and money, they say. By its very nature, a firm that specializes in a particular area of the low would be better suited to answer pointed questions quickly.

“Even if the hourly rate is three times as high, that doesn’t bother us, because they can give us an answer in 30 minutes.”

They are quite comfortable paying an hourly rate that is substantially higher to get a rapid and concise response from a lawyer with advanced expertise. The billable hour seems to be an appropriate billing model for this segment of the market.

6.14 Poor understanding of alternatives (ABM s)The figures speak loudly: 61% of private-practice lawyers and 76% of in-house lawyers who responded to the surveys stated that they have not mastered alternatives to the billable hour. When asked if they believe the alternatives are profitable or efficient, however, their opinions differ (see Graphs 5 and 6).

The figures from the surveys suggested two things: profitability is uncertain, and lawyers have not mastered the tools. At the same time, based on what was said in the focus groups we can conclude that a large proportion of private-practice lawyers consider alternative billing methods to be nothing more than a cosmetic change, not a new way of conducting business relationships.

“In the end it doesn’t change much. They’re going to pay the same amount.”

The belief that alternatives can make services more efficient is much stronger among in-house lawyers (84% compared to 54% of lawyers in private practice).

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6.15 Ethical considerations Another question that came up at the focus groups was, “Have we become a business?” The answer is clear: yes. Lawyers today are an integral part of the business world and play a role in commerce. However, the law is not a commercial activity like any other. Lawyers need to maintain a noble image of the profession and avoid the connotation of lucre.

“The image of the profession is part of the product we’re selling.”

Avoiding the appearance of lucre does not mean ignoring sound practices of management and commerce. It simply means that before thinking of how they themselves can profit, lawyers have ethical responsibilities. That being said, lawyers have a duty to manage their organizations properly in order to provide quality service to clients.

7 FEATURES OF FOCUS GROUPS Now that we’ve looked at what the lawyers we consulted have in common, here are some details on the size of the firms and the type of clients served by the various groups of lawyers who were consulted or surveyed.

7.1 L aw firms

7.1.1 Sole practitioners or small firms 8 5

Gr aph 14 – t ypes of clients - sole pr actitioners or l aw yers working in small firms

Individuals (50 %)

Corporations and SMEs (27 %)

Individuals with legal aid mandates (11%)

Non-profit organizations (3 %)

Municipalities (3 %)

Associations (professionals or companies) (2 %)

Provincial government (public and parapublic) (2 %)

Unions (2 %)

Federal government (public and parapublic) (1 %)

2%2% 2% 1%

50%

27%

11%

3%3%

Sole practitioners and lawyers working in small firms (2 to 10 lawyers) are the most numerous group in the profession, accounting for 55% of all the lawyers in Quebec86.

What defines this group is their close proximity to their clients. Lawyers who practice on their own work with individuals to a very large extent. Interpersonal relationships are thus an important factor for this group. Lawyers who practice on their own or in small firms are in the front lines for helping with access to justice, since it is primarily their clients who face the type of problems that are especially sensitive to cost and timing considerations. They note that individuals and small businesses are now shopping around more than ever.

85 This category includes lawyers who work alone or in an office with 2 to 25 lawyers.86 BARREAU DU QUÉBEC, Barreau-mètre 2015 – La profession en chiffres {The profession in numbers}, Montreal, Quebec, Barreau du Québec, 2014, p. 26, online:

http://www.barreau.qc.ca/pdf/publications/barreau-metre-2015.pdf

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COne striking result that emerged from the focus groups was that this was the only group to stress the importance of Dispute Prevention and Settlement (DPS), a real alternative to offering legal services. However, like the other focus groups, they see a certain commodification and specialization of legal services hovering on the horizon. They also believe that individuals are better informed thanks to the Internet, and that the ever-increasing amount of legal information that is available is contributing to the lack of comprehension.

We have noticed that when it comes to billing methods, sole practitioners and lawyers from small firms are more likely to use alternatives to hourly billing than medium-sized and large companies. This can be explained by the fact they have more flexible structures, and so can adjust more easily to demands from clients. Another explanation that was given was that package prices paid in advance are offered to clients in financial difficulty to make sure that bills will be paid, which is a major concern for this group of lawyers.

Despite having more restricted access to resources, the democratization of electronic tools gives lawyers from smaller firms recourse to management software so that they are better equipped to provide for different billing methods.

According to an optional survey that was attached to the annual registration form, 35% of lawyers practicing in the regions are in small structures (working alone or in offices with 2 to 25 lawyers)87; 85% of respondents to the survey on billing for private-practice lawyers were in offices with fewer than 25 lawyers.

According to available data, lawyers in the regions are more likely to be generalists than those in other groups. Also, the most commonly practiced areas of law are criminal law and family law, unlike the trend in more urban regions. Personal relationships remain an important aspect of their practice. As for their use of alternative billing methods, they largely share the paradigm of lawyers who work in cities. The percentages of use for alternatives of hourly billing are similar, as shown in the table below.

Table 6 – regions and use of ABM s

REGIONS % USING ABMs

Montreal 32%

Quebec 24%

Regions 28%

87 BARREAU DU QUÉBEC, optional questionnaire on “Évolution et tendances” (changes and trends) on the annual registration form for 2015.

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7.1.2 Medium-sized firms 8 8

Gr apH 15 – T ypes of clients served by l aw yers in medium-sized firms

Corporations and SMEs (60 %)

Individuals (23 %)

Municipalities (7 %)

Provincial government (public and parapublic) (3 %)

Associations (of professionals or companies) (2%)

Unions (2 %)

Individuals with legal aid mandates (1 %)

Non-profit organizations (1 %)

Federal government (public and parapublic) (1 %)

2%1% 1%

1%

60%23%

2%

7%

3%

Differentiation and specialization are phenomena typical of medium-sized cabinets in particular. Competition from boutique firms is being felt, and many lawyers in this area mentioned that it is becoming imperative to find your niche these days.

Unlike lawyers who work alone or in small firms, those who work in medium-sized firms think of automation as a threat that could cost them part of their client base.

As is the case for lawyers who work alone or in small firms, those who work in medium-sized firms mention that today, they have access to a more informed clientele. This is partly due to the fact that large litigation firms are shopping around more for external services, looking for small and medium-sized firms that can do the same work as large firms at lower hourly rates. This is why marketing for medium-sized companies often focuses on the possibility of offering lower hourly rates.

7.1.3 Boutique firms

A high proportion of medium-sized firms are concentrated in specific fields and are now calling themselves “boutique” firms.

Boutique firms are a custom-made business model designed to meet demand for advanced expertise. And that is exactly what the in-house lawyers we met with are wanting.

The use of alternative billing methods is related not to the size of the firm, but to the type of law the firm practices. For example, boutique firms in the area of intellectual property told us that they used package pricing almost exclusively, while litigation firms generally opt for hourly billing.

88 This category includes lawyers who work in firms with 26 to 100 lawyers.

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7.1.4 L arge firms 8 9

Gr aph 16 – t ypes of clients served by l aw yers in l arge firms

Corporations and SMEs (67 %)

Individuals (13 %)

Municipalities (5 %)

Provincial government (public and parapublic) (4 %)

Associations (professionals or companies) (4%)

Unions (3 %)

Non-profit organizations (3 %)

Federal government (public and parapublic) (0.3 %)

Individuals with legal aid mandates (0 %)

67%13%

5%

4%4%

0%0,3%

3%3%

Of all the groups we met with, this group has the most demanding clientele. For example, some clients of large firms now have the electronic tools to follow changes in billing in detail. Another example: in the field of insurance, lawyers are expected to follow the same time entry system as their clients.

Large firms feel pressure on prices exerted by their clients. They believe that clients now have the upper hand as they understand how things are done and use this for leverage in their relationships. To offer better prices, they delegate some of their activities to offices in other cities where hourly rates are lower. They are also trying to reduce fixed costs. In this group, the issue is “rate shock” expressing the stagnation of hourly rates. Pressure to lower prices translates into rationing and cuts in expenses; This is tending to change commercial practices and make it more difficult to rise to associate status. The situation can be attributed to the economic crisis of 2008 and the growing number of in-house lawyers.

“In-house clients are a menace. They know our tricks, because they’ve often been through the big firms. They are more and more aware of how to assign mandates

and apply pressure on prices.”

Most of the lawyers we met with were aware that changes are on the horizon and they are investing in the search for solutions. They realize they need to follow commercial practices from the business world to be competitive. For example, some large firms are developing business solutions based on project management. It’s too early to say whether these initiatives will change their business model for the better. Competition seems to be increasingly intense, and many large firms are trying to “refresh” and set themselves apart in response to pressure from clients and some of their competitors.

A particular phenomenon was observed among the lawyers in this group: they are seeing a consolidation through integration with international mega-firms. These entities will turn typical local ways of doing things upside down, bringing new ways of managing clients and new business methods. These mega-firms are strong and solid so they can take on more risk, an important factor in choosing billing methods.

89 This category includes firms with 100 or more lawyers.89.

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7.2 ClientsIn this section, we will look at statements from the focus groups that specifically brought together in-house lawyers and the information the Barreau du Québec holds about this clientele in general. Their opinions are presented separately to illustrate their particular relationships with lawyers in private practice and billing for legal services.

