pricing

If you are going to discount: ‘Discount with dignity’

In Episode 748 (7 July 2020) of HBR’s Ideacast podcast (23.04), Curt Nickisch interviews Rafi Mohammed, founder of the consulting firm ‘Culture of Profit’, on the topic of ‘Pricing Strategies for Uncertain Times‘.

During the course of the conversation Nickisch states that with COVID-19 service/product providers will be under intense pressure from clients/customers to offer discounts, to which Mohammed replies:

Clearly, in the short-run, you have to offer a discount. And what I would be focused on is what I call discounting with dignity in a manner that doesn’t devalue your product in the long run. And so, that’s really important because once you set a low price, it’s very hard to recover when demand eventually does come back.

And so we turn to how this really important concept applies to law firms

Blind Freddy can tell you that clients are under intense pressure to cut costs. I doubt there is a CFO out there who has not phoned (or even Zoomed) his/her GC and told them to cut costs.

And I suspect there are few GCs out there who have not responded by calling, zooming or even emailing the law firms on their legal panel to tell them to reduce rates by X%.

And, having lived through the Asian Financial Crisis of 1997 and the GFC of 2008, I suspect there are few law firms partners who have not passed along this request to their Finance Department with a note to “make it happen“.

But if this sounds familiar, and if a law partner you know would or has done this (*because it is never us*), then you would be missing out on Mohammed’s very powerful ‘discount with dignity‘ concept.

Because, as much a I hate advocating or agreeing to discounts, Mohammed is right:-

If you offer a discount to customers/clients merely because we are going through turbulent (or should I be saying ‘unprecedented’ 🙂 ) times, then what you are really doing is devaluing your service/product in the long term.

Because what you are saying to your customer/client when you unconditionally agree to a discount request of this kind is that “you have been over paying me all this time” – I’m not really worth what you have been paying me.

A Suggested Alternative Approach

Much like scoping in Legal Project Management methodology, when it comes to discounting (and I’m realistic enough to know that there needs to be some consideration of discounting in current times), you need to be considering what you take out of the basket when you offer that discount.

Which is to say it isn’t a ‘like for like’ for less conversation – you don’t get the same for less. If you take 15% off, you take 15% out of the basket. And you look to alternatives to how that can be sourced – either in-house or some other way (including LPOs/ALSPs).

And, if it really does need to be ‘like for like, but for less’ then it needs to come with a risk sharing collar. For example, I will accept 80% of my fees, but if we get past COVID-19 and your share price returns to pre-COVID highs within 6 months of completing this deal, then you agree to pay me 120% of my fees.

And, in the very worst of scenarios, your invoice should include a line item that states the discount being given is a one-off COVID-19 discount (and Mark Stiving, of Impact Pricing, has an interesting thought on this issue).

Regardless of what it is, you do need to do something. You cannot standstill for less. Because we will get past COVID. And in the ‘new world’ (even if that is a world where we merely live with COVID) there will be a ‘new, new normal’. And if you have agreed to discount your rates now without taking anything out of the basket, then what you have actually done is recalibrated your value in the new world.

And you won’t recover from that.

As always, the above just represent my own thoughts and would love to hear your thoughts.

rws_01

This week’s photo credit is Chrissie Kremer on Unsplash

Not every step is an equal step

bruno-nascimento-PHIgYUGQPvU-unsplash

When it first became apparent that COVID-19 was a pandemic – and one that we truly needed to be concerned about here in suburban Sydney, my doctor gave me a call. The call went something like this:

Doctor: “We need to make you ‘COVID ready’ Richard”.

Me: “Okay Doc, what’s COVID and how do we go about making me ‘COVID ready’?”.

We all now know what COVID is, and for a number of reasons – asthma, lack of general fitness and age group – I fell relatively squarely into what my doctor termed: the ‘vulnerable‘ (it sounded a lot less sinister then than it does now – now it’s actually a worrying tag).

His plan for preparing me to be ‘COVID ready’ (or at least better prepared) included walking 10,000 steps a day (and if you are wondering how far that is, it’s roughly 9kms). To help me (actually more importantly my doctor) track my success at achieving this daily task, I downloaded an app onto my iPhone and off I went.

Being the grumpy old man I am however, it didn’t take me long to come to the realisation that not every [walking] step is equal – a step walking up a steep hill takes a lot more effort than a step walking on a flat tarmac road.

