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:
- Hourly – the ‘go to’ pricing option for law firms. But are hourly rates pricing or billing?
- Volume – nope, not a pricing mechanism. It’s a discount. Not even an alternative fee arrangement (AFA).
- Blended – isn’t that an hourly rate?
- 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.
- 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.
- Task – okay, but isn’t this really just a fixed fee?
- Flat (Transaction) – okay, but again: isn’t this really just a fixed fee?
- Phase – sounds like a fancy name for task to me!
- Fixed – Nirvana. Now we need a pricing expert.
- Contingency – implies it needs to be contingent on something.
- 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.
- Hybrid – yeah right. Are we talking cars now?
- 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.
- Risk Collar – is hourly billing with an up and downside calculation mechanism.
- Success/Bonus – again, performance related.
- 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.