#RIP to the #RFT?

I came to Australia in 2007 to fill a tender writing role. Till then, while I was familiar with responding to tenders, I hadn’t comprehended that responding to tenders could be a full time role.

Since 2007 though, on average, I’d guess that I have responded to one RFT – panel or project – per week (and I should add that during this period my roles have changed from tender heavy to tender light to tender heavy without that much difference in tender workload). I would guess that I also probably respond to one Request for Quote (RfQ) every two days and I must assist with at least two capability statements per week.

What I’m trying to say is this:- I’ve worked on a lot of proposals over the past decade.

And why wouldn’t I have? So far as I’m aware, in Australia:-

  • every level of government – Federal, State, Territory and Local – is panelled to some extent. A number of states, including NSW, QLD, Vic and WA also have collective Local Council panels.
  • approximately 80% of the ASX 200 is panelled.

That’s an awful lot of tenders – some of which are public and others invitation only.

Right about now you’re probably asking why this all matters?

The answer is this,  last Friday Corporate Counsel reported that ‘Barclays Looks to Shake Up Law Firm Panel Model in Coming Years‘, going on to state that:-

“Beginning in 2021, Barclays will ditch RFPs and adopt a more flexible approach to outside counsel management.”

[Noting that the terms RFP and RFT are largely inter-changeable]

Having been at the coal-face of requests for tenders for so long, this is music to my ears!

Only, as a half decent tenderer can tell you, on closer inspection it isn’t.

Chris Grant, the head of Barclays’s firm relationships, has come up with guidelines that the Bank hopes will allow them to build better connections with their firms. These include Barclays using a “gateway process” that includes a probationary period for new legal service providers.

Hang on a second – this is suddenly sounding like an ad hoc – as opposed to a structured – RFT process.

Shame really as one day B2B clients will come to realise that legal panels are a very costly and time consuming process.

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Law firms need to change their definition of “success”

Read an interesting post by Alison Laird last weekend. Interesting as it was, Alison’s post (‘It’s Time’) isn’t the first to call ‘time’ on hourly billing. Nor, in my opinion, will it be the last.

Why do I say this?

Because, as important as the calls for “more for less” and “cost certainty” have been for in-house lawyers and clients more generally, behavioural evidence has shown they’re not really that important to law firms and that clients (in the more general definition of that term) are not willing to push their legal service providers to move away from hourly billing, if – caveat –  they can get a “quote” (read cap or fixed fee expectation).

In short it’s a game. Client says: “we want cost certainty”. Law firm says: “we bill by the hour”. Client says “meet you in the middle – capped/fixed/discounted fees”.

But it doesn’t have to be this way.

What if your law firm really wanted to be “entrepreneurial” and decided to think outside the box – starting by changing its definition of “success”?

What if, instead of defining “success” as being the number of hours a year a lawyer works (note not paid for), and/or the amount of revenue the lawyer earns (note not profit), the definition of “success” becomes:

Success is measured in terms of the value received by the customer and the law firm.

I agree, not perfect.

But imperfect as it is, it’s a start. A start of a conversation we need to have as a profession: “How do we measure success?”.

Because until we have this conversation, all other conversations – including that around hourly billing (not pricing) are meaningless.

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When Seth Godin’s simple contribution analysis for pricing doesn’t work

Last week Seth Godin wrote a brilliant post titled ‘All other things being equal (simple contribution analysis for pricing)’.

As the title of the post suggests; in his post Seth suggests that if you know your cost of production you can use this as the basis for calculating your go to market price – and ultimately this will effect your profit margin (price – cost = profit).

In Seth’s example he uses the price points of $7 and $9 and states that, with a cost of production of $5-:

.. all other things being equal, you’ll need to sell twice as many at $7 as you’ll need to sell at $9.

($2 profit per unit at $7 as opposed to $4 at $9).

And Seth is right. So what has this to do with law firms?

My answer:

this is exactly how law firms have priced their services (hourly rates) for the last 20 years.

And it totally falls apart because of what we call in the business the “average billing rate”.

Back up: what exactly does that mean?

Well we know what our cost of production is (only we don’t because we will argue all year long over “shared costs” etc) and we know what our “rack rate” is (only we don’t because there are so many of these we never sure which is the “actual” rack rate) so we know the profit margin.

Using Seth’s example, our cost of production is $5- per hour and our rack rate is $7 per hour or $9 per hour. QED, $9 per hour lawyer is making more “profit”.

But…

say $9 per hour’s realisation rate is 70% and $7 per hour lawyer’s realisation rate is 100%…

..then you have a whole different story as now $9 an hour lawyer’s Average Billing Rate is less than $7 an hour lawyer’s.

And suddenly ‘simple contribution analysis’, which law firms have been using ever since I joined the profession over two decades ago, becomes meaningless.

But ultimately Seth is right:

Price is a story, it’s a story we tell ourselves and others about what we have to offer. But price is also the path to being able to stay in business.

and also: his post clearly states “All other things being equal“, which we all know will never be the case in the matrix known as a law firm!

