law firm management

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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Why asking someone to work 2,000 billable hours a year will kill their spirit

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According to a post by Casey Sullivan of Bloomberg, earlier this week US law firm Crowell & Moring announced that it would increase its billable hour requirement for associates, from 1,900 hours per year to 2,000 per year. This new target will take effect 1 September 2016, but on the plus side 50 pro bono hours will count as billable.

15 Years ago I would have cried out “all kudos to you”. Back then my yearly billable target for an English ‘Magic Circle’ firm was 1,400 hours and I flogged my guts out to achieve that. So if you can effectively put 50% of billables on top of what I was doing (and trust me when I say I wasn’t going home at least one day a week), then you’re a better person than I (or so I would have said then).

But if you really need validation of what asking someone to work 2,000 billable hours a year means, then I would like to recommend you read “The Truth about the Billable Hour” by no less an institution than Yale University. In that publication, Yale caution aspiring lawyers that if you are being asked to “bill” 2201 hour, you need to be “at work” (includes travel time and lunch, etc.) 3058.

Taking that further, from an Australian law perspective, if you are being asked to bill 2,000 hours a year then you need to bill 8.3 hours a day (assuming a 48 week year and you never get sick; which, if you are being asked to do this, you most likely will be). That means you are very likely going to need to be “in the office” around 12 hours a day – and that assumes no write-off by your partner or leakage.

But here’s the question: “What difference does this make?

I ask this because I wholly agree with the following comment my friend Kirsten Hodgson made when I posted a link to this article on LinkedIn:

“why would you reward the number of hours someone spends working? Surely it would be better to focus on how to deliver value smarter and more quickly. This doesn’t incentivize innovation or any type of process improvement.”

Exactly right, you’re measuring all the wrong things!

Leaving aside the Balance Scorecard argument, asking someone to do 2,000 billable hours a year doesn’t take into account:

  • client satisfaction
  • realisation (it’s a utilisation metric)
  • working smarter
  • innovation

or many other metrics.

And for those who may point out the benefits of this including 50 hours pro bono I say this: the Australian Pro Bono Centre National Pro Bono ‘Aspirational Target’ (ie, where we would like to get to), is 35 hours per lawyer per year.

But probably more importantly than all of this is this:

–  if you ask someone to do this, then you really leave them very little time to do anything else.

This really should be a concern, on the business front because you leave almost no time whatsoever to train them in the business of law – ie, you kill any entrepreneurial spirit they may have. And, crucially, the only metric that really counts to them is that all important 2,000 billable hours (keep in mind that like I was, they’re very young). Which for a profession that has the mental health issues we do, is not good.

For all of these reasons, I’m hoping no other law firm follows this. But sadly I think they will.

Oh, and if you are a law firm client reading this post you might just want to look up whether your local jurisdiction has a “Lemon Law” rule that applies to provision of a service.

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Survey: The role pricing specialists play [or don’t] in RFP responses

Last week the USA’s J Johnson Executive Search, Inc and the UK’s Totum published their combined ‘RFP Survey Responses: U.S. and U.K. Data 2016‘.

A fairly evenly distributed demographic of large (defined as being 600+ lawyers), mid-sized (defined as being 100-600 lawyers) and small (up to 100 lawyers, for the U.S. only) law firm respondents, insights from the survey include time spent responding to RFPs, persons within firms charged with project managing responses, as well as tools and expertise made available to responding teams, in both the U.S. and the U.K.

As with most surveys of this nature however, it is the role that pricing plays that typically grabs my attention and given this survey’s combined U.S. and U.K. perspective even more so in this case.

Given ongoing market pressures, it should surprise no one that responses of “strong” from the U.S. (58%) and the U.K. (64%) to the question of what current “price pressure” for proposal & RFPs were fairly similar.

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A little more surprising to me was the difference in responses between the U.S. (40%) and the U.K. (60%) to the question “when developing proposals and RFPs, I have easy access to” the answer was “pricing guides/professionals“.

 

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Now don’t get me wrong, even these days I think it is particularly progressive and somewhat comforting to know that 60% of my colleagues in the U.K. have access to some sort of “pricing guide/professional”.