But to the app they are the same. The app doesn’t distinguish between the effort of a step, it merely counts the number of steps!

So if you are still reading this – and you’re roughly 200 words in – you’re probably thinking:

“Fine, but what does this have to do with the business of law?”

And so here is my point – without trying to belittle the situation we are in at the moment:

If you are a lawyer and record your time by the billable unit, and have some kind of software to help you track that time, it won’t recognise the time and effort of the task you are undertaking: it will merely record the unit of time.

So much like my walking app records each ‘step’ I take, your billable software will record each [typically] six minute unit of time. It won’t give you any additional credit for the ‘effort’ (read difficulty) you put into that unit.

In fact, quite the contrary.

My walking app – and by extension my doctor monitoring it – gives me more credit for walking 15,000 steps a day on a flat and even surface than it does for walking 8,000 steps a day up a very steep inline that takes me three to four times more effort and for which I will ultimately be penalised by my doctor because I’m still 2,000 steps short of my daily target – despite the fact that overall I’m getting fitter, which is actually the ultimate goal!

So which of the two options do you think I go with?

rws_01

Photo credit to Bruno Nascimento on Unsplash

Altman Weil Survey: 98.7% of hourly rate fees are discounted

damir-spanic-vwaTtIhCjVg-unsplash

One of the most surprising take-outs from this year’s Altman Weil ‘Law Firms in Transition 2020‘ report is how little full freight fee collection is happening.

Keeping in mind that the collectable information in the report would have occurred pre-COVID, it is absolutely amazing to me that 98.7% of all hourly rates fees are now at “discounted hourly rates“.

Pricing Discounts copy

To be fair, the term “discounted rates” is not defined and most law firms would argue – in this day and age – that they rarely get full freight rack-rate.

But it does make me wonder, if only 1.3% of your firm’s hourly rate legal fees are not discounted…

…why bother?

If becoming more progressive about how your firm prices is of interest to you then right now is the time to start thinking about this; because if all you are getting is 1.3% of your hourly rate fully realised…

it’s time to start thinking outside the hourly rate pricing box!

As always, the above just represent my own thoughts and always interested to hear the views of others.

rws_01

Photo credit to Damir Spanic on Unsplash

 

 

 

 

Does your firm use data as a profitability management tool?

AW LFT 1

I’ve just finished reading the latest Altman Weil ‘Law Firms in Transition 2020‘ report.

With all things COVID the Report (as it has done in any event for the past decade) makes for interesting reading.

But, the response(s) to one of the questions in this year’s Report  I found particularly concerning.

When asked:

“Which of the following statements describes your firm’s use of profitability data as a management tool?”*

16.2% of respondents replied:

“We don’t want to use the data because it is potentially controversial or divisive.”

16.2% of respondents believe sharing and using data in 2020 can be ‘potentially controversial or divisive.’

I find that rather sad.

And don’t even get me started on how it is possible that over 13% of respondents don’t even know how to use the data!

As always, the above just represent my own thoughts and always interested to hear the views of others.

rws_01

* see page 50 of the Report

[This post first appeared on my LinkedIn feed Thursday 2 July 2020]

Survey: Production returns; Billings fall; Firms need to find new ways for clients to pay

dreamstime_xxl_61377836

Having reported a cliff-fall in new matter instructions post-COVID in its Legal Trends Report Briefing #1 in May of this year, June’s updated Briefing #2 by Clio shows a subsequent significant upward spike in new matter instructions that have, effectively, netted out year-on-year the number of new file matter instructions.

While, at first glance, a return to quasi-normal file opening matter numbers look to be good news for law firms, as the latest Briefing numbers also shows, if you scratch the surface you’ll soon see (diagram below) a far bigger underlying problem is starting to emerge – namely clients’ inability (or possibly unwillingness) to pay!

20200628_image1

While the above wheel-chart is, at first glance, alarming, it’s also worth keeping in mind that a client’s ‘ability‘ to pay a legal fee pre and post the pandemic is not necessarily the same as its ‘willingness‘ to pay that fee. Which is to say there may be (and likely are) other underlying reasons as to why clients are saying they are not willing to pay fees – including a re-evaluation on the part of the client in respect of the perceived value being provided.