7.2.1 Individuals

What most affects this group is doubtless the fact that they consider services to be too expensive and they no longer have access to a lawyer. Costs, deadlines and the complexity of the justice system are the most important considerations for this group. A great many individuals no longer envisage having recourse to the services of a lawyer or the justice system. To alleviate these considerations, individuals and small businesses are trying to do more of the legal work themselves. There are more and more online tools to help them with this work, such as the dissemination or automation of legal services. Lawyers, however, are seldom part of that equation.

When it comes to billing, the general public does not usually understand the available options. According to the Barreau’s mediation department, which reports to the Syndic’s office, the major problems individuals face with their billing are the imbalance with client needs, the procedures used and the potential gains. According to the mediation department, alternatives to hourly billing are rarely contested. Transparency and predictability are mentioned by way of explanation.

7.2.2 Litigation l aw yers in SME s90

The in-house lawyers we met with stated that they were sending many fewer contracts outside than they used to do. This change probably occurred more than five years ago, since the Barreau survey reports that the sums going to outside lawyers have risen by 6% over the last five years. Litigation budgets appear to have risen by 13% over that period. One explanation for this apparent contradiction between the focus groups and the surveys is the rise in the cost of justice. It is possible that this costs companies more, even if the number of mandates sent outside has gone down. The increases observed in the survey are weak, around 2%, which points more to stagnation than to a substantial increase.

Litigation lawyers from large and small companies alike are unanimous: they want concise answers to specific problems. This is why boutique firms, with their advanced expertise, will be more and more in favour. These lawyers want to manage risk in their files themselves, but the objective is to limit the scope of the outside lawyer’s mandate.

“We’re firefighters – we put out fires all day long. We need outside lawyers when we’re snowed under or in extraordinary cases.”

In other cases, they would like to find out how to act in a commercial manner without being lectured on the applicable law. Nearly everyone mentioned having refused promotional gifts from firms.

In-house lawyers are more sensitive to commercial realities. They are asking outside lawyers to try to understand the business concerns that could affect them.

“We should all take basic courses in marketing, finance, IT management, HR… management course in general. It’s become essential to understand the business world.”

In small businesses, managements and majority shareholders often play a preponderant role in decision-making. Some are more careful about legal costs, given that it’s “their money that’s being spent.” In any case, personal relationships are becoming an important factor when the time comes to choose an outside lawyer or a billing model to be applied.

90 This category includes companies with 1 to 500 employees.

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7.2.3 Litigation l aw yers in l arge companies

Lawyers in large litigation firms differ from their colleagues in smaller companies due to the resources at their disposal. They also do more and more legal work internally. They mention handling nearly everything except for mergers and acquisitions, labour law and litigation. Despite the survey results indicating that litigation budgets sent outside the company have risen, the lawyers stated that they are sending three to four times fewer mandates to be handled externally than before. Sending fewer mandates outside does not mean that the cost of mandates sent outside the company has not risen, however. The attitude of in-house lawyers is not equivocal, as witness the statements made by one participant on the subject:

Your price policy has taken you out of the market… [reference to some large firms].”

“Our company’s revenues have tripled and the fees sent outside are just one-third of what they were.”

In this climate of pressure on prices, calls for tenders are being used more and more often. Many of the large litigation firms mentioned that they were adopting this way of proceeding systematically for all mandates over a certain amount.

Furthermore, in-house lawyers are increasingly reluctant to pay any other costs but the hourly rate.

“I don’t pay fees for photocopies, travel, opening the file any more…for me, these are all normal administrative costs that clients should not be specifically asked to pay for.”

There is obviously some frustration regarding remuneration for lawyers in large firms. The in-house lawyers we met with feel that the business model and remuneration structure of law firms are responsible for the sense of disconnectedness they feel from the big firms.

To better align their interests with the interests of litigation lawyers, law firms will need to find a better way to describe the value of their contribution and turn to other business methods that make it possible to use alternative billing structures.

Billing methods do not appear to be the main cause of frustration. A fair number of in-house lawyers showed interest in learning more about the subject, as the don’t know much, or anything, about these practices.

7.3 T wo different visions Billing practices are in a state of flux. Not only is the billable hour being called into question, but the business model on which is it based is coming under scrutiny as well. The most flagrant example of this is the dichotomy of opinions between private-practice and in-house lawyers, which is not only seen in opinions on billing. Both private-practice lawyers and in-house lawyers believe that the other is in a stronger position.

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Table 7 – percep tions held by private-pr actice and in-house l aw yers

LAW FIRM THEMES COMPANY

Believe it’s private-practice lawyers who…

Initiated use of ABMs Believe it’s in-house lawyers who…

Quality of legal services is… (36 %)

The most important consideration

Minimizing the cost of services is… (42 %)

64 % believe that projects billed other than on an hourly basis or less or just as profitable.

Profitability and efficiency 81 % believe that projects billed other than on an hourly basis are more or just as efficient.

For most of the private-practice lawyers we met with, using a billing model other than an hourly rate is an artificial change – the final price will come to the same thing. On the other thing, clients believe that ABMs are a way of improving the services lawyers offer. Private-practice lawyers and in-house lawyers do not see the ultimate objective of using ABMs from the same viewpoint.

In-house and private-practice lawyers subscribe to different visions of the service industry. Commercial realities such as risk-taking, predictability, marketing and improving processes are not part of most business methods for private-practice lawyers, which their clients decry. There does not appear to be much communication on ways to improve the efficiency of services rendered. Clients have trouble saying what they want, and private-practice lawyers have a poor understanding of alternatives that could potentially improve their offer of service. The low rate of use of feedback programs by private-practice lawyers (18 %) is both a symptom and a cause of this.

As a result, in-house lawyers are asking that practices be changed and applying pressure on prices. Private-practice lawyers don’t really see how this would be possible without directly affecting their remuneration. Seen from this viewpoint, clients’ interests clash with lawyers’ interests, resulting in friction and discomfort in commercial relationships between lawyers and clients. This also indicates that lawyer/client relationships will need to change in the coming years. Pressure on prices puts many lawyers in a difficult situation.

“But if I cut my hourly rate, that will directly affect my salary.”

There are three ways of lowering prices:

1. by reducing lawyers’ incomes;

2. by boosting lawyers’ efficiency in terms of work time;

3. by improving the efficiency of the process in general.

The first two options have inherent limitations. First of all, lawyers are reluctant to reduce their income and their standard of living, and the business model based on the billable hour has limitations in terms of boosting efficiency. There is little financial incentive for lawyers to work faster, and there are limits to increasing the amount of work an individual can do in an hour. Any real gains to be made are in the way work is structured and in providing a more precise response that is more focused on client needs.

To sum up, three observations:

1. Lawyers need to adjust their offer of service to increase their revenues.

2. Lawyers are no longer in a situation of power – today, it’s the client who dictates the terms of their relationship.

3. Lawyers will need to find innovative ways of filling needs for legal services.

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PART 2: UPSTREAM FROM THE BILLING PROCESS

8 ESTABLISHING THE VALUE OF A LEGAL SERVICE The first step is establishing what we are selling. What legal products or services are being purchased by clients? Clients don’t buy billable hours – they buy legal services. For example, a client may buy a tax optimization or legal representation in court for a case that’s estimated to take two days. It is difficult to calculate profits on services when you can’t define the type of services rendered.

To do that, lawyers need to divide the services they provide into understandable steps. This will help them explain to the client what is being sold, make it easier to assess the costs to be assumed, and help them evaluate the costs generally associated with each stage of the work. It’s impossible to keep statistics on costs without first drawing up a detailed description of the service rendered. As you go along, statistics on the process will be compiled and your estimates will improve. This will make it possible to reduce the risk associated with diversifying billing.

The nature of what is being sold can also help to guide lawyers in choosing a billing model.

For example, a repetitive task that is easily identifiable can be billed at a fixed rate. Or a highly strategic task with major implications for the client could be sold at an hourly or performance-based rate.

In the focus groups, unpredictability was considered the most common obstacle to explain the inability to evaluate costs or the profitability of services:

“There are just too many things you can’t predict. I don’t know how the opposing party will react or how long it will take me to prepare…”

This may be a fair response, but it is possible to substantially improve estimates of costs and hours to be devoted to a case. Bear in mind that this is an ethical obligation for Quebec lawyers. Over the past 50 years, various process evaluation techniques have also been developed, such as project management systems (PERT, Six Sigma, etc.).

8.1 Creating added value Few lawyers in the legal services industry are able to define the concept of added value (AV). As a result, the concept of the value chain for the industry is poorly understood in the legal community.

8.1.1 Added value

Depending on the context, the term added value can have several different meanings. For example, in a case where a tax lawyer puts together an effective tax plan that results in substantial savings for the client, we would call that a quantifiable AV of the legal service. Here, AV represents a net benefit of the legal service as perceived by the client, since the cost/benefit ratio of legal services is positive and constitutes a measurable AV.

