Goodbye billable hour, hello Legal Output Points (LOPs)

Off the back of a post by Joel Roy where he asked if anyone who has to record billable time actually likes/prefers it, I thought I'd circle back on, and further explore, an idea I've been playing around with for replacing the seemingly immortal billable hour (BH) with a defined points-based unit of consumption for legal work.

I call these Legal Output Points (LOPs).

At the outset, I should be clear that I’m not:

• expounding LOPs as a singular replacement fee model for legal services - because there's arguably nothing simpler and more certain than a fixed fee - but attempting to find a way of crystallising, in a measurable way, the output provided by lawyers in what is becoming an increasingly systematised and post-professional world (by which I mean a world that is becoming more procedural and less dependent on people as a source of knowledge and expertise);
• proposing LOPs as a rigid framework for all legal services, as much as I like the idea of a pricing construct that has universal application; or
• suggesting that how lawyers charge for providing their services is the greatest question of the legal industry's age. As the Susskinds note in their book 'The Future of the Professions' (as I’ll refer to it a few times, the FotP): "...there is a view amongst the more innovative leaders in professional firms that to fixate on pricing models is to miss a bigger point - that the real drive will not be to change the way traditional professionals charge for their work, but to source the work of professionals in new ways. There will be a move away from pricing differently to working differently (for example, by para-professionalization or online services)". We're already seeing this in various guises, not least through the advent of generative AI.

This is very much a starter for ten - a thought experiment - and if anyone is interested in the ideas I’ve discussed here and has thoughts on developing them further, I’d be happy to chat!

What's 'bad' about the BH?

I'm not sure 'bad' is the correct adjective, after all, the BH is nothing more than a unit of consumption based on time. But there's certainly a lot that's wrong with the BH in terms of how it's become a false proxy for productivity and measure of individual performance, rewarding inefficiency often to the detriment of lawyer wellbeing* and positive client outcomes.

I won't say anything more on the issues with the BH because many others have done so extensively, not least Scott Simmons across his various LI posts and Graeme J. in a series of blog posts starting with 'Syllables of recorded time'.

* There have been moves by some firms such as Slaughter & May to retain the BH but dissociate it from performance targets as part of a 'no target hours culture', explaining that: "Although we record time, we have no billing or time targets. This means our lawyers are not forced to compete with each other to find the jobs or clients that bill the most hours. Equally, we are not forced to live under the stress of finding someone to bill for a set number of hours a day. This way, people have everything to gain from being selfless." This is a positive move without a doubt, but it doesn't address the deeper issues with the BH as a fee model in my opinion.

What's 'good' about the BH?

While I'm not a proponent of the BH, I can accept that as a fee model it does have some things going for it(!):

• Ubiquity - the BH has been a mainstay of the legal professional services market for well over half a century. As such, it's largely familiar both to those within the profession and to consumers of legal services.
• Usability - calculating the number of BH on any project is straightforward, but it’s also a useful project management tool in the sense that it can be used to measure how far a matter has progressed against a budgeted amount of time.
• Teachability - perhaps falling out of its ubiquity, the BH isn’t difficult to grasp (I remember being taught how to record my time and use dictation in less than 30 minutes by a Senior Associate on the first day of my training contract).
• Gaugeability - very often hourly rates are used by clients to benchmark law firms on cost, even though a lower hourly rate doesn't always mean a provider is more cost-effective than one with a higher hourly rate.

Any new unit of consumption for legal output will need to incorporate these benefits for it to become widely capable of adoption, as well as being practice area agnostic.

What are consumers of legal services buying?

This is one of those questions you're sure to get a different answer to depending on who you ask. I expect you'd even get a range of answers from lawyers, depending on their seniority or practice area.

Certainly when I was at law school, I recall a lecturer telling us that consumers of legal services primarily buy two things:

• Time - there are a finite number of hours in the day within which an individual can be productive, and therefore time spent by a lawyer advising one client is time that isn't otherwise being dedicated to other clients or tasks.

• Knowledge - this is why the legal profession has more or less been able to survive by doing the same things in broadly the same way for so long. The specialist knowledge that separates legal professionals from 'lay people' (for want of a better term), together with the credentials required to impart that knowledge, reinforces what the Susskinds refer to as the 'Grand Bargain'. Knowledge is the professions' 'defensive moat' and the application and dissemination of that knowledge attracts a premium.

