Why Practice Area Isn’t a Law Firm Business Model (Full Transcript)

[00:00:00] Speaker 1: So, Stephanie, in episode 600 of our podcast, which is part of the series that we're in here in this video, you said something that I think might have stopped a lot of people in their tracks. And I really liked this thought, this quote. You said, practice area is not a business model. And I want to dig into that today because I think for most lawyers, when they hear that, they think, yeah, obviously, obviously my practice area is not my business model. That's not how I did this. But then when you push on that, when you actually ask them what their business model is, they don't have a great answer then.

[00:00:38] Speaker 2: I mean, I think that's right. And the gap between thinking you have a business model and actually having one is where a lot of pain lives, right? Because if you haven't consciously or intentionally designed your business model, then you've accidentally chosen one. Unfortunately, the default model for most firms is the billable hour, which is fine, but it is a design choice with real consequences. And most lawyers, they made it without realizing that they were making that choice at all.

[00:01:12] Speaker 1: We can kind of give people a little bit of leeway here because we don't get taught how to run a business in law school. So not everybody necessarily has the idea of business model in their brain. So let's define that. What do we actually mean when we say business model?

[00:01:28] Speaker 2: I'm glad you asked this because I think a lot of people have visions of really long documents and things that they see on the internet. And really, if we boil it down, your business model is the answer to three connected questions. What are you selling? Who are you selling it to? And how does that money flow in return for that exchange of services? So it's not your practice area. It's not your rate sheet. It's the underlying architecture of how value moves through your firm. And the reason it matters so much is that your model is what determines your capacity for selling, your cash flow pattern, your ability to delegate, and ultimately whether the business can run without you. So all of those things track directly back to our business model.

[00:02:18] Speaker 1: And most attorneys, I mean, at least in my experience, most attorneys have never thought about that, much less had a conversation about it.

[00:02:26] Speaker 2: Yeah. I mean, I think what's fair to say is that most attorneys inherit the model from the firms where they were trained, right? They watched other people. They watched how it worked. They absorbed it. And then when they went on their own, they just simply replicated it because it was familiar and because no one told them that there were other options. And so, again, it's not inertia or laziness. It's just sort of the water we swim in, and we just don't know any better.

[00:02:55] Speaker 1: And I think what most people have learned is, yeah, like you said, the billable hour. So let's talk about that specifically because I hear that you have opinions on this. I've been following the show enough to know that you have some opinions on this. What's actually wrong with the billable hour, though?

[00:03:14] Speaker 2: It's not that it's inherently wrong, and it's not necessarily wrong in every context. But I think we need to be really clear about what it does to your firm. So first, it ties your revenue ceiling directly to your hours. So you can only bill what you can physically work, which we know is not 24 hours in a day, which means the only way to scale, the only way to grow is to work more. And that more has a ceiling. Now you can hire more people. Of course, that creates a whole new set of management and cost challenges. But even then, your ceiling is capped at what that person can bill. So first and foremost, we have a revenue cap anytime we're dealing with the billable hour, right? Second, there's an inherent misalignment with our clients.

[00:04:11] Speaker 1: I like that.

[00:04:12] Speaker 2: Your incentive, if you're billing by the hour, your incentive is time, right? You want to put time on the case. But your client's incentive is speed and resolution. And inherently, those pull in opposite directions, right? What's your incentive to use AI and do something in minutes instead of hours? Because now that's your now, yeah, your client would love for you to get that answer quickly. But you, from a business perspective, have no incentive to do that. And then third is this other one that maybe people don't talk about enough. But it actually, the billable hour makes your pricing really hard to communicate and for clients to understand, you know, somebody is going to ask you, how much is this going to cost me? You can give them an idea. But the reality is, for most of us, the answer is, I don't know yet. And that is a really hard client experience. It also doesn't build trust. It also creates issues down the line. Because oftentimes, because we don't know what we default to saying something like, well, my, you know, I need a $5,000 retainer up front and my billable rate is $250, we'll bill against that. And, you know, that's an all, what is, what did the client just hear? $5,000. But they don't know if they just purchased a small automobile or a condominium, right? And so then you just start working the case, you start billing. And we know this creates sometimes collection problems, because client has no idea what to expect. They just get bills in, that retainer gets depleted, you want more money. And they're like, what's going on? I thought, you know, they heard $5,000. So from a business perspective, that also creates a lot of potential problems down the road.

[00:06:07] Speaker 1: I think I've heard you once say, and this gets to what you're talking about here, can a client explain your pricing to a friend? You know, and what does that reveal?

[00:06:20] Speaker 2: If a client can't describe what they're getting and what it's going to cost them in a single sentence, then, you know, you might not have a business model, you have a billing arrangement. I know, but that matters enormously when you're trying to grow and delegate and eventually sell. So businesses are built around models that people can understand, and billing arrangements are just transactions.

[00:06:44] Speaker 1: What are their alternatives then? You know, like what are modern firm models? We hear that all the time, but what do modern firm models actually look like?

