pricing

Want to know how Microsoft’s legal team measure value?

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Value” – specially how we create and communicate it – is probably the hottest issue in legal pricing at the moment. So how much would you pay to find out how Microsoft’s legal team measure value?

If you’re smart – nothing.

Instead you will listen in to the ‘Business of Law Podcast‘ where Karen Kepler (Law Procurement Manager at Cargill) talks with Rebecca Benavides (Director of Legal Business at Microsoft Corporation) and Jason Barnwell (Assistant General Counsel of Legal Business, Operations, and Strategy at Microsoft Corporation) about the process of designing and building an outside counsel panel.

And after you have listened to the podcast (around 40 minutes of your time), download the show notes and take a look at the 4 page slide pack on ‘CELA Law Firm Engagement: Strategic Partner Selection Process‘ – because you’ll then be able to recognise where the image at the top of this post comes from.

Big lesson learnt here: Our clients want to talk to us about this, but are we really willing to listen?

As always interested in your thoughts, views, feedback.

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Question:- Is your firm pricing the issue or the risk?

One of the first things you will be taught in project management is the difference between a ‘risk’ and an ‘issue’. For those not in the know, an ‘issue’ is something that has happened – and we need to fix it (preferably ASAP); whereas a ‘risk’ is something that has not yet happened but may foreseeably happen, so we need to factor this in.

In any discussion around the pricing of legal services we are faced with exactly the same problem:

  • there is an issue – the client has a problem: we can workout how much it will cost to fix it, yet;
  • there is a risk, the part we are not sure about, nor are we sure about the scope.

QED: 9 times out of 10 instead of looking at the issue/risk conundrum rationally, we take on the risk blinkers and either price to the issue and/or tell the client we cannot know how much it will cost outside of the risk (hence hourly rates).

Whereas the smart pricer/legal project manager in the room will typically white-board both the ‘issue’ and the ‘risk’ with the client and say to the client:

  • This is what we know (the issue). It’ll cost you X.
  • This is what we are pretty sure will happen (the risk). It will cost you Y.
  • And this is the remote (bad luck it happened element) – let’s reconvene and discuss.

But this is just my take. As always though, would be interested in your thoughts, views, feedback.

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Has your law firm considered subscription-based pricing?

Like many lawyers who have worked under billable hours or fixed fees, for most of my career I have pondered the question: “How can I make money while I’m asleep?”, or better yet, awake but not working!

Early in my career I thought I had the answer – subscription-based pricing.

At the time I was working with Linklaters on their Blue Flag program (see this article for an overview of what Blue Flag was all about) which essentially provided compliance related information to subscribers who paid a monthly fee. This was then extended to basic loan documentation that was created using automated software (an early version of HotDocs if I am not mistaken).

As I was to find out though, the problem with this business model is that there is always someone willing to undercut you on price, with little attention to the value you were providing.

And so I never really took it much further.

But I remained interested in the dilemma of how I, as a knowledge provider working on hourly or fixed fee arrangements, could make money while I slept (outside of writing a book and get loads of royalties).

A couple of things recently changed my view on this whole issue though.

First, I listened to Episode #217 of Ed Kless and Ron Baker’s the soulofenterprise.com podcast in which they discuss ‘The Automatic Customer: Creating a Subscription Business in Any Industry’ a book by John Warrillow.

Ed and Ron continue this discussion in Episode #221 (Part II).

One of the big take-outs for me from the podcast was the fact that Porsche has introduced subscription pricing (see here for a story on this).

That’s worth repeating – you can subscribe to drive a Porsche!

And get this, Klaus Zellmer, CEO of Porsche North America, says of subscription-based pricing that:

“We engage people with a brand that they usually wouldn’t,”

As a law firm, imagine…

Second, I recently read that ‘Apple will lean more on subscriptions as iPhone sales drop

That’s right, Apple – as of the date of writing this post – the world’s second biggest business by stock market value is moving towards a subscription-based business.

Which made me think – what’s the biggest doing?

Answer: ever heard of Amazon prime?

So if subscription-based pricing works for these big players, why not your law firm?

As always though, would be interested in your thoughts, views, feedback.

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Lawyers and ‘the amplifying factor’

On 11 January Seth Godin blogged ‘Good intentions (how to be on time)‘. Typical Seth, it’s a relatively short post; and typical Seth, it contains an important message – ‘The amplifying factor‘.

In Seth’s words:

The amplifying factor is that when they’re late, people wait for them.

So why is this relevant to your firm?

The answer:- how familiar does this [2015] post by Bruce MacEwen (Adam Smith, esq) sound:

(3) We recently had a meeting scheduled with the partner on the matter at the firm’s offices in midtown. (I was not present.) Our representative—one of the two wardens of St. Michael’s—arrived about five minutes early and ran into the partner in the firm’s reception area; he was heading for the elevator to go out to get coffee.

He kept going.

My colleague sat in the conference room for 15-20 minutes awaiting his return. When he did appear, the plan was to conference in the other St. Michael’s warden on the speakerphone. He didn’t know how to do that.

This is a perfect example of ‘the amplifying factor‘. And in law firms I see this behaviour every single day…

As always, would be interested in your views.

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The R.U.L.E.S – again!

R.U.L.E.S.:

  • Realization
  • Utilization
  • Leverage 
  • Expense(s)
  • Speed

Taken from Robert J Arndt’s 1988 publication ‘Identifying profits (or losses) in the law firm‘ a flawed metric to determine:

  • which lawyers and partners were making a profit,
  • which practice areas were making a profit,
  • which matters were more profitable than others, and
  • which clients were more profitable than others.

But, is this really the way forwards when planning for 2019?

Would be interested in your views.

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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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