Let s start with the macro what do trends in the legal industry mean for the billable hour?

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1 THE FUTURE OF THE BILLABLE HOUR My co-presenters have both spoken about whether or not the billable hour is ethical. I m not going to an express an opinion on that issue, except that I ll offer this: I believe that our overriding ethical obligation as lawyers is to always ensure that we are acting in the best interests of our client. I m not suggesting that there is no commercial element to a retainer relationship there is, and in general the courts have supported the notion that within certain limits, lawyers are free to contract their services to clients on commercial terms. What interests me about the relationship between ethics and billing is how the notion of acting in the best interest of our clients interacts with different billing structures. This notion relates directly to the two things that I want to talk about today: how changes in the legal industry will affect the way lawyers charge their clients, and what Miller Titerle + Company is trying to do when it comes to rethinking the billable hour. Let s start with the macro what do trends in the legal industry mean for the billable hour? THE LEGAL INDUSTRY I believe that all legal work fits into one of three boxes: routine; somewhat custom; and custom. Routine Services I don t think anyone will be shocked to hear that the routine, or easily commodizable, area of legal work will not be the purview of law firms for long. The move that began with the Legal Will Kit has expanded into other areas wills, real estate conveyances, and simple incorporations, all of which have begun to be replaced by software and online applications. But the commoditization of routine legal services goes well beyond these simple processes. For example, the area of entrepreneurship and startups has taken on a life of its own. Many brilliant business people have been forced into these areas by the corporate downsizing that is part of the great recession, and Western governments (including Canada) have pushed entrepreneurship as the panacea to some woeful job numbers. But the legal work associated with these types of businesses hasn t increased in proportion to the amount of activity. One of the big trends that started in Silicon Valley, and has since made its way here, is the commoditization of early stage legal work to the point that it s now run by many firms on the as a freemium model. You want to incorporate, do a friends and family round of raising money, and maybe even do your first venture capital deal? No problem. You can find all the documents for free on many law firms websites. Miller Titerle + Company LLP millertiterle.com Carrall Street Vancouver, B.C. V6B 2J2 Tel Fax

2 - 2 - Where does the billable hour and legal fees fit into this area? They don t. Work that law firms do in these areas is increasingly becoming an accounting entry on the marketing expense side, simply part of the cost of client acquisition. Law firms take this work on in an effort to get clients in the door, and hope that a sustainable proportion of those clients turn into paying clients. For lawyers, the train coming down the tracks is one that will take away the back of this previously-lucrative work. The solicitor who has traditionally been able to hang his shingle and do a variety of routine work is likely a thing of the past. Somewhat Custom Services This second area does not include as much as most commercial solicitors like to believe. Before you think that clients will continue to pay a lawyer on an hourly basis to put together commercial agreements, take a look at LegalZoom. For a relatively low fixed fee, a client can access customizable forms of agreement that cover a lot of what solicitors see as their bread and butter. Want to sell a business? LegalZoom can do that. Want a confidentiality agreement or non-disclosure agreement? LegalZoom does it. Loans, promissory notes and security agreements? LegalZoom s got you covered. Service agreements? RFPs and tender docs? Leases? Trademark and patent applications? Affidavits? Website terms and conditions? All covered by LegalZoom. These documents traditionally the core revenue source in a solicitor s practice have become routine, commodizable, readily available and inexpensive. Even where these types of documents are very custom, in-house legal counsel that I ve talked to are reluctant to pay full freight. Why? Because that s what in-house teams are designed to do. As one VP-legal said to me, if he does two significant contracts in house, the cost savings can pay for a full time employee that will turn out a lot more than two contracts in a year. If you don t believe me, there are two very scary stats. The first is that legal demand the amount of work done by AMLAW 200 firms has been stagnant for the last 3 years. The second is that two-thirds of significant in-house legal departments in the United States grew in Moreover even where companies look for outside counsel for this type of work, procurement is becoming more and more popular as a way to control costs and create inter-firm competition. We are seeing more and more clients focusing on procurement by mechanisms like RFPs or reverse auctions to create a race to the bottom on fees.

