pricing

In response to Patrick Lamb

Overnight Australian time, Patrick Lamb wrote a post (‘The importance of understanding context.‘) in which he makes several comments on a recent post by me.

I will start by saying that I know Mr Lamb, by reputation at least, and I have very high regard for him. I was thinking about it when deciding whether to write this post this morning and I believe I have been a follower of his blog for about 10 years (could be slightly less, maybe longer).

The following are three brief responding comments I would make to Mr. Lamb’s post:

  1. I strongly believe that any discussion that includes a component that AFAs are cheaper than hourly rates is the wrong discussion. Data-driven or otherwise. Do I want to see data showing me that AFAs are cheaper than hourly rates? Probably not. Why – because it would assume like for like, and the fact is behaviours of lawyers differ under the two structures. And, the only way I can see of getting close to like for like comparables is by asking fee earners under a fixed fee structure to track time – and my own view is even then the statistical data that falls out of that will be tainted and virtually useless for any meaniful discussion. So I’m not really interested as I believe it will lead me – and many others – down a conversation path that I fundamentally believe is the wrong one to be on: which is that AFAs are not a comparable to hourly billing. [as an aside: any conversation I have been involved in which starts with “data suggests AFAs are cheaper than hourly billing” typically ends up being a race to the bottom and rapidly results in a commoditised product.]
  2. I believe a “value equation” is precisely that: value must be experienced by all parties. If the value discussion results in the client believing they are getting great value but the lawyer feeling they are being cheated, then you are going to have a problem. So my own view is that any “value conversation” is not a one-way street and, as with the case with any pricing discussion, lawyers need to know when to walk away from the discussion.
  3. My comment on “if you cannot do AFAs, stick to hourly billing” is somewhat tounge-in-cheek, but has a serious undertone. Value pricing/AFAs are not easy. It takes a particular skill. It needs to be learnt. So if you wake-up one morning and decide you want to do value pricing/AFAs, by all means get help. But, whatever you do, don’t set out on that road without some guidance because it will be a road to ruin – stick to hourly billing (if your clients are letting you) until you have learnt how to price otherwise. And it is also my view that too many lawyers in Australia are failing to understand this and are implementing AFAs that are fundamentally “hourly rates in drag” as Mr John Chisholm has been known to say.

I want to finish this post on what I consider a positive. I wholly agree with the following comment by Mr Lamb – and comments like this are largely why I read his blog:

AFAs can provide great value to lawyers, but only if they change the way they do their work.  The old way is burdened with fat and excess, and it is why clients grew so frustrated with the billable hour.  Second, firms need to decide if customer service is a core value of the firm.  If it is, you find out what is of value to your clients and you figure out how to provide it.  It is an exceptionally rare matter in which, over the duration of a matter, an AFA cannot be used.  The challenge must be to carefully and precisely identify the client’s objectives. Once that is done, a fee to incentivize the accomplishment of those objectives is possible.

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‘Do fixed fees need to be cheaper than hourly rates?’

Earlier this week Corporate Counsel published an article (“What GC Thought Leaders Experiment Is About (Hint: Not Cost)“) by Firoz Dattu and Dan Currell of AdvanceLaw in which they comment on a recent open-letter by 25 GCs [‘GC Thought Leaders Experiment’], which rightly has received a certain amount of industry attention.

Despite indicating that cost is not the primary issue in the project, Data and Currell stated:

“Here are three of the questions we are excited about—and these are just the beginning:

[First]…

[Second]…

Third, flat fees. A natural question about flat fees or other alternatives to the billable hour is whether they are cheaper. You now know that we think this is a half-question (and not the interesting half). The whole question is: do alternative fees work better, all things considered?”

Let’s look at that third question again with highlights by me:

“A natural question about flat fees or other alternatives to the billable hour is whether they are cheaper.”

Actually, that’s a very, very long way from the natural question.

But then we get…:

“The whole question is: do alternative fees work better, all things considered?”

And while that question may seem a lot closer to the answer we seek, it is still – well – the wrong question.

Flat fees, or other alternatives to the billable hour, should not be about whether they are cheaper. In many cases they are more expensive.

Nor, per se, are they about whether they work better (and by that i am unfairly reading “easier”). In some cases they are far more complicated and getting them to work is a real art of communication (that is, if you have scoped the matter and given appropriate thought to LPM, etc).