I suspect this somewhat reductionist view of ‘what lawyers do’ probably still holds some sway within the profession, but I’d like to think that most lawyers recognise the value in what they offer beyond the time spent in imparting their knowledge, be that giving clients the confidence to take certain decisions, peace of mind or obtaining access to justice.

With the exception of time, and arguably the knowledge ‘transferred’ using that time, the BH does little to frame the output or value being transacted between a lawyer and their client. The BH is a one-sided affair, concerned not with value but with that which can be charged for. It certainly isn't collaborative or transparent, despite any discussions that may take place around fee caps/collars/stages or, arguably, even in the context of subscription-based offerings (all of which are attempts to make the bitter medicine of the BH go down more easily). The time it takes to complete a task is elastic, because efficiency isn't constant but rather dependent on several variables. On any given day, the same task may take the same person more or less time. In short: the BH is opaque.

Output vs. Value

I’m conscious that I use the terms ‘output’ and ‘value’ interchangeably when they aren’t the same thing. I must admit to having had an internal struggle around whether a unit of consumption for legal services is one that should reflect one or the other or even both! You could say that an ‘output’ is something tangible, such as a deliverable or an outcome, while ‘value’ is a qualitative assessment of the effectiveness of an output relative to the cost of obtaining it.

I came across a helpful paper from an academic at the University of Windsor (Ontario) by the name of Noel Semple entitled ‘Measuring Legal Service Value’. Semple’s paper proposes a model for calculating ‘legal service value’ for legal services generally, both contentious and non-contentious, and for corporate and individual clients. The function of the model proposed in the paper is one of measuring value in the sense of the usefulness and worth of legal services as opposed to determining how much a firm should charge. With this goal in mind, the ‘value model’ is based around four elements: effectiveness, affordability, client experience and third party effects. Each one of those elements takes into account internal metrics (what happens within a firm in terms of its systems and processes), input metrics (who provides the service, which the author admits may be of limited value) and output metrics (what comes out of a firm in terms of deliverables and outcomes). Overall, I found this paper helpful in shaping my understanding around the complexity of defining legal service value, but struggled to see how it could be translated into a pricing methodology.

At least for now, my sense is that output and value aren’t mutually exclusive, but that in defining a unit of consumption for legal services, the main focus must be on output at the risk of introducing too much complexity and variability. A data-driven assessment of value is something which could follow completion of a matter or take place at various points during a matter, and some version of Semple’s value model could be an effective starting point for this purpose.

How do you define legal output?

Let's take time out of the equation. It's outmoded and we need to find something to replace it. We therefore need to define what 'legal output' actually means before attempting to define a corresponding unit of measurement.

It seems to me that any legal task requires consideration of at least the following factors:

Complexity ??

The BH measures complexity only by reference to the time it takes to deliver legal output (whether that's an advice note, a project or transaction, or the settlement or determination of a claim) combined with the hourly rate of the individual required to deliver that advice (which is typically based on the seniority of that individual). But even when work is properly allocated to a junior lawyer, risk management controls often require the review of that work by a more senior lawyer so that the effective hourly rate is increased rateably. The need to meet time recording targets creates competition for work which ignores capacity and tends to result in the inefficient and inequitable allocation of work (though see note above regarding Slaughter & May's approach).

Whether a request for legal support is complex or not depends on the extent to which the request is context-specific. For example, a simple question about how much statutory holiday leave a part-time employee is entitled to is less complex and more formulaic than a question about how best to deal with the termination of an employee's contract in a way which will mitigate litigation risk.?

Technology is also redefining the meaning of complexity: LegalOps and LegalTech exist to find ways to replace/augment people with process and technology, while generative AI has the ability to surface and present knowledge in a variety of ways on demand.

Time may well be a facet of complexity; complex things do tend to take longer. It therefore may be appropriate to reflect the element of time in any unit of consumption in some way for appropriate types of legal work that are more contentious or transactionally complex. I’m reserving my position on this point!