Of more concern to law firm management, however, should lie in the second of these two charts, namely the fact that rather than chasing fees 25% of firms are electing to forfeit the revenue.

Again, there could be a whole raft of underlying reasons why a firm may decide it would rather forfeit some of its billed revenue, and without undertaking a root-cause analysis we left to guess these (including my favourite – trying to preserve the relationship), but we should be left under no illusion that discounting and write-offs will have the biggest impact on profitability*.

A willingness to look at alternative payment methods

20200628_Image 2

For me, a somewhat surprising take-out from the latest Briefing was the statistic that 72% of consumers would prefer to pay their legal fees via a payment plan. Again, the term “consumer” isn’t defined and so we are left wondering if this is B2C or B2B; but even then, that only 53% of firms are equipped to offer payment plans seems odd.

Take away?

So what’s my top 3 take outs from this latest Briefing from Clio?

  1. Once things settle down, law firms will be as busy as ever,
  2. Cashflow will be king and clients are struggling with their own cash-flow, so
  3. Think outside of the box when it comes to pricing and how you ask clients to pay and you should be okay.

As always, these just represent my thoughts and always interested to hear your views.

rws_01


* N.B. If hourly billing is the way you work and you want to get a better understanding of the effect that discounting/write-offs has on your firm’s profitability, take a look at this post by Patrick Johansen that profiles Stuart Dodds’ ‘1-3-4 Rule

 

Survey: Top 5 Reasons Clients Switch Firms

If you’ve recently lost a client to a competitor and have been wondering how that happened, wonder no longer. The recently published ‘2020 Future Ready Lawyer Survey: Performance Drivers‘ by Wolters Kluner has the answer.

Surveying 700 in-house and private practice lawyers across the US and EU in January 2020, this is probably the most comprehensive survey post COVID (although most of us were not entirely sure what this meant in January so I look forward to a survey report that has been conducted post March this year).

The Top 5 reasons cited as to why a client might leave your firm are:

  1. The client no longer trusts your firm can meet their needs,
  2. Your firm doesn’t specialise in the area of law needed by the client,
  3. Your firm failed to communicate its value proposition properly,
  4. Your firm did not demonstrate efficiency and productivity, and
  5. Your firm’s leverage was/is all wrong.

And three of these are essentially because you messed up on sourcing, communicating and delivering on your pricing promise.

Take-away top tip: want to make sure you keep clients and keep them happy – make sure you (and your team):

  • understand(s) your value proposition and are able to communicate this,
  • get your team’s leverage right [hint: don’t hoard work at the top end just so you can meet budget this year!], and
  • understand the scope of what you are being asked to do and project manage both the scope and the client expectations (especially if out of scope creep occurs).

Manage this well, and you’ll be three-fifths of the way to keeping your client happy!

Demonstrate Efficiency

As a bonus, think about how you demonstrate efficiency to your client.

  • Is this by saying you have the relevant expertise/experience so that you can do this faster than others,
  • Is this by saying you have the appropriate IT systems that allow you to get the job done faster, or
  • Does efficiency even really matter – should the conversation not be about being an effective lawyer?

As always, these just represent my thoughts and always interested to hear your views.

rws_01

 

 

Now is the time to focus on your existing relationships


I read an article on Inc.com last week by Damon Brown in which Damon writes that if you run a business in a post COVID-19 world ‘You Need More Customers, Not Higher-Paying Ones’ – which [as someone with an interest in pricing] caught my attention.

There is no doubt that right now the appeal of diversifying your customer base and revenue stream is going to look appealing. As Damon writes, “your business needs varied and multiple customers” for essentially three reasons:

  1. Diversify income streams
  2. Lessen the over-dependence effect – security in numbers
  3. Protect your business against Black Swans

My mother would have called this: “avoid putting all your eggs in the same basket”.

But while insulation from risk is undoubtably core to a lawyer’s heart, right now – appealing as it may seem – would be the wrong time to be looking to expand your client base. And I say this for the following three reasons (in inverse order to Damon’s):

  1. This is a pandemic, not a Black Swan, event: in that none of us have a clue how we got here or how we will get out of it – we are not here because of strategic issues.
  2. Pareto: notwithstanding how large your client base is, the facts are in -: 80% of your revenue comes from 20% of your clients. Expanding your client-base isn’t really going to have much beneficial impact on this, rather it’s going to suck-up much needed diminishing resources.
  3. Diversify income streams: isn’t a customer-based issue in professional services firms. If you truly want to diversify your income stream you don’t need to expand/diversify your client-base, you need to expand/diversify your product offering. That’s a whole different problem (and one which could be achieved).