But, crucially, what alternatives to the billable hour should be about is simple: ‘Do they offer better value?’; To the client? And to the lawyer?

And if they don’t, the simple truth is this: maybe you shouldn’t be using them.

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Deutsche Bank, junior lawyers, being outcome focused, and a voice of reason

A fair amount has been written since Legal Week published its story on 21 March that ‘Deutsche Bank to refuse to pay for trainees and NQ lawyers after panel overhaul‘, which alleged that the Bank had told its panel firms it would no longer pay for trainee and NQ lawyer time on its files. Some of the commentary around this story has been in favour of the Bank’s position, some has questioned the wisdom of the Bank, and the vast majority of it has sat somewhere in the middle*.

With the level of public legal issues the Bank has had in the past few years, it’s little wonder that the Bank would look to reduce its legal fees, and not paying for trainees’ and NQ Lawyers’ time would certainly go some way to achieving that goal.

That’s all well and good, but to my mind if you are outcome orientated – rather than input driven – then the number of years a person has done something really doesn’t bother you – because what you are really paying for is the result. I mean: who is to know who will have that eureka moment?!?

Sure, it may be more likely to happen to a more experienced lawyer. But isn’t it just as likely that a senior lawyer will have their thinking clouded and the answer comes in the form of a fresh eyes approach from a junior lawyer?

And so enter a voice of reason into the debate – in the form of Vodafone Enterprise global general counsel Kerry Phillip, who is quoted in a later Legal Week article on the issue as saying:

“We do not expect to be charged for training time, but not everything a trainee does is training time. Law firms should absorb the cost of training solicitors, but where there is genuine value added to the client – rather than pure learning through shadowing or watching – then it is fair to charge.”

Absolutely spot on Ms Phillip.

But, crucially, this concept can be extended to all lawyers who act on all matters, in that where you genuinely add value to your client’s business/issue, then charge for it and more often than not you’ll be paid for it (without questioning of the bill).

But, where you don’t add value to your client’s business or issue, you cannot charge for it. Or, more accurately, you can: but increasingly you won’t be paid for it.

And just for the record, Ms Phillip goes on to say in that article:

“That said, we generally agree a fixed price for a piece of work. I expect the law firm to put an appropriately experienced and qualified person on that work, but we are paying for an agreed result or output that the firm puts its name to.”

Again, absolutely spot on:- clients are paying for an agreed result or output that your firm puts its name to – and there is a massive, massive, marketing lesson for private practice law firms to get their heads around in that statement.

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* NB: in my experience working tenders, Australia has seen this trend since at least 2010 – if not before.

Capped fees are lazy pricing

Seth Godin recently wrote:

“Price is the last refuge for the businessperson without the imagination, heart and soul to dig a bit deeper.”

Seth’s quote rings true to me every time I hear a law firm partner suggest a cap fee arrangement to their client.

Capped fees lack imagination. They lack investigation. And because of it, they lack understanding.

Understanding of your client’s priorities, as well as your own.

More damagingly, they encourage apathy.

Because, if I – as the service provider – want to get my maximum value, then I need to work to my cap, and no more. I don’t want to be too good at my task though, because otherwise I won’t get paid for my labours. At the same time, I don’t want to be too bad, because I won’t get paid for my labours then too.

So, cap fees are a lose-lose scenario.

And that is why, capped fees are lazy pricing.

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Are billing software providers perpetuating the life of the billable hour?

I’ve read a lot about #Newlaw since I first came across the term in tweets and blogs by Eric Chin and George Beaton back in late 2013. In all that time, a leading theme of #Newlaw, as opposed to traditional law (or #Oldlaw as my friend John Chisholm likes to call it), is its progressiveness. Here, one of the more progressive Australian-based #Newlaw entities I read about is the old Advent Balance, including this wonderful 2014 post by another good friend – John Grimley.

For those of you who may not be aware, Advent Balance in Australia recently became Lawyers on Demand – and as far as pedigree in #Newlaw goes you’re not going to get much better provenance.

Given all this, can you imagine my surprise when I read the following headline in Lawyers Weekly earlier this month – ‘NewLaw firm implements ‘innovative’ time capture software‘ – to discover the ‘NewLaw’ firm being hailed in this article was none other than Lawyers on Demand!

Leaving aside what “‘innovative’ time capture software” actually means, who would have thought we would see the day when a Newlaw firm like LoD was happy to go to the press with a comment like this:

We now have our team using modern technology to capture time

Really? More importantly, why?