I should acknowledge that, while logic dictates that the person best-placed to determine the complexity of a matter is the subject matter expert, lawyers may look for complexity where there isn’t any or overplay the complexity of a matter. Lawyers may consider it necessary to explore all relevant factors in the interests of mitigating risk of a negligence claim being brought against their firm. While it may be possible for both lawyer and client to reach an agreement around the complexity of a matter, I’d be minded to remove this concern from the equation as this would play into the affordability and perceived usefulness of the advice which are value metrics (see above re output vs. value).

Gravity ??

The BH only cares about how long something takes, not the gravity of the legal output, that is, the difference that the legal output makes to a client achieving its objectives. Q&A-type questions that are not context-specific will generally have less gravity than challenges or problems requiring a more consultative engagement. You could just as easily replace 'gravity' with 'impact'.

Value-based pricing permits lawyers to charge a premium to customers by effectively asking the question: "what's this advice worth to the client?"

Urgency ?

This reflects the opportunity cost to a lawyer of prioritising the needs of one client over another. Under the BH, if a client asks a question at 9am to which they require an answer by 5pm the same day, the maximum billable potential of that opportunity is 8 BH. But if the legal output can be provided within 2 BH, then the BH only permits the lawyer (who is presumed to be acting honestly and in the best interests of the client) to charge the client for 2 BH.

Urgency may become a less relevant factor given the pace of technological development but, for now at least, it seems relevant.?

Predictability ??

One of the criticisms levelled at lawyers, especially contentious or transactional lawyers, is that if they've done something long or often enough, it should be possible for them to predict, to within a reasonable degree of certainty: (a) what the outcome should be; and (b) how long something should take and therefore how much it should cost. The BH thrives on the unpredictability of both dimensions: the longer something takes, the greater the delta between correspondence/events (requiring lawyers to refresh their memories) and the more that external factors create unforeseen complexity, the more money that can be billed.

In the fixed fee context, lawyers need to ensure that the fee they agree factors in an element of unpredictability. Invariably, the fixed fee will either be constrained to a tightly defined set of objectives or outputs or the completion of a discrete phase of a claim, project or transaction, or it'll be subject to several caveats which allow the lawyer to reopen the discussion about what the fixed fee should be. While I accept the need for lawyers to ensure that any matter doesn't become unprofitable, my view is that a fixed fee should be just that, having weighed everything in the balance.

For predictability to be an effective ingredient in any unit of consumption, it must be determined on an objective basis without emotion. It must be grounded in data. This is something that AI of course lends itself to, although I can't say how effective it would be in doing so. Looking at time records for similar matters undertaken by the same group of lawyers only tells half the story; you need to know what factors were taken into account in agreeing the original fee/fee estimate with the client and what changed during the course of a matter to reliably make predictions in the future, that is, both quantitative and qualitative factors.

Arguably a unit of consumption shouldn't need to take into account future events, because it is just that: a unit of consumption.

Resource ???

Here, we're effectively talking about recovering the cost of delivering a legal output or, in accounting terms, the cost of sale.

The cost of sale needs to take into account a lawyer's total expected cost (salary, employer's NICs, training and overheads) and the rate attached to the BH needs to cover the cost of sale and then some, in order for the firm to turn a profit. While I'm not sure how many firms still adopt this approach, historically some firms have set BH targets based on 3x salary: 1x to cover salary costs, 1x to cover expenses and 1x profit.?

In a pricing environment where fees are agreed upfront, as opposed to an open-ended time and materials basis, recovery may be calculated by working out how much a firm needs to bill to cover its overheads (including staff) and how much of a profit margin it wants to make, and then working back from this to set individual or team billing targets.

But is resource really all that relevant? In the same way as clients don't care how long something will take, do they care what resource is needed to deliver legal output? I don't think so. This is a matter for unit economics; the price per unit of consumption needs to be set at a level which allows recovery of the costs of doing business and making a profit.

Learning from software developers

As a tech lawyer, I can say from experience that software development projects can be messy. Software projects are susceptible to scope creep and cost overruns, often like legal services. Yet, I've always believed that lawyers have a lot to learn from software developers and their ways of working. Certainly, there's been some spillover in the way legal project management has adopted variations on a theme of agile development methodologies, and the way developers save and recycle snippets of code has manifested itself in some of the legal drafting tools that have come to market over the last few years.