In short, you don’t need to be expanding your client-base, what you need to be doing is focussing and developing your relationships with those top 20% of your clients.

Or, as Ron Baker has written: “It’s one thing to get more business, it’s another thing to get better business”. And while predictability and certainty of revenue is great:

“…if you bring in those customers at the wrong price, you have done nothing but add layers of mediocrity to your firm”.

Some thoughts to consider before you start chasing rabbits down holes…

Again, these just represent my thoughts though and always interested to hear your views.

rws_01

Tribes, Teams and Pricing the ‘New Normal’

The goal isn’t to find people who have already decided that they urgently want to go where you are going. The goal is to find a community of people that desire to be in sync and who have a bias in favor of the action you want them to take.

Seth Godin

TRIBES

In around 2009 I recall reading Seth Godin’s, then recently published, blockbuster ‘Tribes: We Need You to Lead Us‘ and thinking this would have a profound impact on the way clients engage law firms. To give this thought some context, it was around the same time as we had started talking about a new fad called ‘unbundled legal services‘ (which would later also become known as ‘limited scope representation‘ – see ‘The great unbundling of legal work‘ in the Australian Financial Review). It was also a time when ‘disaggregation‘ and the rise of Legal Process Outsourcing (LPOs) (predominately in India at that time but later this would extend to South East Asia and South Asia) would have many of us who worked on bids and tenders discussing issues around disruption of the legal services supply chain – if for no other reason than clients were asking us to provide answers to these questions in their requests for tenders.

A cold wind, amounting to real structural change, in the way clients purchased their legal services was coming (Pfizer Legal Alliance).

THE ‘NEW NORMAL 1.0’

Fast forward a decade and probably the only person who still talks to me about Seth’s Tribes is my good friend Julian Summerhayes, and it is never within the context of an RFT or legal services more broadly.

Nope, in short tribes, disaggregation and unbundling, while definitely remaining vogue, never really had the impact and penetration that I – and I would suggest many others – thought they would.

The ‘New Normal 1.0’ had, to all practical purposes, failed.

KRYPTONITE TO THE ‘NEW NORMAL’ – TEAMS

Probably the biggest obstacle to the growth of tribes post 2009 has been the role that teams have historically played within the legal profession.

Since the times of Dickens a junior apprentice lawyer has worked with, and been mentored by, their senior (supervising) partner. It has always been thus, and with it has come an almost umbilical cord tie between lawyers who have worked in the same team.

Many an in-house General Counsel has sat at the foot of the table of the private practice partner to whom they send instructions. A relationship that has been forged within the confines of a team structure.

TRIBES REBOOTED – TRIBES 2.0

It’s my opinion that one of the biggest likely outcomes COVID-19 will have on the profession is the re-emergence of tribes – tribes 2.0!

There are a number of reasons why I think this might be the case, but probably the biggest is that in-house counsel have, over the past three months, become used to working with remote teams.

It should not, then, be too far removed to say that in-house counsel will be happy working with subject matter experts across firms who can enable them to achieve their objectives rather than with an individual firm that might get them across the line.

In short, on the right deal, in-house counsel will be happy to work with a group of lawyers from various law firms rather than one firm – a tribe over a team.

THE CHALLENGES

Moving from teams to tribes is not a foregone conclusion, it faces challenges.

High among these will be:

  • How is risk allocated?
  • Who wears the professional indemnity risk?

My own view is that these can be overcome with:

  • properly scoped Engagement Letters
  • proper use of Legal Project Management
  • a good understanding of Workflow Process Methodology

But that still leaves the issue: How do we price the ‘New Normal 2.0’?

HOW TO PRICE THE ‘NEW NORMAL 2.0’?

The cynic in me says that many law firms will not have the first idea how to price the New Normal 2.0. This presents a significant problem because if they cannot price it, then they cannot sell it (pricing still remains the principal form of credentialisation despite, or rather because of, whatever experience you claim to have).

