Law firms the Pricing Debate Has Moved On: Get Over it
I know the death throes of time based billing in firms are significant with some firms now finding even more ways to track their time via mobile apps & the like just in case they miss out on some time while driving, flying, eating and in those little intimate moments (their clients must be deliriously happy with this as they have always felt their law firms have ever been able to "capture" enough time!), yet the smart debate for the more innovative firms has moved on from do I continue to only time base bill? to two much more salient questions:
what range of billing and pricing options do we offer? and
do we still keep recording time?
In this article I focus on the first question but in my next article I will (again) return to the proposition that timesheets are hugely detrimental to law firms for a number of reasons- including that they are useless for both the costing and pricing of work any law firm undertakes.
There are numerous ways law firms can and are pricing their services. US law firm pricer Patrick Johansen's very handy guide to Continuum Fee Arrangements reproduced below with kind permission lists 16 different fee arrangements used by law firms in the US starting at one end with the one dimensional hourly rate model right through to value based fees:
Patrick himself defines value based fees as:
"Value offers a true partnership between buyer and seller. The law firm understands what the client wants and what the client will pay for, and the client understands what the law firm can contribute and why its services are valuable. Value is the antithesis of Cost-Plus: there is no connection between the law firm's costs and its fee arrangements. Value aligns client and law firm objectives and promotes an open relationship."
I make no apologies for believing that a more optimum pricing approach for any law firm, for any situation, client and matter, is to adopt value based pricing principles.
In short that means we first need to clearly understand that the value of whatever we provide is determined solely by our clients perception of value-not ours. At best we can only try and influence our clients perception of value. We need to have a conversation with our clients around what they value, agree on both the scope of the work and the price of the work before the work is undertaken- not after. It is about focussing on outcomes and results-not activities and time spent. Even if you agree on a fixed fee, if that fee is solely calculated by projected time to be spent it is not in my view a value based fee-it is merely time billing in drag.
Many law firms continue to confuse fixed fees with value based fees and I find firms get themselves in such a knot and partners start sweating profusely whenever the term fixed fee is mentioned. It conjures up all sorts of nightmares for the partners, principally because they feel they are forced to "discount" their fees or worse still lose money. One of the reasons they feel that way of course is that those firms still calculate everything back to time under the mistaken and totally disproven belief that for professional firms time is money. It logically follows from such a mindset if our time is reduced or fixed so is our ability to make more money.
If firms are going to continue to calculate any fixed fees based on time of course they are never going to get it "right"-actual time is never ever going to equate exactly to anticipated time. This is why firms practicing under the time based billing model have so many problems providing accurate or even realistic estimation of their proposed fees to their clients (clients of law firms continually tell me that rarely does a final bill they get from their law firm get within cooee of the initial estimate) and therefore provide their estimates and “fixed fees” with so many disclaimers.
Another reason why firms recoil from fixed fees if they possibly can, is that when they fix a fee many firms still continue to produce their work in exactly the same way as if their client was still paying them an open ended time based fee. The smarter firms however have focussed on re-engineering the way they produce their work- or in economic parlance reduce their own costs to serve- and at the same time have put more skills and emphasis into proper project management. Legal project management is about focussing on what you want to happen in the future whereas timesheets merely reflect on something (and one thing only-time) that happened in the past. The only "time" good legal project managers focus on is elapsed time or turnaround time as that is the only time your clients should really ever care about.
I always encourage firms to look at a range of pricing model options but only if those models use value based pricing principles. Not all fixed fees are value based and not all value based fees are fixed fees. Value based fees don't have to be a fixed fee from whoa to go, they can and do encompass a huge variety of fee arrangements which might include such models as retainers, event based, staged pricing, success/bonus fees, contingency fees (just not in Australia, at least at the moment, in litigation), holdbacks, etc.
What value based pricing does not include are any fees that are solely time based and cannot be agreed in advance, such as blended rates, capped rates, volume discounts, and the like.
Rates are not prices.
You might ask why shouldn't a firm, in addition to offering non time based fees also offer time based fees? After all aren't you limiting your potential client base, revenue and profitability-especially if a client insists on paying you by the hour- by limiting your pricing offerings?
My short answer. No.
Properly explained and properly discussed the overwhelming majority of your clients would understand the benefits to them of agreeing prices up front-price certainty and predictability, no bill shocks, for starters. After all that is how the vast majority of your clients deal with their customers-and it is what you do in just about everything you yourself purchase.
You will of course encounter the odd client who won't like your price but when are you better off knowing that-before or after you do the work? You might also experience the client who won’t accept your fixed fee if you continue to relate that fee to time and have so many disclaimers attached it is not really a fixed fee at all.
But as those firms and those clients of firms who now use value based fees will attest, once both parties become more accustomed to discussing and understanding value from the clients perspective and work together to become more competent and confident in pricing, the benefits to both the law firm and their clients far outweigh any effort and courage required to make the change. You will make pricing mistakes-you do now-it’s just we can learn from any mistakes.
The other major problem in firms offering both time and non-time based fees is that, by definition, if you still have time based fees you have to record your time and attempt to record it accurately. Invariably what that has meant too many firms practising this way is that, even with the best will in the world, when they attempt to offer non time based fees they usually struggle as they still default to time as their principal costing and billing tool.
As I will discuss in my next post, when you stop relying on timesheets as your firms indicator of cost and as a prime internal measurement and reward tool, you better and more quickly understand that value is created outside your firm. As Matthew Burgess lawyer, entrepreneur, author and former partner of Biglaw firm McCullough Robertson and now one of the founding directors of the innovative start up Viewlegal explains:
"With timesheets you think what's billable: without timesheets you think what's valuable"
For most firms though this requires a mindset and business model change-not simply a pricing or billing model change. Therein lies the main obstacle