After all, everything I’ve read about the Lawyers on Demand/Advent Balance/Newlaw business model would have put “modern technology to capture time” as bottom on the business critical list.

And yet, not only is the legal press shouting this; but LoD are assisting and supporting in this effort.

Absolutely mad.

Then I got to thinking, who has a vested interest in Newlaw becoming time-based billing…?

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Survey result: Which groups are using AFAs?

Bit of a loaded question this, but if I were to ask you which groups were making the most use of Alternative Fee Arrangements (AFAs) what would your answer be?

If you’re anything like me, when answering a question like this you’d have thought of a commoditised practice or product – say property leasing or conveyancing.

Until yesterday that is, when I came across CounselLink Enterprise Legal Management’s Trends Report: ‘Update on the 6 Key Metrics‘ (published in February 2017).

Insights based on data derived:

…from nearly $26 billion in legal spending,  almost six million invoices, and approximately 1.5 million matters processed through the CounselLink platform…

this report is nothing if not comprehensive. And, interestingly enough, it debunks a lot of myths surrounding the application of AFAs to legal matters – for example, that they cannot be used in litigation or mergers and acquisitions.

AFAs by billing.jpg

That’s right, what this table shows us is that some of the most “complicated, cannot tell you what will happen” work is being serviced on AFAs while other “commoditised” work, not so much.

This chart makes for quite compelling reading. Unfortunately it also tells me that only about 7.5% = on average – of all billable work is done on AFAs (without defining AFAs). Evidence like that is most likely going add to the voice that clients prefer being billed by the hour – which is a shame.

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Before you can kill the billable hour, you first need to get rid of utilisation

A lot has been written about a need to kill the billable hour. Some of it has merit. Lots of it doesn’t. Some of it has been written with the client’s benefit in mind, most of it hasn’t – in the it is written with law firm survival in mind.

Crucially, pretty much all of it is irrelevant.

How can I be allowed to say such a thing?

Because the reality is that under most law firm’s current performance regimes, we actively encourage the survival of the billable hour, even while we advocate for its death.

What do I mean by this?

Well, as I alluded to in my post last week, what consistently surprises me is that while many advocate for the death of the billable hour, with few exceptions most of these advocates fail to look at one of the principal underlying issues that makes its death – overnight or otherwise – near impossible:- utilisation.

Utilisation refers to the metric by which we determine how busy fee earners are. In most firms (although not all), to ascertain ‘utilisation’ we look at the annual budget of hours the firm has set the relevant fee earner (typically starting at 1,400 hours and going north) and we measure that against the amount of billable time they have put on their time-sheets (daily, weekly, monthly or annually). From this, we then decide how “busy” that fee earner has been.

But, it’s actually a crock of shit as a metric of measurement.

Why?

Because, it doesn’t tell us how much time the fee earner has worked on the business – e.g., KM time (typical requirement of an additional 40 hours) or pro bono time (maybe another 40+ hours – notice the reoccurring hour theme here?).

It doesn’t even actually tell me how busy the lawyer has been, heard of “desktop discounts” aka “leakage”.

But most important of all, it doesn’t tell me if you made any money at all, much less any profit!

What it does is assumes that you get 100% of your hourly rate paid – but as we have seen the reality is far from the truth insofar as that assumption goes.

So it’s an absolutely rubbish metric in my opinion.

But, and I kid you not when I say this, utilisation will determine the pay rise and bonus of pretty close to every lawyer (and by that I mean partner down) in Australia this year.

So, if we except that utilisation is a rubbish metric: why does it persist?

The answer to that question is, in my opinion, one of the principal reasons why we will never get rid of the billable hour under the current reward and benefit system – because it is perceived as being a fair metric of comparison.

What”, I hear you cry, “that’s madness!”.

But it’s true. In the modern ‘full service’ law firm, where billable hour rates vary according to the type of work we do, how busy we are is seen as a fairer metric of comparison than the rate we charge or the amount we earn – with the number of hours we work, Goddess of all.

So how ridiculous is all this really?

Well, in most firms as a lawyer working on the billable hour I’ll be better paid (including bonus) with 150% utilisation, 80% realisation and 15% net profit margin, than a lawyer working on fixed fees with 80% utilisation, 150% realisation and 40% net profit margin.

I’ll leave you to decide the madness of that.

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