ONE ANSWER – THE ROLE OF SCOPE PRICING IN THE ‘NEW NORMAL 2.0’

Scope pricing will play a critical role in the pricing in the ‘New Normal 2.0’.

Unlike a fixed fee, capped or fee estimate pricing, scope pricing does it exactly what it says on the tin – it prices to the scope of work being undertaken by the relevant lawyer. This means that proper use of scope pricing should allow in-house to teams to unbundle the legal work within their project – either between the role the in-house plays and the role the private practice firm plays; or, in the case of this post, the role that multiple lawyers with subject matter expertise from various firms play in a project.

And, if done properly, the biggest upside to scope pricing over any other type of pricing of legal services is that, by definition, there really shouldn’t be any scope creep – what you see [in the tin] is what you get!

rws_01

‘Imposter syndrome’, how it effects your pricing, and what you can do about it

dreamstime_s_20548423

Imposter syndrome‘:  “The persistent inability to believe that one’s success is deserved or has been legitimately achieved as a result of one’s own efforts or skills.”

For some time, sparked through the conversations I’ve had on the topic with Katherine Mountford, I’ve been interested in the concept, theory, and roll that imposter syndrome plays within the legal profession.

My interest was given a nudge over the past week by a LegalSpeak podcast that included some great thoughts by both Albert Farr and Jay Harrington, who talked about their experiences with imposter syndrome in the early part of their legal profession [noting that Farr is actually just starting out his career in law] (Calming the Imposter Monster: You Don’t Know Everything, And That’s OK.) and a post by Susan Harper on the issue of ‘What is Imposter Syndrome and How May It Be Affecting Your Leadership?‘ which looks at the broader implications of imposter syndrome at a more advanced stage of your legal career.

Read together they give a pretty good balance on some of the major crisis of confidence issues that can plague lawyers.

What am I worth?

While I am in no way qualified – nor do I profess to be – to talk to the diagnosing and/or treating of any medical conditions associated around imposter syndrome, or mental health issues in the legal industry more broadly, with over 20 years’ experience in the industry, I have no doubt whatsoever that most lawyers wake up in the morning and ask themselves (if no one else) ‘What am I worth?‘ – ‘What is an hour of my labour worth?‘.

Adding to these frustrations, and doubts, is the fact that, in private practice, in most cases, a lawyer’s intrinsic value is not determined by them. Nor, importantly, is it determined by their clients in recognition of their craft.

No, more often than not, a lawyer’s worth is determined by the Accounts Department and/or a Senior Management committee who have worked out [this should probably read, “been told”] how much the capital [equity] partners want to be paid this year (including bonus). Having determined this we then work backwards and determine the number of hours that will need to be worked in order to achieve this, taking account of historic realisation rates, and minus any leave, and then looking at the relevant leverage and required multiplier needed to ensure that the required amount is met.

All of this is then wrapped around a completely meaningless ‘industry survey’ that costs a fortune and suggests your law firm’s hourly rates are 10-20% less than your competitors and you really should be doing a better job!

If this sounds convoluted and over complex, or if you have any doubts about my sincerities here, read ‘Associates Want a Break on Billable Hours as Pay Cuts Roil Law Firms‘ by Dylan Jackson.

Little doubt then, in my opinion, as to why lawyers would suffer from imposter syndrome (or mental health issues more broadly).

Taking back control – how to demonstrate value to your customers

Adding insult to injury, having not had much say in the hourly rate they charge, and with little or no training, lawyers are then asked to go to market and justify why they are worth the amount they charge.

So can lawyers take back some control?

The short answer is: ‘yes’; there are several ways that lawyers can take back that control – one predominately relates to internal processes and the other to external communication.

Change the internal process: Establish a Value Council

If you want to adopt greater transparency and conversation around the amount that your lawyers charge – relative to the value they are delivering to your customers – and at the same time get greater collective buy-in from your lawyers, then I would suggest you take the power away from your Accounts Department and establish a Value Council.

The mission statement of your Value Council should be to establish:

‘a collaborative platform to discuss and exchange views and information about value to ensure outcomes that are mutually beneficial to all.’

Progressive law firms will include customers of the firm in their Value Council and consider adopting a Pricing Charter.

To be effective, it is suggested that your Value Council consist of no less than six and no more than 10 participants who, crucially, are willing to invest time in the process.

