Some may argue that they already have, but I’m getting ahead of myself. One Ph.D. economist has laid out a case for dealing with the billable hour by substituting insurance policies as a legal marketing strategy that will “…Satisfy Current Clients, Attract New Clients, and Make You More Money…” 

Dr. Rafi Mohammed sent me an e-mail asking for my comments on his post on his Pricing for Profit  blog on the above topic.  I don’t usually respond to such requests as a rule, but after perusing his post and credentials (BU, London School of Economics, and Cornell (Ph.D)), I found his posting interesting and scary at the same time.

His premise is that clients hate the hourly billing strategy (not all do, of course; e.g. some in-house counsel who themselves came from a law firm billable hour environment like it).  I do agree, though, that the billable hour is not in a client’s best interest, as I have mentioned in earlier posts here and here. It encourages cost-plus thinking like government contractors (the more you work the more you make), rather than pricing on the value/results obtained for clients.

What then does Rafi suggest? Fixed fees. Wait a minute, that isn’t a new idea, you undoubtedly are saying to yourself. But stick with me.

He accurately recognizes that one of the main reasons lawyers don’t like flat fees is the cost uncertainties associated with legal services.  Thus, his solution involves the client purchasing insurance to cover their risks associated with higher than estimated costs; and, since insurance companies are used to assuming risk, there will be companies willing to do so.

So, what’s so scary? Letting insurance companies put their nose into the tent. According to Rafi’s theory, the client would submit an estimate of legal costs to the insurance company, which in turn would assess the risk and price the policy. Client could then decide whether to buy the policy or choose the hourly rate option.

He also offers three “tangential” business models:

  1. Insurance companies offer a “lower priced version.” And, they would get involved in the legal strategy as in a “sort of ‘managed care’ legal approach” (isn’t that what much of insurance defense work is all about today?);
  2. Large firms could cut out the “middle man and self insure” (I think that law firms that offer flat fees are doing that currently); or
  3.  Insurance companies could market directly to consumers by offering fixed legal prices and a list of lawyers to choose from (I believe that is what prepaid legal plans offer now).

I don’t know whether Raji’s initial idea or a variation of it will ever fly; but, were I practicing law today, I’d sure be keeping an eye on the flap of my tent when it comes to insurance companies.