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In the industry, on the other hand, the AV of a legal service is highly perceptual – qualitative. To fully appreciate the lawyer’s work, AV means adding a benefit to a service that would otherwise have been comparable to the service offered by competitors. In this context, the variables chose to measure AV would notably focus on expertise, effort, reliability, reputation, speed of completion, relative certainty as to the result, and the price. This conception of AV can be substantially improved with the increased use of technologies (see section 9).

8.1.2 The value chain

It’s important to establish a new configuration for the value chain in legal services. If a change in the way client and lawyer proceed is desirable, the process will need to create value.

The value chain can be defined as analytical tool that makes it possible to determine key activities for a company – those that have a real impact in terms of costs or quality and give the company a competitive advantage in order to satisfy a sector or segment.

Michael E. Porter91, a high-profile professor at the Harvard Business School, believes that there is a distinction between activities in the value chain:

• Primary activities connected to production and those connected to the sale of a product or service and to client contact;

• Support activities, which support the principal activity and form the company infrastructure.

The company’s activities may produce competitive advantages in terms of costs or differentiation. When properly exploited, they can create value for the client in addition to generating margins for the company.

Let’s look at this diagram.

Figure 2 – value chain for producing legal services

Logistics of producing the legal service

Operations of solo law firm

Delivery of legal service Marketing Customer

service

Support activitiesINFRASTRUCTURE - HUMAN RESOURCES

- INFORMATION TECHNOLOGY

BASIC ACTIVITIES FOR PRODUCING LEGAL SERVICES

value chain for producing legal services

SPHERE OF INNOVATION

-PRODUCTION

In general, the link between the time devoted to a case and the cost of the service is subject to interaction between support activities. The strength of the correlation between infrastructures, human resources and information technologies is the key to the added value of legal services. Moreover, support activities are the area in which it is possible to demonstrate innovation and create more added value.

91 The value chain approach is described in detail by Michael Porter in MICHAEL E. PORTER, The Competitive Advantage: Creating and Sustaining Superior Performance, 1st ed., New York, Free Press, 1985.

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CBasic activities involved in producing legal services, or production functions, are changing. This will lead to a migration from the business model based on the hourly rate, which is now in effect, to a high tech-intensive business model for the provision of legal services. This transformation will not occur without some difficulties. Let’s look at a few of the roadblocks that could slow down this migration process.

• First, lawyers will have to invest in human and financial resources. Lawyers are universally reaping the benefits of low-cost technologies, such as CAIJ services. Nevertheless, they will absolutely need to invest substantial amounts of money in their training in order to fully understand and manage these efficient, but complex tools. Just remember the difficult days in the early 2000s when simple (by today’s standards) technological tools were being introduced – the Windows environment, email, digitization of files and procedures, cell phones, etc.

Lawyers didn’t try to evaluate the real added value of these new technologies for the provision of legal services – to be proactive. They preferred to be reactive and point out the risks for the profession in terms of professional secrecy, ethics, etc. All the same, clients benefited and lawyers adjusted to using these technologies.

• Second, lawyers will have to learn to work closely and collegially with mathematicians, computer specialists, statisticians, economists and project managers. Today, these colleagues are no longer considered “expenses” in the practice of law, but “investments.”

From this perspective, the legal community will be no exception and will be under the permanent influence of this new generation of startups in developing and marketing legal technologies. As with the hotel industry now facing AirBnB or the taxi industry with the arrival of Uber, lawyers will have to assimilate this change and be part of the movement instead of fighting it. This new environment will result in substantial investments in the practice. This situation in marketing legal technologies is now developing quickly in the United States, and will soon reach the rest of Canada, and Quebec within three to five years.

Unlike decision-makers in other economic sectors, lawyers do not have massive investments in practice as part of their DNA, and the hourly billing model does not lend itself to investment. Lawyers bet on their own “economic rent” rather than what is required for the growth and technological efficiency of practice overall.

The current business model is therefore a real handicap for this change in culture. The blockage arises in part from intergenerational values of traditionalist/ /baby-boomer lawyers versus those in generations XYZ.

• Finally, lawyers will have to concede to the evident truth that the litigation market is condemned to major changes in the provision of legal services. With high-performing technological tools and in the wake of a major legislative change like the coming into effect of the new Code of Civil Procedure, lawyers will be called upon to act as “facilitators” in conflict resolution. This new trend will have a major impact on hourly billing.

Legal technologies have a direct effect on the provision of services and prices with the full range of clienteles. How can we measure the AV of producing a legal service that until recently was primarily focused on the “human resources: lawyer” input? In the immediate future, many of these tasks will be performed by increasingly powerful software programs, nominally by artificial intelligence. This does not reflect the fact that production technology substantially reduces the cost of service provision.

The migration to a new business model is all about adopting new production functions.

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8.1.3 The business model

Lawyers’ current business model is entirely based on business development, relationships with clients, and billable hours. But what is the purpose of having a business model? A business model should help lawyers to meet challenges and cope with the constant changes they face, based on the objectives for their firm and the specific needs of their target clienteles.

The objectives covered by the business model are:

1) to foster the growth and profitability of the firm;

2) to improve differentiation and competitiveness with a view to offering value-added services; and

3) to use ICT to set up systems for continuous analyses and improvement.

Targeted actions to achieve these objectives should reflect the development of strategic planning, taking the following aspects into account:

1) developing achievable target objectives and an efficient communications system for the whole organization (objectives to be known throughout the organization);

2) promoting teamwork, reducing waste, promoting continuous improvement and maintaining a quality assurance system;

3) precisely defining income sources for each domain, perfecting skills within the firm, and maintaining successful relationships with various clienteles;

4) defining financial objectives, drawing up budgets, implementing follow-up systems, analyzing gaps found and improving operational procedures through optimal operational efficiency that meets industry standards to make sure that actions are profitable (benchmarking);

5) setting up and promoting a technology investment plan based on the firm’s mission and growth and improvement of processes.

Based on the principal components of the firm’s business model, planning, analysis and reflection will enable management to understand and measure the efficiency of the model and its value chain according to clients’ objectives and needs.

The process of understanding and analyzing the value chain can be divided into two parts:

1) activities related to innovation, income sources and activities related to creating income (growth);

2) activities related to the practice of the profession.

> GROWTH-RELATED ACTIVITIES

The following are integral parts of this value chain:

1) financial planning, budgets, measuring performance and growth, and overall performance based on the firm’s objectives;

2) innovation and differentiation of services (added value);

3) identifying needs, requirements, market trends and technology monitoring;

4) client satisfaction and feedback, along with quality measurement;

5) identifying income sources based on areas of expertise, resources and skills, and market value;

6) drawing up a market study, positioning, opportunity and globalization (marketing and commercialization plan).

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C> PROFESSIONAL PRACTICE-RELATED ACTIVITIES

Value proposition

1) Differentiation in offer of legal services to submit a value-added proposition that responds to the specific needs of the clientele;

2) Optimization of services rendered to the client based on the expertise, skills and brand image of the firm. Resources able to deliver the value proposition;

3) Training, competence of staff, human resources development plan, evaluation of current skills, setting short-term and medium-term objectives for achieving desired results and measuring follow-up and evaluation;

4) Creating a system for evaluating quality of services rendered according to client needs (value added for client).

Processes and cost control

1) Strategy for cost improvement identifying and analyzing most important costs (priority) and their value in setting prices for clients;

2) Use of ICT and establishing measurements on returns, a scorecard and a performance measurement system;

3) Benchmarking for management based on the firm’s objectives and comparison with the market;

4) Implementing the control panel and reporting needed to evaluate financial and other performance to make the firm profitable;

5) Communicating objectives and strategies within the firm.

Figure 3 – analysis of a business model

THE BUSINESS PLAN SHOULD

INCLUDE:

The organizational structure, roles and responsibilities, access to talent

Innovation and income sources based on client’s objective and needs

(technology monitoring, sound business practices, and innovative process

(VALUE ADDED FOR CLIENTS)

Knowledge and analysis of performance and profitability indicators (relevant

information system)

The firm’s vision, strategic objectives, areas of expertise and differentiation

(VALUE ADDED)

Knowledge and analysis of operational processes needed to meet profitability objectives (CREATING VALUE INTERNALLY)

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8.2 New functions for producing legal servicesThe analyses and statements above show that the provision of legal services will now be subject to different product modes. This diagram presents the essence of the new content.

Figure 4 – production functions

MANDATE

Input in the production function of legal services

Costs for the client

• Technology• Legal research• Formatted documents• Procedures• Predictive legal analysis

Ad hoc services/ commodities

Until quite recently, the production function for legal services was “packaged” for standardized clienteles92. Today, under the influence of legal technology, services are developing in network form – hence the requirement for production functions that focus on client needs that the lawyer has identified as key targets.

Not all of the inputs in Figure 3 will be used at the same time. Depending on the type of mandate and the lawyer’s experience, the lawyer will need to select appropriate inputs. Given the efficiency of the technology, service will be provided rapidly at low cost. These new production functions will improve access to justice for individuals and SMEs93. In fact, technology will let previously underserved clienteles gain access to the legal services market. In this context, lawyers will need to conduct a precise assessment of market segments. The Susskind model points to “commodities” – high-volume legal services, or specialized niche services.