[00:06:54] Speaker 2: I mean, we are seeing a few things that are working really well right now, right? And it might depend on what your ultimate goals for your business are. But for sure, we're seeing a lot of people have success with flat fees. They're incredibly powerful. You get to define the scope of work, you price the outcome, and for a lot of firms, you might get paid substantially, you know, a lot or all of the cash before you do the work. Or at least you might break it up into some predictable payment points.

[00:07:31] Speaker 1: Yeah, a little more predictability.

[00:07:34] Speaker 2: Yeah, so that's going to improve cash flow, client communication is going to be clearer, you remove the anxiety for both sides of it, for you and your client about what this is going to cost, and then for you, am I going to get paid for this, which I know comes with hourly billing. I mean, I see it. And by the way, we also see lawyers routinely write down their bills because they're nervous about sending those bills out. This shouldn't have taken that long. I can't believe this, you know, I spent this much time on it, the client will never go for this bill. Well, now, if that's really the case, you've invested time into that matter that you're never going to recover. So wouldn't it be better on the front end to be able to scope out what work you're going to do, how much you'll charge for it, and then you have some assurances that you're actually going to get paid for it?

[00:08:21] Speaker 1: I think that word, though, the scope, that scares people. And rightly so. I mean, it's okay to be thoughtful about that, but like the scope management piece of flat fee is where people get very nervous, I think.

[00:08:36] Speaker 2: For sure. And totally get it. And scope creep is a real risk if you haven't defined the engagement clearly, you know. And even if you have, because, you know, we always hear this, oh, what if they notice more depositions or, you know, the unexpected thing happens. I can't predict all the things that are going to happen, especially if there's an adversarial thing happening. I mean, even in transactions, right? Maybe something blows up and it costs more. But by the way, most, I always say this, most skyscrapers in modern cities were built on a flat rate project with change orders, right? So one, you can solve for the unknown, you know, what ifs with something. Like if you've defined the initial scope clearly, then those other unknowns can get managed through change orders. Then when you think about, so let's just, so we've solved for that. Then we look at, well, how did we define the scope of the work we're going to do? And if we're worried about scope creep happening inside that container, then I would say that's a systems problem, not a model problem. So, you know, we could solve for that by making sure we have great client intake, right? Really clear engagement letters, people understanding what's covered, what's not, you know, do you have repeatable outcomes and services? Like how are you then now building the system that you're going to use to get the work done? And that can then, you know, as those efficiencies get better, you protect yourself against, you know, scope creep inside the model.

[00:10:19] Speaker 1: The thing that strikes me there about that scope creep is that I think a lot of times people are concerned about, you know, shifting the ground underneath their client. Well, you've already talked to your client, you've laid these things out. Isn't that in many times shifting less than, I hope they don't get to the $5,000 retainer or, hey, buddy, I just hit the $5,000, you need to refill this retainer. That's not any, that's certainly never more straightforward than this is, even with the change orders.

[00:10:56] Speaker 2: The process that we're talking about, it gives more agency to our clients because right now, especially with the billable hour, right, we have all of the decision-making power, at least it feels like it. You know, a lot of times the lawyer's deciding, do we want to go down path A or B? Imagine a new scenario, and I'm not saying you do that. I mean, I get it. Sometimes you're going to talk to your client and say, you know, hey, they just served us with this thing and now it's going to cost more. But what if you could instead like have, by having your scope defined, you give your clients more options. And I know firms that have done this where they've really empowered clients that clients could see from a, they understand the financial risk now, because again, when we're billing by the hours and we're like, we have to respond to this motion or we have to go take an extra deposition, the client doesn't do that. They don't know what that means in terms of real dollars out of their checkbook. But instead if we could say to them, hey, we're at a decision point here, and if we go this path, it's going to cost you $10,000, or we could go this path and it will cost you $2,000 or whatever the options are. And maybe there's real differences assigned to those results. Then people make those kind of judgments all the time. I may decide to spend more because I'm, I want what's at the other end of that cost. It's not that people always just choose the least expensive option, but now the clients in the driver's seat and involved in the discussion and you know, they feel like they have a role to play. They're going to understand. And so as a result, they're going to understand the work that you're doing better and they're going to appreciate the value that you're providing to them better too.

[00:12:40] Speaker 1: They're better informed, they're, they're theoretically a better client. But in that scenario, I still think that a lot of times with the flat fees, we're really talking about chunking hours. You know, you know, if you can, you're still incentivized to do things faster, you're incentivized to, to get, you know, technology. And so we, we can get away from that chunks of hours sort of mentality, but a lot of people think chunks of hours with this. What about like subscription models, you know, what about something even different than that?

[00:13:14] Speaker 2: Yeah. I mean, I love subscription models. They can be interesting, certainly for certain practice areas that have ongoing relationships and you know, membership style practice. It's not going to be right for every practice, but where it fits, it could be really attractive. And then I think the challenge that you're kind of bumping up against though, even with that last question is, even with subscription, there's a tendency to say, am I just pre-selling a block of hours? And, and look, it's complicated stuff. Pricing is not easy by the way. That's why the, I mean, the billable hour is, I'll give you that, it is the easiest way to price. And there's really no risk associated for the lawyers because they just got to pick their rate, do the work, multiply it out, and that's the price, right? Write their bills down. The things that you and I are...