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Fixed or capped fees – as a client which would you go for?

Last week the American Arbitration Association (AAA) announced that it would introduce an alternative fee arrangement (AFA) option on “eligible cases” offering to help resolve B2B disputes through the arbitration process (source prnewswire.com).

The AAA’s claim is this is the “first of its kind to be offered by a national provider of alternative dispute resolution (ADR) services“.

So let’s check it out.

Setting aside the “eligible cases” issue, what are the AFAs being options being offered?

According to the AAA:

  • Fixed Fee Arrangement, whereby an AAA arbitration panel member proposes a fixed fee for the pre-hearing, hearing, and post-hearing phases of arbitration which must be approved by all parties.

  • Capped Fee Arrangement, whereby an AAA arbitration panel member proposes a fee cap for the entire arbitral process which must be approved by all parties.

Wait a second, as you’ll know from my last post, capped fee arrangements are not an AFA and any pricing expert advising you otherwise needs to be shown the door.

But…

Given the choice – as a client of a  law firm client – which would you choose?

My take: depending on how different the two quotes are – which I’m guessing would be done on an “hourly rate x number of hours x which way is the wind blowing calculation“, I’d go capped fee (the exception here, a really low ball fixed fee).

Why – given my objection to this?

Well, because a fixed fee is – fixed. While a capped fee is – capped.

So if your lawyer comes in under cap (using hourly rates), they can only bill you what they have charged. And if the lawyer breaches the cap (using hourly rates), then they cannot charge you any more than the cap – hence it’s name.

So, as a client, I win both ways.

While a fixed fee is fixed. So if the lawyer uses time-sheets (hourly rates) and comes in under the fix, back luck you client. On the flip side, if the lawyer uses time-sheets and comes in over the fix, back luck law firm.

QED: in this case, I’d go the capped fee option.

The sting in the tale here though is these 7 little words:

“which must be approved by all parties.”

which despite India Johnson, President and CEO of the AAA-ICDR, comment that:

“Alternative fee arrangements align with our mission to add cost savings and fee transparency and predictability to the arbitral process; the AAA and its Roster of Arbitrators are proud to be the first arbitral institution to offer an AFA option to parties and counsel seeking to resolve their disputes through arbitration,”

means the reality is it will never happen.

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Why most law firms don’t need to hire a Head of Pricing

Following a conversation I had recently with John Chisholm, I had reason to revisit Patrick Johansen’s website patrickonpricing.com and re-read both his Continuum of Fee Arrangements™ and his Roll Call of pricing professionals.

Let’s get controversial. Re-reading Patrick’s stuff it occurred to me that there are an awful lot of law firms have hired pricing experts (Patrick has over 300, but it wouldn’t surprise me if that number were closer to 500) on -most likely- really good money who, get this: don’t really need them.

Why do I say that?

Looking again at Patrick’s Continuum of Fee Arrangements, Patrick has sixteen different pricing options available for law firms to offer clients:

  1. Hourly – the ‘go to’ pricing option for law firms. But are hourly rates pricing or billing?
  2. Volume – nope, not a pricing mechanism. It’s a discount. Not even an alternative fee arrangement (AFA).
  3. Blended – isn’t that an hourly rate?
  4. Retainer (Periodic) – okay, now we are talking. Law firms may need some help from a pricing expert on this one. But wait up, how much of a law firm’s revenue is done on a retainer mechanism? Less than 5% would be my guess. Justify the cost of pricing expert on the books (as opposed to freelancing), unlikely.
  5. Capped – OMG don’t get me started on capped fees. Known as the “heads I lose, tails I lose” pricing mechanism for law firms. I understand why clients love capped fees, they cannot lose. But any pricing expert on a law firm’s books who recommends capped fees as an option deserves to be sacked immediately.
  6. Task – okay, but isn’t this really just a fixed fee?
  7. Flat (Transaction) – okay, but again: isn’t this really just a fixed fee?
  8. Phase – sounds like a fancy name for task to me!
  9. Fixed – Nirvana. Now we need a pricing expert.
  10. Contingency – implies it needs to be contingent on something.
  11. Portfolio – my view is that this is one of the most misunderstood and under-used of the various pricing options. I’m not sure there are many pricing experts in commercial law firms who do this well.
  12. Hybrid – yeah right. Are we talking cars now?
  13. Holdback – this isn’t pricing. This is a reward mechanism. I could do all the pricing calculations in the world, but if the legal team provide a rubbish service then the client will withhold a part of the fee.
  14. Risk Collar – is hourly billing with an up and downside calculation mechanism.
  15. Success/Bonus – again, performance related.
  16. Value – right, and how many law firms are really doing this? Few and far between. Hell, most law firms don’t even understand the ‘value’ they provide (see ‘discounts’ and google number one AFA offered by law firms). No, nice to say; but a very long way from getting it.

So looking at this list I ask myself: “How much science is involved in pricing legal services?”. And the answer I come up with is: “Not a lot”.