The hourly rate will not disappear, but will be adapted to services with extremely high added value. For example, artificial intelligence will not be able – at least in the immediate future – to replace the cognitive segments of legal services provision. Collaborative negotiation with other professionals will always be a lucrative market segments for lawyers.

92 Kelly M. BROWN, Enter the Disrupters: How New Law Firm Rivals are Disrupting the Market for High-end Legal Services in the U.S., The Wharton School of the University of Pennsylvania – William and Phyllis Mack Institute for Innovation Management, 2014, online: https://mackinstitute.wharton.upenn.edu/wp-content/ uploads/2014/10/Brown_Enter-the-Disrupters-V2.pdf.

93 Raymond H. BRESCIA, WALTER MCCARTHY, ASHLEY MCDONALD, KELLAN POTTS and CASSANDRA RIVAIS, “Embracing Disruption: How Technological Change in the Delivery of Legal Services Can Improve Access to Justice,” (2015) 78-2 Albany Law Rev. 553-621.

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CFigure 5 – evolution of the legal service as a “commodit y” – Richard Susskind

Strategic

Impor tant / requires at tention

Repetitive /commodity product

8.3 Added value for client and communications In the end, what the client wants to buy is not hours of work. Clients consult lawyers to minimize some possible inconveniences or to maximize their benefits. They buy services to achieve those ends. However, it is difficult for lawyers to put a name to what they are selling. For example, they tend to sell hours of preparations, hours of court appearances, etc. However, this does not, in and of itself, hold value for the client. The objective is to communicate a certain intangible value. To effectively express that value, the lawyer needs to understand under what circumstances the client needs a lawyer and be able to discuss what is being sold. If the client is a business, the lawyer needs to be able to understand the foundations of the industry and the client’s business model. For an individual, the lawyer needs to grasp the emotional and financial situation in order to guide the client. This brings us back to predictability and minimization of risk – two concepts that have value for the client. Even if the amount in the final bill is the same, the billing model can equate to an added value. This needs to be understood by the client and communicated by the lawyer.

8.4 Client needs The first step in responding to client needs is to fully understand the client’s reality. To do this, the lawyer needs to consider means and objectives and present the benefits of the various options being offered94. For businesses/clients, this also means understand commercial realities and business practices. To that effect, many boutique firms specialize not only in a particular area of the law, but also in a type of industry.

There are two types of client needs assessments that should be performed:

1) Evaluate market requirements: As with other industry industries, a market study is needed to establish the needs of the market segments to be attacked. A market study can then make it possible to compare your offer of services with your competitors’.

2) Evaluate your own clients’ needs: It’s important to focus on the preferences of your clientele. Demand for legal services is diverse, and so it’s important to be somewhat flexible in your pricing strategy and billing model to adapt to clients’ different realities. The objective is to offer not only adapted pricing but flexible pricing as well.

Two dynamics of today’s legal market make it crucial to study the market:

1) The commodification of legal products;

2) Clients’ facility in finding information and comparing offers of services.

94 GOUVERNEMENT DU QUÉBEC, see note 38, 3.08.02.

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8.5 Service qualit y and cost controlIn some cases, the important thing is to keep costs down. In others, it’s most important to minimize delays or maximize results. You need to understand the client’s interests so that you can establish the appropriate pricing model that applies to each situation. Each pricing model structures the lawyer’s and client’s interests in a different way. The pricing model and the agreement on fees are prime tools for matching the interests of all parties. This is crucial to reassure clients and let them know that the stakeholders are working together.

“When you bill by the hour, I don’t have the impression that you’re aligning your interests with ours. I think that the more hours you put in, the more you’re the winner and I’m the loser.”

“Pricing needs to be structured so that there is an incentive to close the file as quickly as possible.”

8.6 Statistics and determining the cost price Lawyers are just as sensitive to risk and uncertainty as their clients. These are the main reasons why they do not use one of the alternative billing methods. The best way to minimize risk is to understand your cost structure. For the most part, lawyers understand their fixed costs. However, according to surveys, they do not keep statistics on the profitability of files or the cost price of various steps in the services sold to clients. As noted previously in section 8, without such statistics it is difficult to bill other than by the hour. It’s important to understand both your clientele and the market, and it’s equally important to keep statistics on your own clientele and the market.

8.7 Management skills and operational efficiency To control your cost structure, it’s important to master a range of concepts. In addition, remember that in many cases, lawyers who own their own firms are entrepreneurs. And so they need to have the knowledge of a savvy business owner.

As with the practice of law, it’s becoming more and more complex to manage a business, and as with legal science, management science is also getting more and more complex. Managers have a wide range of tools at their disposal to maximize efficiency. There are also many ways of structuring work within the company to encourage all employees to cooperate. Like any other business, a law firm can benefit from measures designed to make work more efficient.

On the marketing front, there are also many ways of attacking a market. While many think that skills are acquired naturally, without training, it may not be wise to trust to your natural predisposition for entrepreneurship.

It is also important for lawyers to understand the universe in which they operate, and their clients’ world as well. It’s essential for lawyers to understand their clients’ main sphere of activities and their business model.

We have observed that clients want more than just a legal opinion – they want to understand the risks and options that are being offered. In addition to understanding the client’s reality (see section 8.4), lawyers need to understand their environment in order to provide effective guidance.

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8.8 Technologies

8.8.1 Improving processes and measuring performance

Innovations in technology or management are occurring at such a rapid pace today that you really need to monitor developments at all times. It’s important to develop a consistent strategy for this. Spending some time on a weekly basis and keeping notes on innovations that can affect legal practice is one way of setting up a monitoring system.

For example, many acts performed today may in the future be automated online services. It would be a good idea to look ahead to benefit from such opportunities or to refocus your practice on other activities. Good planning can help to improve processes and measure performance.

8.8.2 Methods for providing legal services

> WHAT ARE THESE METHODS?

Only in rare cases do lawyers today have the training required to understand the dynamics of technology-based methods for the provision of legal services. Various fields are involved: legal research in general, production of formatted documents, procedures, predictive legal analysis – quantitative metrics/legal analytics and eDiscovery. That being said, the Barreau du Québec has a comparative advantage in this sphere thanks to the CAIJ.

Several in-depth analyses have been conducted on the penetration of technology into these fields95. Let’s look at the technological applications.

> LEGAL RESEARCH IN GENERAL

Here again, the dizzying pace of developments in artificial intelligence is changing the game in legal research, which is designed to identify and retain the information required for a case.

The proliferation of legal information makes it imperative to use information tools to sort or classify documents, find more useful results or find precise information in a particular area of the law. Semantic search engines have multiple functionalities, the main ones being: acquisition of multi-format data, automatic structuring of documents, content analysis, metadata analysis, indexing, semantic research in many languages, and configuration and adaptation of professional dictionaries.

Semantic research: the semantic Web, made possible by high-performance software, uses natural language rather than computer language. Legal information is only of value to lawyers who know how to find and use it. Information needs to be created with a set of criteria in mind. Information needs to be of real value to appear in research results. Semantics possesses a high level of meaning and information value in both the content and the way in which that content relates to other content.

95 John O. McGINNIS and Russell G. PEARCE, “The Great Disruption: How machine intelligence will transform the role of lawyers in the delivery of legal services,” (2014)82-6 Fordham Law Rev. 3041-3066; Kelly M. BROWN, Enter the Disrupters: How New Law Firm Rivals are Disrupting the Market for High-end Legal Services in the U.S., The Wharton School of the University of Pennsylvania - William and Phyllis Mack Institute for Innovation Management, 2014, online: https://mackinstitute.wharton.upenn.edu/wp-content/uploads/2014/10/Brown_Enter-the-Disrupters-V2.pdf

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> PRODUCTION OF FORMATTED DOCUMENTS

Many technological initiatives for the provision of legal services listed by specialists in legal technology are the result of automation. This makes it possible to standardize processes and replace certain functions previous performed by lawyers with information technology. The automation of contracts, document review, client relations and billing are just a few examples. These technologies bring improved efficiency, narrowed communications channels, and ultimately, quantitative (monetary) and qualitative (better service) gains for clients. Some jobs in law will not be saved by automation.

Richard Susskind is referring to this type of legal services when he alludes to commodities. Many lawyers and law firms have automated certain components of the services they provide, which reduces the cost of some legal services. They can then exploit a segment of the market in which these services were exorbitant. The hourly billing model is incompatible with these highly automated services.

> PROCEDURES

While artificial intelligence makes it possible to produce certain forms, the situation is quite different when it comes to drafting legal documents, such as memos and legal briefs. In most cases, this depends on stereotyped entries. But this type of document produced with software can be the equivalent of a lawyer with intermediate experience. Analog programming can also reduce lawyers’ workload.

This type of programming is already being tested in some sectors for the drafting of articles – journalism. In a similar vein, some startups have developed software that can write simple reports on business and sports. It goes without saying that as artificial intelligence evolves, it will in the near future make it possible to connect the drafting of legal documents to legal research programs.