Change the external communication

For years lawyers have liked to brag about the hourly rate they charge. It’s up there with the mount of billable hours they have worked this year as ‘badges of honour’. The reality that most lawyer’s Average Billing Rate – the amount clients are actually paying for that lawyer’s time – are nowhere in the region of that lawyer’s hourly rate is conveniently forgotten.

But there is an alternative. Rather than going to market bragging about how much you cost, why not change the conversation up and talk about how much value you bring to your customers. How you help your customers? How you change outcomes to their benefit.

Dare I say it, you move the conversation away from you and onto them. In doing so, it is hoped you will take a critical step down the path of the Value Conversation; because, as John Chisholm wrote back in 2018:

“Before we price, we need a scope of work; before we have a scope of work, we need to have a scope of value and you cannot have a scope of value without first having a value conversation.”

That seems like a good place to put a line in the sand to this week’s post. I will add though that if you are one of those lawyers who questions their value, who may question if they deserve to be where they are or who suffers some form of imposter syndrome, keep in mind that around 90% of the profession is right there with you (and listen to Episode #182 of the Soul of Enterprise) .

rws_01

‘Annuity Revenue’ – who wouldn’t crave some financial certainty in current circumstances?

Annuity revenue – a predictable revenue stream from new or existing customers who buy products and services associated with new or previously purchased products. 

As the Managing Partner of a law firm today, what would you say if I walked into your office and told you that I could:

  • provide you with a guaranteed monthly revenue income,
  • with a product that creates loyal customers, and
  • where those customers become – at no additional cost to you – brand champions and refer your services to their network, free of charge, via the Holy Grail of marketing – positive ‘word of mouth’ referrals.

Sounds great doesn’t it. Almost too good to be true.

Well all I can say is that if you were anything like one of the Managing Partners servicing customers who responded to the Pitcher Partners recent ‘Legal Survey 2020 Report‘, that’s exactly what you would be saying: “thanks, but no thanks we are happy with the billable hour”.

Pitcher Partners - Billing Methods

The fact that the billable hour remains the ‘go to’ method of billing (not the same as pricing) for Australian law firms and their customers does not, in and of itself, surprise me. I must admit, however, to being a little surprised with the 1% increase in this billing method (up from 58% to 59%) year-on-year.

Given the times (even pre Covid-19), I was also a little surprised to see that both ‘fixed fee’ and ‘value-based’ pricing remain relatively static (although it should be added that from what I could see the report lacks a definition of ‘value-based’, probably purposely so).

To me this represents a massive lack of foresight on the part of law firms and a significant lost opportunity.

In much the same way as software as a service (SaaS) companies have come to realise that one-off payments around shrink wrap contracts were not servicing the long-term financial interests of the company (unless it’s a legacy product that will no longer be supported), the time has come for law firms (and professional services firms more broadly) to realise that if we want to maximise revenue and, potentially, profit we need to rethink how we generate that revenue.

One alternative that the likes of Ron Baker and Mark Stiving have been banging the drum about for some time is ‘subscription based pricing’.

The benefits of adopting a subscription based pricing model

I have posted previously on this blog about the benefits of subscription based pricing (see here), but leaving all that aside for a second; as Amy Gallo wrote way back in October 2014 in the Harvard Business Review (see ‘The Value of Keeping the Right Customers) with the acquisition costs of acquiring new customers running being between 5 and 25 times more expensive than servicing existing customers, it makes economic and financial sense to find, and keep, the right customers.

How you price this is probably the most important step along that path.

The weakness of having billable hours as your default billing method is that you are pricing to the transaction. Whereas one of the greatest benefits of the subscription based pricing model – or even a retainer based pricing model if you must at the start- is that you start thinking about pricing the customer or even the portfolio.

In other words, you start to think about the customer and their needs first. And for an industry that always talks about the customer being at the centre of everything we do, doesn’t it makes sense that our pricing structure reflect this claim?

But it also makes sense internally, because it:

  • is smarter pricing
  • leads to smarter collaboration
  • moves you away from seasonal end of financial and calendar year pressures, and
  • helps remove any discussion around the ‘commodity’ tag.

Not to say, in these COVID-19 times, when you are talking working capital facilities with your bank, it provides you with a guaranteed annuity revenue stream.

Now who would not want that comfort right now?!

These just represent my thoughts though and always interested to hear your views.

rws_01