While terminology varies depending on methodology, software teams often define the requirements for chunks of projects they need to deliver as 'stories' and tackle them in short bursts of development effort called 'sprints'. Each of those sprints may have assigned to them a budget (sometimes, but not always, in monetary terms) which is distilled into a number of 'story points', representing a unit of measurement that factors in the effort, complexity and uncertainty estimated to deliver the functionality framed by that story. As a means of addressing the struggle that humans have with estimating how long something will take (for an array of reasons, not least ‘forecaster bias’), the Fibonacci sequence (where one number is the sums of the previous two) attempts to account for this uncertainty and the number of story points will be discussed and agreed, subject to an agreed upon limit (e.g. a maximum of 13 points). This feels like something which, with some adaptation, could help define a unit of measurement for legal output.

Story points aren't used so much to determine the price payable by a client as they are a means of measuring and tracking the amount of work required to produce a deliverable within a specified time period. While not all software teams adopt this approach, they may divide the amount of time spent up to a particular point in a sprint by the estimated number of sprint points to determine the 'velocity' and 'burndown' for a project, that is, the amount of gas left in the tank to get over the finish line. Time recording for such purposes isn't the end of the world: time isn't the basis on which developers' individual performance is being measured, nor how the client is charged, but I want to avoid anything that requires someone to start and stop a clock every time they perform a task. To scrap the BH, but still require granular time recording, feels regressive to me and not the spirit of what I’m trying to achieve.

Introducing Legal Output Points (LOPs)

And so, at last, we arrive at my proposed unit of consumption for legal services: LOPs.?

Why LOPs? Well, I wanted something that connotes the unit of consumption as specific to the delivery of legal services. That takes care of the 'L'. I also feel that it's important to focus on what the client gets in return for the units they pay for. That takes care of the 'O'. And as for the 'P', I wanted to stray away from units given their association with the BH and 'points' is the best alternative synonym for units as something that is capable of measurement.

But how do LOPs work?

Of the five factors for pricing legal outputs set out above Complexity, Gravity and Urgency seem, not only the most relevant factors, but also the most straightforward to define. While I accept that the complexity of a matter is an input rather than output, it has such a bearing on the output that in my view they can't easily be separated.

The factors comprising a LOP would work as follows:

• Complexity - on a scale of 1-10 (from least to most complex), how complex is the task by reference to the novelty of the legal question(s) posed, the complexity of any facts in issue (i.e. the volume of information that needs to be assimilated), the importance of accuracy to the output (lawyers always assuming that anything less than 100% = failure) and the need for the output to be context-specific (i.e. with a knowledge and understanding of externalities such as market forces, industry norms etc.).

• Gravity - on a scale of 1-10 (from least to most critical), how critical is the task by reference to the opportunities it may create, the threats it may avoid or mitigate or the achievement of the client's objectives.

• Urgency - on a scale of 1-10 (from least to most urgent), how urgently does the client require the output.

For now, each of the three factors has the same weighting. This certainly makes things simpler, but depending on the context different factors may be more or less critical than others. If weighting was applied, then the number of points on the scale for each factor would be multiplied by the corresponding weighting.

Here's a worked example:

• A LOP is ascribed a monetary value which a firm deems sufficient to achieve a target net margin based on its cost base, let's say, ￡25 (meaning that some firms, or perhaps even teams within firms, will be more expensive than others, but there's no getting away from this).
• A lawyer is asked to review a potential buyer's 10-page, 2,000 word NDA in anticipation of completing the distressed purchase of their client's company.

• Even the most complex NDAs tend to be much of a muchness; this is a task for an AI document review tool and quick glance at the report by the lawyer to ensure nothing has been missed. Complexity = 2.

• The company is in distress. The sale of your client's company is paramount, but in and of itself, signing an NDA is a small step towards the client achieving its objective. Gravity = 3.

• The client needs the review turned around in quick time at the risk of losing the prospective buyer's interest. Urgency = 10.

• That gives a total of 15 x ￡25 = ￡375

This doesn't mean that the maximum amount chargeable for any matter is 30 x ￡25 = ￡750. It means that the maximum amount chargeable for a task or part of a task is ￡750 (or more, depending on weighting). A matter would comprise multiple tasks each with separate LOPs totals.