> PREDICTIVE LEGAL ANALYSIS – QUANTITATIVE METRICS/LEGAL ANALYTICS

The management of metadata – BIG DATA – was made possible by the increasing power of computers and cloud computing, secure data storage. We can now handle not only databases but manuscripts and video recordings. Powerful algorithms make it easy to process and analyze a phenomenal amount of data to see trends and predict certain results.

This type of application uses software that can predict the result of a trial, judges’ decision, jury selection and even the strategies used to certain parties. The software is no longer in the realm of science fiction; many companies are now offering this type of “legal” service. With data aggregation, you can compare the strengths of a given market, and compare different levels and methods of billing that are used. These tools could become powerful levers for clients, generation even more competition for lawyers.

> EDISCOVERY

Artificial intelligence is most advanced in this segment of the litigation and legal notices market. eDiscovery lets users explore huge databases on different themes. The basis technique does have certain limitations on the capacity of software to retain the themes under analysis.

To refine a key-word search, statisticians/computer experts have developed software based on transparent predictive coding. This involves examining e-documents on the computer.

First of all, lawyers examine a sampling of documents that appear to be relevant at the statistical level. For each question, the software assigns a level of relevance to each document. This technique yields extremely precise results, thereby limiting the risks of verification and electronic searches. Strict control over the prediction process lets users make the best possible decisions, with total confidence in the nature of the results.

Transparent predictive coding has many advantages. It substantially reduces verification costs and cuts verification time. Further advantages include controlling for accuracy, built-in statistical sampling function, and guaranteed validity of the verification process. This technology also reduces the relevance of the hourly billing model.

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CThe concept of predictive coding is known in Canada. Several authors have mentioned the added value of predictive coding and its direct impact on cost savings96. But what about its use, or full integration within the production function for legal services in various market segments? A review of the literature on hourly billing and its use in the legal services industry does not find a significant impact on new business methods directly derived from these technologies.

8.9 Managing profitabilit y In any industry, it is necessary to establish strategies and monitor the achievement of objectives for:

1) service quality;

2) production processes;

3) pricing strategies (billing);

4) positioning on the market;

5) reputation and brand image;

6) marketing.

All of these components serve as levers for making a company or firm more profitable. We have observed that lawyers have long tended to concentrate on levers for boosting service quality and reputation, which are especially important in a classic liberal practice. However, the six points mentioned above are equally accessible and important in a competitive market and in an industry that tends to standardize processes.

Companies in North America have broad access to advanced technologies. Growth and profitability are fostered by the adoption and use of ICT and high-performance software programs. There are many advantages to using ICT, notably growth in sales, profit margins, profitability, improved cash flow, innovation and differentiation from the competition, and improvement of internal and external communications.

9 Turning hourly billing upside down with disruptive technologies

9.1 Disruptive technologies – McKinseyModern economy history states unequivocally that technologies create value for society. However, the process of disseminating new technologies almost invariably means disrupting, often brutally, ways of doing things that workers take for granted. In fact, the “work” production factor heads the list of victims of reorganizations derived from the adoption of high-performance technologies. This is why we call them disruptive technology.

These technologies may seem to be of interest only in the sciences. Their practical links to the legal world may be limited; however, each of the disruptive technologies implies a relationship with one of the legal professions.

Before we identifying some potential for the legal professions among the disruptive technologies, let’s take a look at what experts view as opportunities. The target audiences and economic value of these technologies provide a profile of developing markets.

The McKinsey Global Institute has identified 12 disruptive technologies, as shown in the table below, along with the scope of each.

96 CANADIAN BAR ASSOCIATION – ACCESS TO JUSTICE COMMITTEE, see note 76.

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Table 8 – Disrup tive technologies and their scope (horizon 2024)

TYPES OF TECHNOLOGIESPOTENTIAL IMPACT ON SOCIOECONOMIC STRUCTURE

TECHNOLOGIES TARGET GROUPS ECONOMIC

Mobile Internet

Supercomputer cost $5 million in 1975 – iPhone of equivalent performance cost $400 in 2013.

4.3 billion: People remaining to be connected to the Internet

$1.7-trillion impact on GDP

Automation of knowledge work

Increase in computing power from IBM’s Deep Blue (chess champion in 1997) to Watson (Jeopardy winner in 2011)

Knowledge workers represent 9% of global workforce

$9 trillion: Cost of labour factor

The Internet of things

300% Increase in connected machine-to-machine devices over past 5 years

1 trillion: Number of things that could be connected to the Internet (2012 estimate) in industries such as health care, manufacturing and agriculture

$36 trillion: Connectivity costs for health care, manufacturing and agriculture sectors

Cloud technology

18 months: Time to double server performance per dollar

2 billion: Global users of cloud-based email services like Gmail, Yahoo, and Hotmail

$1.7-trillion impact on GDP

Advanced robotics

75-80% lower price than for typical industrial robot

Manufacturing workers represent 12% of global workforce

$6 trillion: Manufacturing worker employment costs

Near-autonomous vehicles

480,000 km driven by Google car with only 1 accident

1 billion cars and trucks globally on the planet

$4 trillion: Automobile industry revenue

Next-generation genomics

10 months: Time to double sequencing speed per dollar

26 million: Annual deaths from cancer, cardiovascular disease, or type 2 diabetes

$6 trillion: Global health-care costs

Energy storage40%: Price decline for a lithium-ion battery pack in an electric vehicle since 2009

1 billion cars and trucks globally on the planet

$2.5 trillion: Revenue from global consumption of gasoline and diesel

3D printing Printing costs down by 40% in 4 years

320 million: Manufacturing workers on the planet

$11 trillion: Global manufacturing GDP

Advanced materials

$1,000 vs. $50: Difference in price of 1 g of nanotube over 10 years

7.6 million tons: Annual global silicon consumption

$1.2 trillion: Revenue from global semiconductor sales

Advanced resource exploration

300% increase in efficiency of US gas wells, 2007-2011

22 billion: Barrels of oil equivalent in natural gas produced globally

$800 billion: Revenue from global sales of natural gas

Renewable energy

80% lower production cost for solar energy since 2000

21,000 TWh: Annual global electricity consumption

$1,2 trillion: Value of global electricity consumption in one year

Source: Based on McKinsey Global Institute, 2013

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CThe twelve disruptive technologies shown in the table have enormous potential, but also present major challenges for the legal services industry.

The first criterion in tracking these technologies is that many professionals will be “new” and not be members of a professional association of jurists. On the other hand, they will be in an advantageous position for providing these services.

For example, the designers of a software program that analyzes masses of digitized documents could use high-performance algorithms to draw conclusions with a very low margin of error. Some entrepreneurs who are not lawyers will offer forecasting services to obtain probable results in case of litigation (jurisprudence). The analysis of judgments from the same magistrate over many years would confirm the usefulness of this service.

> WHAT CONCLUSIONS SHOULD WE DRAW FROM DISRUPTIVE TECHNOLOGIES?

First of all, it is crucial to get over the reactive approach, as in “the law protects exclusive acts” performed by lawyers. Believing that disruptive technologies will not affect lawyers will only mean a rude awakening in the immediate future. Others, often not members of the legal profession, are already positioning themselves in the legal community. The potential risk lies mainly in what position the statisticians, computer specialists, software designers, economists, financiers and managers of databases will occupy within the legal professions.

While some professions may find it easy to react to disruptive technologies, others will have limited means. These are the professions that are most under threat.

9.2 Disruptive technologies and the arrival of new pl ayers “Disruptive” technologies are new ways of doing things involving technology, now applied to the practice of law, although they were completely unknown in the industry until very recently. These technologies are affected by expressed but not satisfied needs on the part of consumers. The “startup” market in this field would be on the order of $400 billion97. Experts call legal services an ultra-conservative industry, but the arrival of designers/investors/entrepreneurs who are not lawyers is changing the game. On the one hand, lawyers provide services using “continuity” technologies that are typically quite basic – the Windows environment, accounting/management software, etc. On the other hand, this environment is not in any way symbiotic with developments in disruptive technologies and people from outside the legal field.

On a day-to-day basis, apart from the pressure of cost constraints from in-house litigation lawyers, households and SMEs are also asking for legal services that are quickly accessible, transparent, and at a cost corresponding to the value of the service rendered. This table shows some examples of recent innovations.

97 TECH.CO, Tech Startups News, Events & Resources, 2015

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Table 9 – Startups in the legal services industry

DEVELOPED TECHNOLOGY INNOVATIVE CONTENT

Docket Alarm A search tool of subpoenas/rulings that can produce analytical results and make predictions on the probable results of litigation.

IP Nexus Online intellectual property service that connects inventors with startups, universities, lawyers and the other professionals required to protect intellectual property

Lawdingo An app that makes it possible to take charge of all the processes in a law firm – marketing, contracts and billing.

MeWe inc. Software that enables SMEs to find their way in the complex world of regulated industries – the food and housing sectors.

One400 An app that helps lawyers target potential clients.

Patent Vector Global registry on patents.

PlainLegal Online software that provides support in managing clients and the required documentation.

Priori Legal Software that assists corporate legal department in the choice, retention and prices of a network of highly experienced lawyers.

