Excuse me, I think your pricing is broken

28 10 2011

I was pleased to read the post on 3 geeks about value billing as this is definitely a topic that needs exploring further, not least because I’m astonished by the number of law firm partners who continually tell me that it’s for clients to find a pricing model that works for the firm’s services.

Caroline the Finance Director had the new pricing model absolutely nailed

The common refrain from private practice lawyers (especially those who know how I feel about hourly rate billing) is that in-house lawyers who talk about value based billing really just want to pay less, and are not really interested in concepts like sharing risk. Opening a dialogue about pricing is simply an exercise in getting the law firm to do the same work for less money.

I my have missed the point, but of course they want to pay less!

The fact that the firm hasn’t developed a model that really meets their needs, or if they have the firm can’t communicate it in a compelling model does not turn this into the client’s problem. It’s the private practice lawyer’s problem. It’s the firm’s problem. It’s the profession’s problem.

The market has changed.

Forever.

Except for those highly differentiated firms that have unique or otherwise genuinely marketing leading skills and expertise, law firms are shifting to being price takers rather than price setters in the market. As barriers to entry in the legal market fall, and new models of legal service delivery emerge, clients have more choices about how they resource work:

  • Big firm, small firm?
  • Global firm or international network?
  • Insource, outsource?
  • Disaggregate, multisource?
  • Onshore, offshore, nearshore?
  • Automate?

Fewer and fewer GCs respond well to a conversation with a law firm that starts at a notional rate card, which of course is all great news if you’re a firm with some creativity and innovation.

To me, understanding value starts with a conversation with the client.

Too many firms assume that clients all want the same thing, but in my experience the range of client needs and expectations are almost infinitely variable.

Organisations of a similar size in the same vertical industry may look similar on the outside. They may have similar sized legal teams which do similar types of work. But actually the underlying businesses may have different operating models, different shareholder expectations, different objectives, different risk tolerances and of course different legal budgets. What they want from their internal and external lawyers may be very different, in fact it might vary significantly across the business.

There are a whole host of client needs that might emerge from a well structured conversation, implemented through some good questions.

The challenge for the law firm is then to define the service that would best meet those needs, identify the variables, work out what the cost implications of those variables are on the overall cost of service delivery and then stitch the whole thing together into a great value proposition at a compelling price.

Some of the variables might include turnaround times, the style of advice (who is the ultimate recipient – business person or in-house lawyer?), the  level of detail, different types of relationship management (dedicated team?) and the hours of operation/availability for the external lawyers.

Thinking about how these factors help the client’s business, as well as the needs of the inhouse legal team, can provide a deeper understanding of value – for example will a quicker response time allow a deal to be completed more quickly? If so, what does that mean for the business?

From this baseline understanding, the firm can get creative, but to do so also needs to ensure they really understand the cost and benefit to the firm of moving these “levers” (i.e. changing the variables).

Cost is often not simply the employee cost, but also may encompass opportunity cost or the cost of holding WIP for specific periods of time. The flip side is that the benefits to the firm can be broader than simply revenue – improved cash flow, client referenceability, employee retention (if the work is prestigious or interesting), replicability (the ability to reproduce the output for other clients at lower cost/higher margin) are all benefits that have value and can be quantified.

With all these factors to play with, plus of course the dynamic of genuinely sharing risk and reward with a client, I would be amazed if a firm couldn’t find a pricing mechanism that works for both the client and the firm. Once some pricing options (hint: that last word is a useful one in these conversations), the overall value proposition for the service offering can be pulled together and communicated. Law firm BD has become increasingly sophisticated, and there are plenty of skilled professionals who can ensure the resulting proposal is truly compelling and is tightly tied to the value it will deliver.

So I’ll grant you this – it’s more effort than simply negotiating percentage discounts on an hourly rate. It requires you to understand the client’s business in more depth, but also your own. But surely both of those are worthwhile steps in any event.

And if you do get a client who is genuinely not interested in this type of conversation (assuming you are not in the commodity market where the price genuinely will be just about lowest price), then maybe they’re not the right fit for your practice?

Or maybe you need to go back and tweak the model some more…..





Inhouse firefighters

13 05 2010

Speaking at an Intellect event this week (don’t worry, the group is a trade body for the UK technology sector, not some type of meeting of great minds!) much of my content touched on the role in-house legal teams play, and it occurred to me that with much of my focus on law firms, I haven’t been showing the in-house community much love. And let’s be honest, they need it. With their business colleagues wanting faster responses, more commercial insight and a greater range of advice (new markets, new geographies, new regulations), there are more fires to put out at a time when strategic direction is more valuable than ever.

In-house legal sort out the mess again

The question of where the in-house team can add value has long been debated, but often the business sets conflicting priorities for their in-house colleagues. On one hand the board may push the general counsel to get his or her team to give more proactive advice that facilitates the growth of the business (help shape our thinking about which markets we should enter, review acquisition plans with us), the human resources department may have their own needs (help me up-skill the managers so they manage their employees better and avoid claims) and the front line commercial folks are screaming for support to do deals and bring in revenue. In reality who has the loudest voice (or longest job title) may determine what gets done, but bar the odd token off-site meeting, there is precious little time to reflect and plan things more effectively.

Compounding this, the in-house team are often measured (and critically, rewarded) by a set of metrics divorced from the strategic activities that can create longer term value for the business.

So what can be done? How can our legal firefighters be free from the need to run up another tree to save a trapped feline, and spend some time thinking about fire prevention? The answer will of course vary by organisation, but a good starting point is understanding the stakeholder community. Who are the key stakeholders for the legal team? What are their real priorities? How are they measured and what will constitute success for them (at an organisational and personal level)? Once priorities are understood, the next step is to map these against where time and resource is being spent at the moment. The majority of in-house lawyers would recoil at the idea of recording their time, and while I am not advocating recording time on a 6-minute-unit-law-firm-kind-of-way, I do think it’s important to have some hard data about where time is being spent. Peter Drucker addresses the reasoning for this in his excellent book “The Effective Executive”.

Once the in-house team have an idea of what their stakeholders’ priorities are, what their resource profile is and how those resources are spending their time (and this includes external counsel as well as the in-house team), then questions can be asked which will help facilitate a different way of working. The answer may be in organisational design, it maybe in communication, it maybe in the balance of internal and external resources, it maybe in addressing skills gaps (or indeed a host of other areas), but the point is that the team can start to make much more informed choices about where they spend their time to create value for the business. More value means more love, something that in-house teams deserve.