In terms of how LOPs are arrived at for any given task or matter, there are two possibilities as I see it:

1. Mutual agreement: during the course of discussing the matter, the lawyer articulates their view on complexity while the client articulates their view of the gravity and urgency of the matter to them and their organisation. As a result, the parties are able to agree upon the number of LOPs and the corresponding price either for the matter as a whole, or each part or parts of the matter. This is certainly a lot more collaborative than the BH and in my view, any discussion about the price of legal services will always necessitate some discussion around price.
2. Automated: an intelligent system would determine the number of LOPs for the task or matter based on a data-driven model trained on similar matters and picking up on language cues in requests (in email or some form of instant chat or platform through which requests may be made). The number of LOPs for each factor could then be presented to both lawyer and client, giving them an opportunity to challenge them if they have specific knowledge that calls them into question.

Things to like about LOPs

The key things I like about LOPs are:

• LOPs can be determined algorithmically: a model such as this lends itself to algorithmic determination, which would take emotion and subjectivity out of the equation.

• LOPs deliver a fixed price for outputs based on inputs: linked to the above, clients get certainty because the basis on which the number of LOPs is determined is data-driven.
• LOPs make benchmarking easy: clients could price compare firms based on the number of LOPs and price per LOP. As will always be the case, some firms will price LOPs lower and some higher depending on their size and relative cost base, their actual or perceived reputation or the actual or perceived capability of their lawyers and legal platform services. Clients will retain the power to take into account other factors that are meaningful to them, such a firm’s reputation and risk factors.On this benefit, I accept that opinions on the commoditisation (or as the Susskinds label it 'externalisation') of legal services will vary. But there is without doubt a drive towards the decomposition of legal service delivery into elements that require expertise and the 'human touch' and those that can be wholly or substantially systematised.
• LOPs can be sold in bundles: in the same way as clients can pre-pay for a number of BH, a potential commercial model would be to sell bundles of LOPs that are paid for in advance; discounts could be offered depending on the more LOPs a client buys. The client could then have real-time visibility of the ‘burndown’ of those LOPs and see how they were spent.

The challenges with LOPs

LOPs are not without their challenges. Here are a few that spring to mind:

• LOPs are task-specific, rather than matter-specific: the number of tasks required to deliver an outcome is elastic and therefore decomposing the tasks required on the path to achieving an outcome and predicting the total cost of doing so is arguably no easier than with the BH. A potential solution is to increase the points range for complexity and for the weighting of the Gravity and Urgency LOPs to be adjusted accordingly. For more consultative projects, such as corporate transactions or litigation claims, the 'Predictability' factor could be included.
• LOPs aren't that straightforward: as noted above, one of the things the BH has going for it is its simplicity. Simplicity begets trust. A multivariate consumption model could be perceived as even less trustworthy than the BH, where at least a customer may interrogate whether a legal output should've taken as long to produce as what they've been charged for. It’s this asymmetry that I’m striving to address with LOPs. This could be overcome by providing clients with real-time visibility of the number of LOPs consumed per task and, of course, requiring the number of LOPs and corresponding price to be agreed in advance.
• LOPs likely require new technology to implement them: for those aspects of legal practice that are highly relational and demand, not merely expertise, but insight and strategic thinking, I don’t envisage the end-to-end lawyer-client process being entirely automated. But with the gradual, eventual, commoditization of many areas of legal practice or constituent elements of legal services, I expect we’ll see a genuine challenger in the legal services space which is capable of dynamic, transparent, pricing. Essentially, my vision for the future of legal services is based around digital ‘bureau’ services meeting consumer expectations when it comes to convenience and speed of service delivery. We’ve already seen some attempts in the US to take legal services in this direction - see Atrium (which adopted a subscription model providing an unlimited number of consultations combined with a document automation platform) and Clearspire (which adopted the consultancy model of having separately priced statements of work for different phases of a project). While the need for technology may be a rate-limiting step, and one which rules many law firms out of adopting LOPs, it seems to me that any future alternative fee models for professional services will necessarily require some level of new technology to implement them. As fanciful as it may seem, if the industry can align around a common unit of consumption for legal output, the technological implementation of LOPs would seem straightforward by comparison!

What are your thoughts?

As you can probably tell, I've had some fun with this! I don't pretend to have the solution, but haven't been able to find any proposed alternative consumption models for the legal industry; only 'alternative fee arrangements' which, with the exception of value-based fixed fees, riff on the BH.