Shake Platform that makes the law easily accessible to households as well as to small and medium-sized enterprises. The platform provides a series of legal forms at reasonable prices.

Source: Based on TECH.CO, Tech Startups News, Events & Resources, 2015.

A growing number of economic agents are showing interest in the legal services market. Lawyers will need to take these innovations in account in the course of their work.

9.3 Risks of disruption in the legal services industry

9.3.1 Legal services market in a state of flux

In the previous section, we painted a picture of an industry in a state of flux. In fact, the law is to some extent a form of information technology98. Lawyers’ monopoly is increasingly porous. No longer can they justify their monopoly by claiming that information is asymmetrical. Legal information abounds – for example, BIG DATA, and more and more analysts are involved in various segments.

> WHAT IS BIG DATA?

BIG DATA essentially includes two evolutionary vectors: the growing availability of information and the shrinking cost of the technology needed to manage that information. The exponential growth of technologies is having an impact on every component of socioeconomic activity in Quebec.

In the near future, lawyers will be facing a daunting level of competition.

98 John O. MCGINNIS and Russell G. PEARCE, see note 95.

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CThe technology that makes the analysis of legal information more efficient is also bringing down the cost. For example, technology can analyze and interpret substantial quantities of information from different platforms. In this case, technology or artificial intelligence can use powerful algorithms to process a gigantic number of observations, or to classify data without the intervention of a precise system or theory.

It would be wrong to think that the lawyer’s monopoly automatically eliminates the provision of legal services in a free market. From a purely economic perspective, disruptive technologies and new players are propelling the legal services industry into a movement to deregulate some segments of the industry.

9.4 L aw yers’ inevitable migration to a new business model Lawyers who are sole practitioners or who work in organizations of various sizes must realize the urgency of putting in place a new business model. This will be a difficult migration for some, even impossible for others. This diagram details what will need to happen.

Figure 6 – A change of par adigm

Widespread use of ABMs

New production function –

New mixes of inputs

WIDESPREAD USE OF ABMs

Current productionfunction of

legal services

Infrastructure,

humanresources,information

technologies

As the reader can see, the migration of the business model (change of paradigm) is based on new infrastructures, adapted training for human resources now in the workforce, and the unconditional use of information technologies.

> IS THE ADOPTION OF THESE NEW TECHNOLOGIES FOR THE LAW JUST A FAD?

No, this is a solid trend. American experts are calling the growth of startups in the legal technology field nothing short of dizzying. Buoyed up by the entrepreneurial wave of Silicon Valley (“the App Economy”)99, the market for these new technologies could, say some analysts, top the $300 billion mark in the next few years.

While we cannot predict the exact impart of this migration, we certainly should not underestimate it. It seems obvious that the hourly billing model is not really compatible with this environment in which technology continues to bring down product costs. Besides, artificial intelligence is far from reaching its full potential.

99 David HOULIHAN, “Three Hundred Billion is Just a Number: What is the Real Market Size of Legal Tech?”, Blue Hill Research (February 13, 2014), online: http://bluehillresearch.com/three-hundred-billion-is-just-a-number-what-is-the-real-market-size of legal-tech.

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10 Issues rel ating to the business model The migration to a new business model is unstoppable, but the future indisputably rests on the training of new lawyers.

For about ten years, some law schools in the United States have been excited about teaching the practice of law in a technology-rich environment. Interest in this subject seems to be dawning in English Canada as well.

In 2015, Quebec universities are also interested in the subject, but in a marginal sort of way.

On top of a rigorous corpus of the law, the top law schools in the U.S. are giving course in practice management, technology-based law, eDiscovery, BIG DATA, predictive analysis, statistical software, virtual law, automation of legal documents, and how to implement innovation in the provision of legal services. New courses are being added to existing curricula and labs added to courses. These developments constitute a huge threat to Quebec universities that are not moving to level the playing field.

This table lists course content offered by American law schools.

Table 10 – Content of legal technologies courses at some american universities

Universities Pedagogical innovation Pedagogical innovation

Brigham Young University Law School

Practice systems with technology content

www.law2.byu.edu/faculty/?q=faculty

Chicago Kent Law School Center for Access to Justice and Technology

http://www.kentlaw.iit.edu/institutes-centers/center-for-access-to-justice-and-technology

On-Line Course on Digital Law Practice

tdlp.classcaster.net

Columbia University School of Law Lawyering in the Digital Age Clinic www.web.law.columbia.edu/ clinics/lawyering-in-the-digital-age-clinic

Georgetown Law School Iron Tech Lawyer Competition http://www.law.georgetown.edu/academics/centers-institutes/legal-profession/legal-technologies/iron-tech/index.cfm

Technology, Innovation and Law Practice Seminar

http://apps.law.georgetown.edu/curriculum/tab_courses.cfm? Status=Course&Detail=2090

Maurer School of Law at Indiana University

Center on the Global Legal Profession http://globalprofession.law.indiana.edu/

Michigan State Law School Reinvent Law Laboratory {Note: last edition in 2014]

Vermont Law School Center for Legal Innovation http://www.vermontlaw.edu/academics/centers-and-programs/center-for-legal-innovation

Technology & Legal Innovation http://www.vermontlaw.edu/academics/specializations/technology-legal-innovation

Source: Based on RICHARD GRANAT, “13 Top Law Schools Teaching Law Practice Technology”, eLawyering Blog (May 6, 2013), online: http://www.elawyeringredux.com/2013/05/articles/virtual-law-firms/13-top-law-schools-teaching-law-practice-technology/; RICHARD GRANAT and MARC LAURITSEN, “Teaching the Technology of Practice: The 10 Top Schools”, Law Practice Magazine 40-4 (August 2014), online: http://www.americanbar.org/publications/law_practice_magazine/2014/july-august/teaching-the-technology-of-practice-the-10-top-schools.html.

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CThe message is clear, and the list could have been much longer. Future lawyers are being taught legal technologies and the provision of services in new environments.

A new generation of courses designed to prepare future lawyers for new ways of doing things is seeing the light of day. What is needed goes beyond the teaching of law and management. Complementary knowledge of legal technologies must be on the curriculum. This education is absolutely necessary to help Quebec lawyers migrate to a high-performance business model that is adjusted to new realities.

CONCLUSIONThe change in mentalities among lawyers may be a major driving force in the migration of the changes that are now in the process of being made. Small actions can ensure harmony within the environments affected. Without such harmony, there is a high risk that foreign lawyers or non-lawyers from here and elsewhere will take the lead in the market. How will this change of mentalities come about? Mainly through the reaction of each stakeholder in the legal services industry.

By “change in mentalities,” we mean the examination and modification of the actions taken and the ways of doing things, both from the standpoint of their nature as well as their purpose. This change can come about through two major vectors. On the one hand, the Barreau du Québec can encourage and persuade lawyers to act sustainably so that the profession here can effectively adapt within a few years’ time. On the other hand, the Barreau can also develop tools promoting a real awareness and encouraging the changes required. Precarious short-term behaviours will make way for new leadership behaviours in our professionals as we move into the twenty-first century.

The means of communication and the development of work and knowledge acquisition tools must be adapted for each generation of Barreau members. Generations X, Y and Z will facilitate the migration and ensure our success.

The challenge lies in the necessity for this mutation in the hourly billing model to the legal technologies model to occur in symbiosis for members of the Barreau.

The most important message to remember is that this trend to replacements for legal services will continue to be implemented in the industry. The examples given may reflect realities from elsewhere at the moment, but Quebec will be no exception. The legal community will be the winner by adopting strategies for modulating the services they offer rather than simply finding coping strategies. The hourly rate will not disappear, but it must be used to bill for services only in specific situations; it can no longer be the basis of the business model.

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ANNEX 1 – SAMPLE SELF-EVALUATION QUESTIONNAIRE (DIAGNOSTIC)Diagnostic: The creation or revision of a business model is no easy matter. It requires the active and responsible participation of the management team. The process of improving the business model starts with a diagnostic analysis of the current situation in order to pinpoint where the organization stands and define targeted objectives and measures to be taken. This sample questionnaire may be helpful as you start the reflection process.

Do you have the necessary knowledge to understand this data?

Should you take training in business management?

What strengths and weaknesses are perceived by your clientele?

Do you have an action plan for attacking those weaknesses?

Are you satisfied with your business model?

Do you have concrete objectives to achieve?

What services de you offer your clientele?

What is the value of your services as perceived by your clientele? What are you doing to check that perception?

Do you make systematic efforts to get feedback from your clientele?

Which market segments are you attacking?

What are the needs of those market segments?

Do the services you offer respond to a need in the market?

Can you identify your competitors on the market?

What are your competitive advantages for your clientele?

Do you keep track of indicators on your company, the financial market (the competition) and the satisfaction of your clientele?

Do you have an appropriate business model for serving your target audience?

Do you know what types of billing your market segment prefers?

Do you know what image your clientele has of your practice?

Is your business model adapted to offer that type of billing?

Does the type of services you offer benefit from the advanced technology that is available?

Is the billing you offer in line with the types of products you offer (commodities, common service, strategic service)?

Where does your practice come on the value curve?

Are there some services you should start offering or stop offering?