3 - 3 - For lawyers, this means that a lot of our core billable work will be increasingly replaced with technology and in-house legal departments. Of the work that is left, savvy and sophisticated clients will continue to become better at controlling costs. Custom Services The third area is highly custom and highly specialized legal work. Some people call this the true high-end advisory practice. I call this the Box. It s the area of law that constitutes about 10% of the work but 90% of lawyers think they do it. No one ever said lawyers were modest or good at math. When I talk to in-house counsel, the main area they are willing to continue to pay for by the hour are the complicated niche areas where they will pay a premium rate for sophisticated advice based on expertise and experience. We already see the legal world recognizing that this is a premium service hence the trend towards smaller boutiques focusing on very specific advice. Labour and employment has always been one of these. Environmental law, the soft-side of resource development (social licence, permitting, etc) and complicated securities are areas where you see a number of boutiques out ahead of the curve on this. So where does this leave us? It leaves us in a place where it is increasingly hard to find a willing market for the billable hour. And to be clear lawyers no longer set the market. If we have not already reached the tipping point, very quickly I envision a world where, for the first time, there is more supply of legal services than demand. This is already manifesting itself in the downsizing of large national law firm s- to maximize profit per partner hour, they recognize that they need lean teams of true experts that can pursue high value, custom services work. The bottom line about trends in the legal industry is this: clients will have more choice and have more control over the shape of the relationship with outside council and that relationship will rarely look like a purely billable hour relationship. WHAT IS MILLER TITERLE + COMPANY DOING? There s a firm that I ve been watching for a while in the US. The managing partner of the firm is featured in an online short, talking about how the relationship between clients and firms is broken. She talks about the good old days when clients trusted lawyers, saw them as part of their team, and trusted lawyers to render accounts for services rendered with a number attached. And she then talks about how they are trying to move back to those days by rebuilding client trust. It s a nice message, but I don t think she could be further from the mark. Lawyers social licence to value bill has disappeared, in part because clients perceive that it was

4 - 4 - taken advantage of, but also in part because the world has changed. There have been enough Penn and Teller types that have demystified law to the point that it is viewed as any other service. So here s my take: the whole reason we are having the discussion about the future of the billable hour is because clients are now in a position to dictate terms of our commercial arrangement, and they are saying that the billable hour is not always appropriate. When we started to talk at Miller Titerle + Company about how to change the billing status quo, we first had to define the status quo. I don t think the status quo is the necessarily the billable hour (although that s part of it). I think the real status quo is unrealistic expectations about who sets the rules of engagement when it comes to fees. For decades, lawyers have simply said: this is how we bill. Often that was a billable hour model, but the real problem is that it was not a discussion with clients it was an imposition of a generally accepted structure, whether or not the structure was right for the circumstances. So when we position ourselves in the market, we see an opportunity to be the firm that wants to have a meaningful discussion about what billing structure works for the specific matter at hand. And the focus of that conversation, in my view, needs to be: how can we provide you with the best value for our services? And quite frankly, to the extent ethics is ever involved in the commercial relationship between lawyers and clients, being accountable for value is linked to our commitment to act in our clients best interests. So what are some of the alternatives and their pitfalls? 1. Fixed Fee Billing As a starting point, I compare fixed fee billing to hiring a contractor to renovate your office. If I ask my contractor to do this, I know she is just going to take whatever she thinks the job should cost and add 25% for contingencies. Clients understand this. In-house counsel that I ve talked to tend to eschew fixed fee billing unless it is based on competition to control the contingency factor. They all say that true fixed fee systems need to share risk, not push it all onto the client, and only competition between firms can accomplish this. I don t like fixed fee billing because it seems like a knee-jerk reaction to complaints about the billable hour, but it misses the mark: unless it is used thoughtfully and appropriately, there is little room for alignment of interest with the client. File managers are incented to push work to the cheapest lawyer and use precedents (even if they aren t the most

5 - 5 - appropriate) to control costs and maximize margins all of which is directly at odds with our ethical obligations to act in the best interests of our clients. That said, we use fixed fees in some circumstances. We have M&A clients who do several deals a year, have a good understanding of the process, and seek budget certainty. Both sides understand the pinch points and process and can, in a sense, conduct an open book negotiation that lets us make a profit and lets the client feel comfortable that the value in our fixed fee comes from us knowing the process, not cutting corners. Another area we use this are areas where we have precedents that fit most scenarios. Incorporation is an obvious example. We also use this for structuring First Nations economic development groups from the ground up we have a taxation checklist, a governance checklist, and have all the forms we need to turn out an efficient product at a fixed price. Some files are more profitable than other in this model, but we go into these projects with our eyes open and with the understanding that we are taking on some risk. The benefit for us is giving the client a great (and on-budget) experience that should result in more work. 2. Blended Rate Structures Often, clients focus on the rate and can suffer from sticker shock if they see a lawyer who costs $400 to $800 an hour. Some clients have suggested that this could be alleviated by proposing a blended rate. I struggle to see how this aligns lawyer s interests with those of their clients. Much like fixed fees, file managers are incented to push work down to associates to maximize margins. In fact, I ve told many clients that have asked for this that I think it is a clumsy solution but some in-house counsel insist because it makes the retainer an easier internal sell in their own budget discussions. 3. Hourly Rates Scaled to Subject Matter and Expertise, not Years at the Bar We have experimented with retainers where, before we take on a task, we agree with the client what the type of work is: routine, somewhat routine, or sophisticated. The client pays a rate based on the type of work, not the type of lawyer doing it. I like this approach for a number of reasons. The firm is not incented to push work down to lawyers who may not have all the required expertise because the financial upside to that approach does not exist. It removes all discussion regarding which lawyer is right for the job. It also doesn t require us to take on risk or inflate fixed fees to cover contingencies. It does, however, require the client to trust us to work as efficiently as possible on each task because the ultimate metric is still lawyer time.