Taking all this on board, I get why law firms hire ‘pricing experts’ out of accounting teams. And maybe that’s where the real opportunity is being missed.

But trust me, for all but two or three of the above pricing options, you don’t need a pricing expert – you need an accountant. So don’t waste your money hiring one.

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How many working hours a week is too many? Where do we stop?

Without travelling east to west, 169.

One of the more read posts on this blog was something I wrote back in August 2016 – ‘Why asking someone to work 2,000 billable hours a year will kill their spirt‘ . I had reason to re-read this post early this week following the publication of a post on the asialawportal.com website by Matthew Kelly – ‘Work life balance across Asia – and how things are changing‘.

Matthew’s post follows on the back of an article published in Business Insider earlier this month that ‘South Korea is trying to stop overwork by limiting the maximum workweek to 52 hours‘. The gist of the BI article was that President Moon Jae had recently legislated that the maximum working hour week in South Korea had been reduced from 68 hours a week to 40 hour per week, but with the option to do any additional 12 hours per week ‘overtime’. All sorts of reason for why South Koreans work so hard were also mentioned, including that South Koreans need to work overtime to supplement their salaries (which, if true, is a rather sad reflection on the society).

Leveraging off of this, Matthew’s post argues that attitudes to long hours and presenteeism are generally shifting at law firms in Asia.

My View

On the one hand, I would agree with Matthew. Attitudes towards presenteeism are changes in Asia. Partners and senior managers at law firms are more tolerant of the agile approach to work-life balance. The days of sitting in the office as a junior lawyer and waiting till your partner had left do seem to be on the way out.

That said, with the reduction in the number of junior lawyers (relative to previously) working in private practice and the increased use of technology to be able to draft advices and contracts on the go has, in my view, led to an increased expectation around the number of billable hours lawyers are expected to work in the Region.

For some time now the number of billable hours required in order to qualify for law firm bonus pools has been on a slow upward trajectory. A little over a decade ago this sat – as an industry average – around the 1,400 hours a year mark and now it is probably closer to 1,800 (with US law firms being north of 2,000 hour per year).

While this increase in the overall number of hours required to be billed per annum may not seem massive, in day terms it really isn’t uncommon now to see junior lawyers today with billable target hours of around 7 to 8 hours per day.  And as Yale University has pointed out for a number of years now, asking someone to do 1 billable hour is a lot different to asking them to do 1 working hour (‘The Truth about the Billable Hour‘).

Once again though, you may ask why all this matters?

Well in the first instance, and probably most importantly, in a time when ‘wellbeing’, ‘mindfulness’, ‘flexibility’ and ‘agile’ are vogue in law firms, it would seem counter-intuitive to ask someone to work to a set number of billable hours per annum.

But in addition to this, asking someone to work to any set number of billable hours, even if that is one, assumes that ever dollar of revenue is equal. And we all know that’s not true. So it is actually a pointless target. But it is a pointless target that also causes serious mental health issues for lawyers. So it is actually cruel.

And for all those reasons it is time we moved on from billable hour targets and utilisation as reward/budget metrics and came to some consensus on a different metric by which we could reward private practice lawyers that actually inspired them to develop their skills, their practice and remain engaged in the profession,

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“Who still pays sticker price”

…is a quote from the 2018 Buying LegalProcurement Survey‘ that I took the time to read over the weekend.

This report makes for a fascinating read, not least the fact that ’72 percent of organizations are currently using panels/preferred provider lists’ and that ’25 percent are planning to use them in the future’ [Takeout tip:- best to invest in a really good tender team. Something that we in #Auslaw have always under invested in].

Anyhow, one of the quotes of the report is “Who still pays sticker price?

my take, for what it’s worth, is that nobody does.

Leaving aside the fall in realization rates we see continue to see every year in reports such as the one published by Altman Weil (what are we at this year – 83%?), the rise of so-called AFAs currently used by “65 percent of survey respondents and another 31 percent are planning to use it” means that even if the ‘billable hour’ isn’t dead yet, the hourly rack-rate certainly is.

But the point of this post – as is a common theme here on my blog posts – goes to the use and, importantly, effectiveness of ‘discounts’.

One of the graphs in the report shows that a massive 88% of respondents negotiate discounts with their legal service providers and that a further 8% plan to use this tactic in the future.

Picture One - 23072018

While totally believe, this is also an unreal stat (think about that for a second: 88% of clients are saying you are not worth what you think you are worth!).

But – and here’s the crux, when asked the “average effectiveness” of the various fee negotiation options available to them, the client preferred option of negotiating discounts did not come top.

Not even close.

The most effective was negotiating AFAS.

And the second most effective way of ensuring that your law firm delivers on time and on price?

–  ‘pre-matter Scoping of Work’

Picture Two - 23072018

Well there’s a surprise – properly scope a matter and implement legal project management and, odds on, you’ll have a satisfied and happy client that isn’t asking you for a discount – is probably happy to pay you hourly rates – and is giving you repeat work.

What more could you want!

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