Until, that is, you get to see who actually gets to sign-off (i.e., the “decision maker”) on the all important issue of pricing in RFPs in the U.K.. Here, and I kid you not, the response in the U.K. of “pricing specialist” (that same person who 60% claim to have some form of access to – either via guides or in person) was 5%.

I think that is worth repeating – 5%.

Put into context, that means in the U.K. pricing in your RFP is more likely to be signed off by Marketing & BD (9%) or Finance (14%). Indeed, in the U.K., “It varies” is likely to have more of a say on final pricing in the RFP response than the so-called pricing specialist.

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I’m not so sure why the results of this particular survey so surprise me. After all, time and time again survey results show that we typically say one thing about pricing, but do quite another.

What I will say though is this: if you have access to a pricing specialist, and pricing by your pricing specialist is being determined in 5% or less of your RFP responses, my guess is going to be one of two things: (a) you have no idea if you are making money from your RFP “wins”, or (b) more likely, you are leaving money on the table big time!

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* images should be enlargeable, apologies if they appear a little blurred.

#BizDevTip: Develop Value Groups

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Over toast and coffee this morning I read a cracking post on the LexisNexis Business of Law Blog by Carla Del Bove titled “Understanding the Science Behind How Clients Think“. The post provides some good tips for law firm business developers and marketers, but includes an absolute gem of a tip: “Develop Value Groups” (number 2 in the list), which Carla Del Bove describes as being:

“A value group is simply a group of influential business professionals (e.g. CFOs of major corporations or office managers of the top five consulting firms across the country, etc.) who meet either quarterly, or three times a year and share a common interest.

The first step involves figuring out who the firm’s target group is and then finding a common theme that draws them in and keeps them engaged. Some examples of this include: inviting members of the group to a prestigious event or using a prominent key note speaker for meetings. Most important, they say, is there needs to be a clear purpose for getting together and participants need to get some value out of the meeting. Lastly, they agree, value groups are less about quantity as they are about quality.”

Really useful tip by Carla that I thought I would pass on to you. Make sure you read the rest of Carla’s post and if you would like to get updates on other business development and marketing related material I read each week, feel free to sign up to my free weekly Mail Chimp update (or email me if you want to be added to the subscriber list).

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Will a ‘One Asia’ strategy work for BLP?

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I spent just over a decade in Asia between the 1990s and mid-2000s. In all the time I spent there I never considered the Region as ‘One Market’ – but rather as a multitude of diverse and different markets.

By way of example, almost everything we did in Asia was “ex-Japan“. This wasn’t because we didn’t see Japan as part of “Asia” – as it very much is – but rather because the international legal market there (NB, the Japanese local legal market is a very different issue) has far more in common with the US market than the Asian. As a result, we lumped Japan in with the US when discussing strategy (and you’re free to question that thinking/strategy).

Likewise, any strategy discussions we had that involved Singapore almost always included India, the Middle East and the Philippines. Similarly, strategy discussions that involved Hong Kong included not only mainland China but also Indonesia.

Finally, SE Asia (Thailand – where I was located, Myanmar, Laos, Cambodia and Vietnam) was its own regional discussion.

All up then, when discussing “Asian” strategy we had four or five discussions – not one.

That said, I worked with (but not for) firms (notably Herbert Smith as it was then) who operated on a fly-in fly-out basis. In my day we called this the “hub and spoke” approach, where the expertise went to the client need and, I have to assume, strategic discussions were done on a Regional basis.

While not criticising firms who took this approach – some did very well out of it – I didn’t think it worked for the firms I worked with as we held the view that, probably more so than any other market in the world, Asia operates on a relationship basis. Our experience was that relationships trumped expertise, and in the very family operated business world of Asia at that time, cost.

So why the history lesson?

Last week, in the Asian Lawyer, I read Bob Charlton – Asia Managing Partner of Berwin Leighton Paisner (BLP) – comment, following the firm’s Asian retreat, that:

“…in broad terms we agreed we must have a one Asia approach.”

Interesting, I wonder what BLP could mean by “a one Asia approach“?

Fortunately the article sets out exactly what that means:

“BLP’s “one Asia” strategy means the firm is doing away with the concept of geographic and practice area distinctions, focusing instead around sector groups. These groups include aviation, construction, oil and gas, private wealth and shipping.”

Now that really is interesting because, frankly, I’m not sure it is going to work.