After asking yourself all these questions, do you think you have a coherent and efficient offer of services?

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CCurrent status of your billing: A billing strategy is part of a broad business strategy. Here are a few questions to structure your thinking on the subject of alternative billing methods (ABMs).

Do your ABMs advance the interests of your clients? For example:

• Minimizing response time

• Avoiding court cases

• Minimizing professional fees

• Minimizing the probability of errors

• Improving the quality of service

Do they clearly align your interests with those of your clients?

Do they enable you to keep up with your competitors?

Do they sufficiently communicate the value of the service rendered to your client?

Do they foster efficient and satisfactory communication with your client?

Do your ABMs help to improve your image with your clients?

Have you established for which tasks and types of cases or areas of the law alternative billing methods would be beneficial?

Are they an asset to your marketing plan?

Do they make your lawyers more efficient?

Do they advance your teamwork?

What are the advantages and disadvantages of your billing strategy?

Do you use ABMs strategically?

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ANNEX 2 – MARKET STUDY The market study provides raw material for an enlightened reflection process on your position in the market and your business strategy. Here is a list of topics this type of study could address.

This section applies not only to sole practitioners and lawyers working in law firms, but also to in-house counsel, who should concentrate on data and trends that affect litigation practice.

1. Market information and trends

a. Jobs

b. Fluctuations in supply and demand for service

c. Managerial innovations

d. New ways of working

2. Information and trends on legal technologies

a. New tools now available

b. Web presence

c. Social media

d. Use of these tools by clients

e. Use of these tools by your competition

3. Information and trends in your firm

a. Services rendered to your clients

b. Your major distribution channels

c. Your marketing

d. Your control of production costs

e. Your statistics on each task

f. Your average revenue per client

g. Your use of billing methods

h. Your clients’ satisfaction rate

i. Use of management software

j. Use of social media

4. Information and trends on your clientele or target market segment

a. Facts about your clientele (income, age, location)

b. Your clientele’s spending capacity

c. The services your clients want and the perceived value of those services

d. Billing methods your clientele prefers

e. Use of management software

f. Use of social media

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C5. Information and trends on the competition

a. Facts about the competition (income, location, number of lawyers)

b. Services offered

c. Business methods used

d. Areas of the law served

e. Hourly rates offered

f. Billing methods offered

g. Web products and bonuses offered

h. Social media used

i. Marketing used

j. Barriers to entry

6. Positioning on the market

a. Your offer of service meets your clients’ needs

b. Your interests and your clients’ are aligned

c. Your strengths and weaknesses in this market

d. Your positioning on the market

e. Use of managerial and technological innovations

f. Your competitive advantage

g. Your strategic consistency

h. Your prospects for the future

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ANNEX 3 — COST STRUCTURE Here are some suggestions on how to calculate your costs without using hourly billing.

Direct costs: These are the costs attached to the production, sales and communications of a single service you offer and for which you need to analyze your costs (time worked, production tools, Website, advertising, direct marketing).

Fixed costs: Generally speaking, these are costs distributed over all the services a lawyer sells – more “general” costs (office, maintenance, insurance, general services, advertising).

These costs are independent of the number of files to be handled. They need to be paid no matter what is going on and no matter what your financial results may be.

Variable costs: These are costs that can vary, as the name implies. These costs are based on the number of files handles or hours worked.

Service cost: [fixed costs (direct or indirect) + variable costs (direct or indirect)] / number of services sold.

Break-even point: The level of sales needed to cover all fixed and variable costs.

1) Calculate the margin on variable costs: Net selling bring/ variable service cost.

2) Calculate the break-even point: All fixed costs/margin over variable costs.

3) Now you have a result in service units to be reached to pay all costs.

What do you do with all this information? Based on the price at which you want to sell your service and your estimated monthly sales, you can calculate how long it will take to break even and make a profit.

Then you can formulate hypotheses on various selling prices to have a basis for setting your prices.

Are these the only criteria for setting prices? Of course not. You also need to consider other parameters, such as:

1) Elasticity of prices (clients’ awareness that there are other ways of setting legal matters);

2) Comparison to market price;

3) Acceptable price (based on the value perceived by the client;

4) Periodic efforts to boost sales and your promotion policy;

5) The risk incurred by the lawyer or client in the file.

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ANNEX 4 – QUESTIONS SUBMIT TED TO FOCUS GROUPS

QUESTION 1: Please describe your practice and the t ypes of billing you use.

a) What is your status?

Sole practitioner, under your own name or sharing expenses

Salaried

Associate

Looking for work

Retired

Other (please specify)

b) What type of client do you work with?

Private individuals

Individuals with legal aid mandate

Corporations

SMEs

Non-profit organizations

Associations (professionals or companies)

Unions

Federal government (public and parapublic)

Provincial government (public and parapublic) Municipalities

None of the above

c) Which billing model(s) do you use?

Billing by the hour

Package price set in advance

Fixed monthly or weekly billing

Sliding hourly rate based on guaranteed volume

Variable task-dependent rate

Fixed hourly rate regardless of the professional involved

Success-dependent or performance-dependent billing

QUESTION 2: What is your main reason for choosing one billing model over another? At client’s request

Part of my business strategy

To boost profits

It’s less expensive

To improve communication with clients

To build long-lasting relationships with clients Easier to manage

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QUESTION 3: What aspects create value in your exchanges about billing? Establishing the client’s needs

Better cooperation with client or lawyer

Less uncertainty

Diligence

Detailed billing

Details on the value of the service

QUESTION 4: How would you describe your rel ationship with bill able hours? The easiest way to do things

Pays better

Don’t know any other way of doing it

Time sheets are a pain

A necessary evil

Trying to get rid of it

QUESTION 5: How do you think you’ll be billing for legal services in 2020, 4 years from now? Nothing will change

Fixed price will be the norm

Various types of billing will be used

The client will be king

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ANNEX 5 – BARREAU DU QUÉBEC’S ONLINE SURVEYS ON BILLING FOR LEGAL SERVICES

L AW YERS IN PRIVATE PRACTICE1. You’ve been chosen because you stated on your 2014 registration form that you were in private

practice. Is that still the case? YES NO

2. What age group are you in? Under 25 25 to 35 36 to 45 46 to 55 56 to 65 Over 65

3. What is your gender? Male Female Other: specify if you like

4. In what section of the bar is your principal practice? Abitibi-Témiscamingue Arthabaska Bas-Saint-Laurent–Gaspésie–Îles de-la-Madeleine Bedford Côte-Nord Laurentides–Lanaudière Laval Longueuil Mauricie Montreal Outaouais Quebec City Richelieu Saguenay–Lac-Saint-Jean Saint-François

5. In what area of the law is your principal practice? Insurance Banking and financial institutions Criminal law Business law Environment Bankruptcy & insolvency Families and individuals Financing, mergers/acquisitions Tax law Real estate Litigation Intellectual property Public, administrative, municipal Health and social services (including medical responsibility) Labour, employment, workplace health and safety Securities

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Not applicable Other (please specify)

6. If applicable, in which area of the law is your secondary practice? Insurance Banking and financial institutions Criminal law Business law Environment Bankruptcy & insolvency Families and individuals Financing, mergers/acquisitions Tax law Real estate Litigation Intellectual property Public, administrative, municipal Health and social services (including medical responsibility) Labour, employment, workplace health and safety

Securities Not applicable Other (please specify)

7. Please select the status that best describes your situation: Associate Associate under own name/sharing expenses On salary in a law firm Partner in a law firm Sole practitioner Other (please specify)

8. What percentage (approximately) of your revenue do you earn from each type of clientele? If none of the answers applies to you, write “100” on the last line. Enter percentages in whole numbers, without a percent sign (e.g. private individuals = 40, corporations = 60).

Private individuals Individuals with legal aid mandates Corporations and SMEs Non-profit organizations Associations (professionals or companies) Unions Federal government (public and parapublic) Provincial government (public and parapublic) Municipalities None of the above

9. How many lawyers are there in your firm? Please give only the number of lawyers working in Quebec.

I work alone. 2 to 5 lawyers 6 to 10 lawyers 11 to 25 lawyers 26 to 50 lawyers 50 to 100 lawyers 100 or more lawyers

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C10. Complete the sentence with the answers that apply to you: “My remuneration is primarily

determined by …” Salary scale Results of annual evaluation Firm’s budget Number of hours worked Number of hours billed Predetermined objectives Other (please specify)

11. To the best of your knowledge, over the past five (5) years, do you think your firm’s revenues have:Increased by: Decreased by:

12. How optimistic do you feel about your firm’s prospects in terms of revenues over the next year (practice of law only)?

Optimistic Neutral Pessimistic

13. How many hours a week do you spend on your principal employment? 0 to 15 hours 16 to 30 hours 31 to 40 hours 41 to 50 hours 51 to 60 hours Over 60 hours

14. What billing model(s) do you use, estimating the percentage for each in your daily practice? If you don’t use any billing method, please enter “100” on the last line. Enter percentages in whole numbers, without a percent sign (e.g. hourly billing = 10, task-dependent rate = 90).