[00:14:04] Speaker 1: Fail to collect. Exactly.

[00:14:06] Speaker 2: Well, I, yeah, but it is easier because what, because what you and I are discussing, it takes hard work and, and there is risk now inherently involved for the attorney because they're trying to predict on the front end, like how much should I charge? And certainly your labor costs, the time it takes for you to do certain tasks is a component of pricing. And we don't have time to get into, I mean, there's books and books and books written on pricing philosophies and how you go through it. And certainly I'm not necessarily like a, just a pricing expert. And so you do, you can consider the amount of time it takes for you to do a task. There's also opportunities for you to really get smart about delegating, like who should do different parts of the case and including technology. I mean, we would be silly in today's world. It's what is it? It's February. When we're recording this, it's February of 2026. The tools are only getting better. Like every day. I mean, this month we saw a remarkable, crazy, great leap in AI technology on the tools that you and I are using. They're only going to get better and better in legal. And I think, you know, we would be silly if we didn't bring that component into this equation. Because if you're starting a firm today and you're thinking, let me start my firm and just bill by the hour, I don't know, I hate to say it, but try again.

[00:15:38] Speaker 1: Well, I think, I think the biggest thing here, because we could get into hybrid, we could get into, well, I do hourly billing here, I do, you know, pull the rip cord and hourly bill after that. But I think the biggest thing is like thinking about this intentionally. And then for us, stress testing, testing these business models. So let's, you know, we've thought about it. We've decided intentionally what we want to do. Now let's run through stress testing, testing these.

[00:16:06] Speaker 2: Yeah. So let's give everybody three questions. You know, one, can your revenue cover your fixed cost predictably? Not just in a good month, but on an average month. And if the answer's no, then your model has a structural problem. So that's kind of question number one that we want to look at, right? Number two, can your model smooth out income volatility? Because cash may be coming in as a lump sum, you know, especially if you had like a contingency fee win and that feels really great. But that doesn't pay the payroll in the months in between wins. Right. So it's not just enough to look at profitability. We really got to start thinking about cash flow. When does cash come into your business? How often does it come into your business?

[00:16:51] Speaker 1: Right.

[00:16:52] Speaker 2: Ideally, our model is going to create some predictability for us. So it doesn't feel like it's always, you know, faster famine. And then third, can you deliver your model efficiently? Not just can you do the work, but have you built the systems, the templates, the design and delegation structure so that your delivery doesn't require you to be personally involved in every single step? And if not, then you might have a capacity ceiling problem baked into your model. Because one of the things, you know, just to kind of round out our math equation, one of the things, it's not enough to just say, OK, in order to cover my expenses, I need 10 cases a month. Let's just use that number. OK, if I get 10 cases a month that I can answer question number one and I can easily cover my fixed costs and built some profitability in there and that that's good. But on the third question, if your current team, whatever you have in place, your current systems through a combination of people and technology, if they only have the capacity to handle five cases a month, now we have a problem.

[00:18:02] Speaker 1: Right.

[00:18:03] Speaker 2: You got to do both ends of the equation. It's not it's not enough to just say, OK, I need 10 cases a month and I'll be good. We want to make sure you can you have the capacity to do 10 or 12 or, you know, 15 cases a month so we can really hit that profit number.

[00:18:19] Speaker 1: Well, and then I think, you know, going back to what we were saying earlier is then maybe a fourth is can the client explain it?

[00:18:27] Speaker 2: We want the client to be able to explain it. And then I hope we didn't really address this too much yet, but I hope people are seeing that if we build the model right, there's an opportunity for it to scale beyond you. And that's where we really now start thinking and acting like a business and a business owner that the work doesn't just depend on us because we've built a system and the system can continue to grow and therefore, you know, money grows and profit grows.

[00:18:58] Speaker 1: In this in this business model question, then what what do you want to leave people with? What should they really be thinking about here?

[00:19:06] Speaker 2: Let's leave them with this. Pricing is not a math problem. It's a design decision. So most lawyers are underpriced because they're anchored to what they've always seen charged or they're afraid of losing clients who might push back. But underpricing has a real cost. It attracts the wrong clients. It can create resentment and it can make your firm structurally unsustainable. So price like you mean it and then build a model that you can actually defend, explain and grow.

[00:19:40] Speaker 1: I like that defend, explain and grow. Well, so where where should people go if they actually want help working through this in their firm?

[00:19:50] Speaker 2: So this business model conversation is actually one of the very first things we do. And we dig into it with firms inside Lawyerist Lab. We have a ton of tools and templates built out so you can actually see the numbers and see the real data, you know, play with it and see what changes you make and how that would actually impact your firm. So if you're ready to get specific about your model and what that would look like and really stress test it with someone who's done this for hundreds of firms, we'd love for you to check out Lab and what it looks like. And we'll make sure we put the link in the show notes.

[00:20:21] Speaker 1: Love it. So in the next episode, we're talking about the capacity ceiling and what happens when you're doing everything right and then growth breaks everything. So stay with us.