A sector focus in Asia is a sensible move. A sector only approach to market in Asia is gutsy to say the least.

I say this for two reasons: (1) ‘relationships still trump in Asia’, and (2) Asia is not now, nor will it be for a very long time (if ever), one economic zone. That’s the case both for inbound and outbound work. And even if you don’t want to have people on the ground (which I would strongly recommend you do), you need to consider the geo-political economic implications separately.

And I’ve said all of this without mentioning the elephant in the room: “AdventBalance”. I wonder if they take a sector approach to their strategic thinking in Asia…

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Report: Collected realization plummeted to 82.2% in Q1 2016

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Thanks to an article by Dave Galbenski of Lumen Legal – ‘Overcapacity, Underutilization and Realization Rates Plummeting‘ – I have just been made aware of the publication last month (May ’16) of the Q1 2016 Executive Report (.pdf download) undertaken by Peer Monitor Index (Report).

While the Report gives glimmers of hope (demand slightly up for certain practice areas), the overall message is bleak. And none so more than this:

“After showing some recent signs of stabilizing, collected realization took a sudden and sharp drop in the first quarter. For most of the past two years, collection rates have hovered around the 83% mark. But in Q1, collected realization plummeted to 82.2%. Not only is this a new historical low, it was the largest quarterly drop in more than three years.”

OK, two things here:

  1. a collected realization rate of 83% is not a benchmark we want to be heading to, but away from.
  2. if you keep putting your hourly rates up (recently BTI Consulting’s The Mad Clientist asked: ‘Is $5,000 an Hour Next?‘) but your collected realization rate is “plummeting”, then you’re most likely losing money (as well as the respect of your clients I might add).

My only other thoughts are:

  1. why do we insist on the hourly rate model as our primary means of charging if our collected realization amounts to 82 cents in the dollar? Seems absolute madness to me; and
  2. how many law firms out there can continue to operate on such an “historic” low collected realization rate? I know a number of accountants and bankruptcy lawyers who’ll happily tell you: “not many”.

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AFAs accounted for less than 10% of all matters in the US last year

This month saw publication of the End-of-Year 2015 edition of the Enterprise Legal Management Trends Report by LexisNexis and CounselLink.

Based on data derived from outside counsel invoices – accounting for US$21 billion in legal spend in the USA – processed through the CounselLink platform, to my mind what makes this Report different to others is this: it provides insights others might miss because while talk can be cheap, the numbers rarely lie.

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From an Australian perspective, a couple of surprising statistics come out of this year’s Report.

  • the use of AFAs, to govern the service payment of matters, only accounted for 9.4% of matters processed through the CounselLink platform. Given all the chatter and whining you hear from law firms, I would have expected this rate to be much, much higher.
  • Employment and Labor (at 17.3%) is a fairly significant practice area leader in the number of matters (but not revenue – see below) using AFAs, but Real Estate accounting for something less than 2% of its practice area matters using AFAs seems out of whack.
  • Nearly 10% of Regulatory and Compliance matters are done under AFA arrangements. At first this seemed a little strange (given the grey hair nature of the advice being sought), but then I thought a large number of compliance programs could be sold using retainers, fixed fees and other AFAs.

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Moving on to percentage of “billings” executed under AFAs and things start to get really interesting.

  • at 12.4%, by far the biggest practice area using AFAs by billings is Corporate, General and Tax (excluding Mergers and Acquisitions, which is a separate line entry). Not sure I would have guessed that.
  • Finance, Loans and Investments ranked third highest practice area using AFAs by billings last year. Again, don’t think I would have picked that.
  • by billings, only 7% of Employment and Labor practice area matters are executed under AFAs. So, 17.3% of Employment and Labor matters were conducted under AFAs, but only 7% of billings. Might just be me, but that seems strange and I’d want to dig deeper into why that might be the case if my practice was showing these numbers. Then again, may just be the Pareto Theory in practice!
  • At roughly 2% of practice area billings, who says Real Estate has become a commoditized practice area? Because these numbers aren’t showing it.

Interesting numbers showing through this Report. Lots of chatter around the rise in M&A activity/revenue and the fact that “New Law” isn’t being hired to do big ticket work, but the use of AFAs and rationalization of legal panels (which I may well blog on later this week) were my two big takeouts.

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