Billing by the hour Package price set in advance Fixed monthly or weekly billing Sliding hourly rate based on guaranteed volume Variable task-dependent rate Fixed hourly rate regardless of the professional involved Success-dependent or performance-dependent billing

15. In your opinion, what is the most impor tant consideration involved in your choice of one billing model over another?

Reducing cost of services Quality of legal services Relationship with client Reputation of client Sharing risk with client Reducing uncertainty regarding costs

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16. What is the major obstacle preventing you from choosing a billing model other than hourly billing? Client Cost Complexity of use/management of an ABM Billable hour is the modus operandi for the industry Poor understanding of ABMs Other (please specify)

17. Do you believe that alternative billing methods can make the legal services you of fer more ef ficient?

Yes No

18. Most of the time, does the initiative to adopt an alternative billing model come from: The outside lawyer You Established business practice in your firm Client’s litigation lawyer Acquisition policy of company (client) Not applicable

19. Why would one ABM be of more interest than another? Boosting profits Handling files more quickly Improving communication Aligning your interest with the client’s Building lasting relationships Sharing risk with client Simplifying management Other (please specify)

20. When applicable, projects billed other than with hourly billing were: More profitable Less profitable Equally profitable Profitability uncertain This question does not apply to my practice

21. Do you feel that you fully understand the dif ferent options when it comes to choosing an alternative billing model?

Yes No

22. What tools would be most helpful to you in improving your understanding of ABMs? Guidelines Statistical report Interactive Web site Sample billing agreements Training Other (please specify)

23. Does your organization use a legal project management program? Yes No

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Yes No

25. To the best of your knowledge, what percentage of your firm’s revenues is allot ted to research and development?

26. Do you keep statistics in your firm on the following? (Yes/ No / I don’t know)Profitability of different types of files Profitability of different stages in a fileCosts involved in various files Other (please specify)

IN-HOUSE L AW YERS 1. You’ve been chosen because you stated on your 2014 registration form that you worked for a company

or organization. Is that still the case? YES NO

2. What age group are you in? Under 25 25 to 35 36 to 45 46 to 55 56 to 65 Over 65

3. What is your gender? Male Female Other: specify if you like.

4. In what section of the bar is your principal practice? Abitibi-Témiscamingue Arthabaska Bas-Saint-Laurent–Gaspésie–Îles de-la-Madeleine Bedford Côte-Nord Laurentides–Lanaudière Laval Longueuil Mauricie Montreal Outaouais Quebec City Richelieu Saguenay–Lac-Saint-Jean Saint-François

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5. In what area of the law is your principal practice? Insurance Banking and financial institutions Criminal law Business law Environment Bankruptcy & insolvency Families and individuals Financing, mergers/acquisitions Tax law Real estate Litigation Intellectual property Public, administrative, municipal Health and social services (including medical responsibility) Labour, employment, workplace health and safety

Securities Not applicable Other (please specify)

6. If applicable, in which area of the law is your secondary practice? Insurance Banking and financial institutions Criminal law Business law Environment Bankruptcy & insolvency Families and individuals Financing, mergers/acquisitions Tax law Real estate Litigation Intellectual property Public, administrative, municipal Health and social services (including medical responsibility) Labour, employment, workplace health and safety

Securities Not applicable Other (please specify)

7. Complete the following sentence to describe your type of practice: “I practice primarily in a(n)…”: Company Non-profit organization Union Professional order Other (please specify)

8. What is your status? Management On salary

9. How many lawyers are there in your firm? Please give only the number of lawyers working in Quebec.

I work alone. 2 to 5 lawyers 6 to 10 lawyers 11 to 25 lawyers 26 to 50 lawyers 50 to 100 lawyers 100 or more lawyers

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C10. Please give an estimate of how many employees work in your company.

11. To the best of your knowledge, over the past five (5) years, do you think your litigation budgets have: Increased by:Decreased by:

12. To the best of your knowledge, over the past five (5) years, do you think the amounts sent to outside lawyers have: Increased by:Decreased by:

13. To the best of your knowledge, what percentage of your legal depar tment budget is sent outside the company?

14. Complete the sentence with the answers that apply to you: “My remuneration is primarily determined by …”

Salary scale Results of annual evaluation Firm’s budget Number of hours worked Number of hours billed Predetermined objectives Other (please specify)

15. How many hours a week do you spend on your principal employment? 0 to 15 hours 16 to 30 hours 31 to 40 hours 41 to 50 hours 51 to 60 hours Over 60 hours

16. Do you feel you are well paid for the work you do? Well paid Fairly paid Poorly paid

17. Estimating the percentage, what billing model(s) do you use for the work you do outside the company? If you don’t use any billing method, please entire “100” on the last line. Enter percentages in whole numbers, without a percent sign (e.g. hourly billing = 10, task-dependent rate = 90).

Billing by the hour Package price set in advance Fixed monthly or weekly billing Sliding hourly rate based on guaranteed volume Variable task-dependent Fixed hourly rate regardless of the professional involved Success-dependent or performance-dependent billing No billing method

18. To the best of your knowledge, what percentage of bills from outside lawyers is billed according to a billing model other than hourly billing?

19. In your opinion, what is the most impor tant consideration involved in your choice of one billing model over another?

Reducing cost of services Quality of legal services La Relationship with outside lawyer Reputation of outside lawyer Sharing risk with outside lawyer Reducing uncertainty regarding costs

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20. Do you believe that alternative billing methods can make the legal services you of fer more ef ficient?

Yes No

21. What is the major obstacle preventing you from choosing a billing model other than hourly billing? Outside lawyer Cost Complexity of use/management of an ABM Billable hour is the modus operandi for the industry Poor understanding of ABMs Other (please specify)

22. Most of the time, does the initiative to adopt an alternative billing model come from: The outside lawyer Established policy in the outside lawyers’ firms You Acquisition policy of your company Not applicable

23. Why would one ABM be of more interest than another? Reducing costs Handling files more quickly Improving communication with outside lawyer Aligning your interests with the outside lawyer’s Building lasting relationships Sharing risk with outside lawyer Simplifying management Other (please specify)

24. When applicable, projects billed other than with hourly billing were: More efficient Less efficient Equally efficient Efficiency uncertain This question does not apply to my practice.

25. Do you feel that you fully understand the dif ferent options when it comes to choosing an alternative billing model?

Yes No

26. What tools would be most helpful to you in improving your understanding of ABMs? Guidelines Statistical report Interactive Web site Sample billing agreements Training Other (please specify)

27. Does your organization use a legal project management program? Yes No

28. To the best of your knowledge, what percentage of your company’s revenues is allot ted to research and development?

29. Does your company or organization keep statistics on the following? (Yes/ No/ I don’t know)Cost price of various files handled internallyCost price of different files handled externallyOther (please specify)

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TABLES

FiguresFigure 1 — Diagram – Methodology – Logical path 9Figure 2 — Value chain for legal services 51Figure 3 — Analysis of a business model 54Figure 4 — Production functions 55Figure 5 — Evolution of the legal service as a “commodity”— Richard Susskind 56Figure 6 — A change of paradigm 64

GraphsGraph 1 — Complete the following sentence with the answer that applies to you:

“My remuneration is mainly determined by…” 29Graph 2, 3 et 4 – What billing method(s) do you use, estimating the percentage

of each in your daily practice?” 30Graph 5 — Do you believe that alternative billing methods can improve the efficiency

of legal services offered?” 32Graph 6 — Where applicable, projects that were billed other than by hourly billing were…” 32Graph 7 — “Most of the time, where did the initiative to adopt an alternative billing method

come from?” 33Graph 8 — What made you interested in choosing one ABM over another”? 34Graph 9 — “In your opinion, what was the most important consideration in choosing

one billing method over another?” 34Graph 10 — “What is the main obstacle that stops you from choosing a billing method

other than hourly billing?” 35Graph 11 — In your law firm, do you keep statistics on…?” 38Graph 12 — “Does the company or organization where you work keep statistics on…” 39Graph 13 — Types of clients seen in private practice 39Graph 14 — Types of clients – sole practitioners or lawyers working in small firms 43Graph 15 — Types of clients served by lawyers in medium-sized firms 45Graph 16 — Types of clients served by lawyers in large firms 46

TablesTable 1 — Lawyers’ income 13Table 2 — Negative consequences of hourly billing – ABA 17Table 3 — Alternative billing methods – ABMs 19Table 4 — Areas of practice and use of ABMs 37Table 5 — Size of firm and use of ABMs 40Table 6 — Regions and use of ABMs 44Table 7 — Perceptions held by private-practice and in-house lawyers 49Table 8 — Disruptive technologies and their scope (horizon 2024) 61Table 9 — Startups in the legal services industry 63Table 10 — Content of legal technologies courses at some American universities 65

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ACKNOWLEDGEMENTS

The Barreau du Québec would like to acknowledge the support of the in-house lawyers’ committee in completing this ambitious project, and thank all the lawyers who took part in the focus groups and online surveys.

Maison du Barreau445 Boulevard Saint-Laurent Montréal, Québec H2Y 3T8

Phone 514 954-3411 Toll-free 1 844 954-3411

[email protected] www.barreau.qc.ca