6 Ongoing Retainers We ve experimented with the idea of ongoing retainers i.e. for a set fee every month, we will take care of all of your legal needs in certain areas. This approach is nice because it takes away all discussion about billing. However, to properly implement it, it does require ongoing discussion as clients needs change and we become more efficient. Again much like successful fixed fee billing the most successful retainers of this type end up in periodic open book negotiations: here is the work we have been doing, here are our fixed costs related to it, and here is what we believe is a healthy profit. Many lawyers cringe at the idea of this type of conversation, but it happens in other industries lawyers just need to feel more comfortable being open with their clients regarding their profit expectations (which, for some, is not an easy thing to do). 5. Freemium Models We have a healthy startup practice. This is because we love the industry, we love helping build businesses, and we love it when those clients grow and either become key clients or ask us to help them with their exit. When we took a small client and helped them negotiate a successful exit to a US software giant, it was probably one of the most rewarding files our lawyers have been involved in. But, as I said earlier, this startup market is filled with firms willing to do much of the early stage work for free or at a huge discount simply to get them in the door. That s a very tough proposition. It requires very clear parameters about what we will do at the outset for free and manage expectations around it. Firms require very good precedents (and must invested a lot in that), have to be very clear about the level of customization that clients get for the free version (being not much), and need to be upfront about when clients are expected to start paying. 6. Deep Value Relationships It s become pretty clear to us that there is no absolute optimal solution that will always be best for any given client, let alone any given firm. So we have started experimenting with a new concept that we call deep value billing. Essentially, we have identified a number of large businesses that are on our bucket list of clients that we want to work with before we retire and that we know have complicated legal needs with an existing in-house team in place. For those clients, here is our pitch:

7 - 7 - Look we can t tell you today how we can best give you value, but we want to be the firm that invests in figuring it out. Let us be your first call for all your legal issues for the next 3-6 months. We ll bill you hourly but will also bill you peanuts 50% or less of our standard rates. We ll log all our interactions, and at the end of the initial period will have a pretty good idea of how you tend to use legal. After that, we ll sit down with you and come up with a retainer structure that is customized to your actual usage most likely a blend of all types of billing methods. This has received a fair amount of traction. In-house counsel like us showing the willingness to be flexible and invest in the relationship we now have skin in the game. There is some risk to us because of the discount period and the effort, but we set a unique opportunity to work with clients to craft creative solutions to the billable hour problem. In my view, that is well worth the risk and if we are doing our job, retainer the client should not be a problem. 7. Value Guarantee This has become a central component of our market position relating to value. It s in all of our retainer letters and on our website. Essentially, we say that no matter how we bill you, we are committed to providing value and are willing to guarantee it. If you disagree with a bill pay us what you think the value is and we re square. Clients love it. It s a law firm actually putting their money where there mouth is. It has made clients feel comfortable about discussing their bills which was exactly the point. It differentiates us in the market when it comes to the promise of legal value. In some ways this is an academic discussion anyway if a key client complains about a bill, every law firm in the city would scramble to reduce it to keep the client happy. All we are doing is codifying that practice to help our clients feel comfortable that no matter where our billing discussion ends up, and no matter what model we use, they can be comfortable knowing that the ultimate metric for measuring whether our fees are appropriate is their perception of value: if they don t feel like we have delivered value, we haven t done our job. CLOSING OBSERVATIONS I d like to leave you with a handful of closing thoughts: 1. Are you the best in your field for solving complex problems? Do your clients call you because paying you $700 an hour is WAY more efficient than asking some other firm to help? If not, prepare for the death of the billable hour.

8 If you need to wean yourself off the billable hour (and this applies to 98% of us), the first step is probably to become the most efficient at what you do. Have you made your internal processes the best you can? If not, you likely won t be able to compete. 3. What clients are seeking is the best value. And our ethical commitment, founded in the idea that we must act in the best interests of our clients, if to provide the best value we can. If you were a client, would you believe you are getting the best value out of your lawyer? If not, what can you do to fix it? 4. Have you ever asked your clients about how they perceive the value they receive? If not, why not? Just asking shows you care about it. 5. We have a filter for making decisions in our firm that is affectionately called f*ck the status quo. Essentially, every time we make a decision, we ask two questions: first, what is the status quo; second, is it broken? If it s not broken, carry on; if it is broken, how can we fix it. When I look at billing, the status quo is not the billable hour, but is something that underlies complaints about the billable hour: it s that lawyers tell clients how they will be billed and then bill them. The only real way to fix it isn t necessarily in adopting just fixed fees, or just ongoing retainers. That would be missing the mark because what needs to be changed is the one-sided relationship. So how we can innovate in the billing space is to be the law firm that says: we won t tell you how you re going to be billed. We re going to sit down with you and solicit your input on how we can provide the best value. I think that s the real change that our clients are pushing for.