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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Survey: The 5 Biggest Challenges Facing Australian Law Firms in 2019

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Happy New Year and Welcome to 2019!

The recent (December 2018) Commonwealth Bank ‘Professional Services’ report highlights five challenges law firms in Australia are likely to experience further pressure on in 2019, which are:

  1. ‘Clients demanding more for less’
  2. ‘Downward pressure on fees’
  3. ‘Willingness to switch firms’
  4. ‘Clients in-housing work’
  5. ‘Clients directly using legal process and services outsourcing ‘

Each of these has it merits, while none is particularly new. So let’s take a quick look at each and assess them on their merit.

The call for ‘more for less’

It’s true, the call for ‘more for less’ continues. But I believe we may be misinterpreting the call a little here between what in-house really want (see Ann Klee, VP of Global Operations — Environment, Health & Safety, at General Electric Company – ‘less for less’) and what law firms believe they should be providing – a Rolls Royce service for a Toyota price tag.

My take: Neither client nor law firm are currently getting what they want and the net result is that nobody is happy with the relationship. Law firms need to get a better understanding of what is being asked of them. Scoping work properly – by experts – and then the subsequent professional project management of that is where the greatest return can come from here.

‘Downward pressure on fees’

Admission time!!:-

“I have never really understood the ‘downward pressure on fees’ argument”

Why?

Because, in order to be putting downward pressure on fees, surely you need to know upfront what that fee is – right?

However, if what you are saying is that this is actually a downward pressure on hourly rates argument, then I get where you are coming from.

But this is not the same thing as a downward pressure on fees argument, because there is little doubt in my mind that clients are willing to pay a premium on fees when the value of those fees have been fully explained and justified.

My take: despite the rhetoric, law firms still have a long way to go in understanding what in-house General Counsel are actually saying when they say “no surprises” on fee issues. And here’s a working reason why:- because while the GC can talk to legal issues the company faces, it’s the CFO who is responsible for explaining costs; and in more Australian companies than not, the GC reports to the CFO. A lesson in that for most private practice firms here.

A ‘Willingness to switch firms’

I often laugh when I see this one, because, really, ask yourself this: if most of your partners and lawyers are willing to switch to another firm, why shouldn’t your clients?

My take: if you want client stickiness, why not start with re-engaging with your own staff and get loyalty in your firm brand (something that hasn’t really happened since 2008 in Oz). Because while attrition will never be zero, if you can get your own staff on board as brand advocates you may find it a lot easier to convince your clients to hang-around.

‘Client in-housing work’

Without a doubt the biggest change in my working life has been the increase in in-house practitioners. A career in-house is now a very viable option for someone leaving university, something that was never even thought of in my day!

My take: the biggest competitors most law firms are not other law firms. It’s not even the #Big4. Don’t get me wrong, these are competitors, but nothing compared to the CFO of your major client working out its cheaper to hire a new lawyer in-house than pay your fees (see here for more on my views on your in-house competitors).

‘Clients directly using legal process and services outsourcing’

Not 100% sure what is meant by ‘outsourcing’ here. If this includes ‘on-shoring’, then I agree it’s a real threat.

My take: law firms in Australia will face a number of challenges over the next 12 to 24 months. Outsourcing, on-shoring will be among them, but I’m not sure I give them the same weight as the Commonwealth Bank Report does.

Some of the other issues I believe law firms here need to be aware of include further consolidation of the market (it remains too big for such a small market), staff retention issues, profit squeezes, technology and process improvements (and how, through change management champions, these are being handled within law firms because currently we are failing badly).

And finally, some 750 words into this post, we can mention the “innovation” word 🙂 .

Anyhow, guess you get the gist of where I am going with these so best of luck for 2019!

As always, would be interested in your views.

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My comments on today’s Lawyers Weekly article: ‘Observations on NewLaw in Australia in 2018’

Today (28 December 2018), Lawyers Weekly in Australia published an article by Lachlan McKnight, CEO of LegalVision in which Lachlan comments on his ‘Observations on NewLaw in Australia in 2018‘.  At the outset I should state that I don’t know Lachlan, and this post is no way directed at him, but is just a numbered-point muse on the interesting observations he makes in his article.

  1. ‘NewLaw’ (which is as meaningless a term as ‘Mid-tier’) is now an ‘industry’ – now that’s interesting.
  2. Agree with Lachlan’s comment in #1.
  3. While I agree with Lachlan’s comments in #2, I also believe the attitude here is changing within the more ProgressiveLaw firms. ProgressiveLaw firms realise that with greater risk (which fixed fees actually are), there should be a premium (much as there is with any insurance premium). EvolutionaryLaw firms go one step further and start to have a conversation about ‘value’ pricing.
  4. Three is an interesting comment: aren’t LegalVision in part owned by G&T  – as an aside (re #3 above), didn’t Danny Gilbert recently state that he thinks that clients don’t want move away from the #BillableHour?. Nevertheless, I agree with a lot of what Lachlan says in #3 but would probably set the bar at $75 million (we still only have a population of 25 million and IBISWorld still only puts the WHOLE legal industry revenue in Australia at $20bn [NB: the top 30 law firms in Australia make over $50m a year – in an industry this small!]).
  5. I would totally disagree with Lachlan’s comments in 4 and in my opinion you only need to look at the stuff MinterEllison and KWM are doing (with whom I have no association) to see this point – to me – is misplaced. In fact I would go 180 and say many BigLaw firms are going through their Arthur Andersen/Accenture moment (the original ‘child eat parent’?).
  6. The biggest challenge NewLaw (and Mid-tier law if such a thing exists) has to #5 isn’t OldLaw, it’s the #Big4.
  7. Number 6 is a point I have tried raising several times this year – scale. Law (Old and New) see ‘scale’ as being bodies (in part because of time-based billing). If it ever was it not longer is and any law firm, new or old, that get’s the right answer to scale will have a point of difference and in such a competitive market this is crucial. The reality is that potentially the biggest winners here should be the so-called Mid-tier (who have a lot of the grey haired industry knowledge without, currently, the scale – but I fear they have missed the boat because of lack of investment).
  8. For #7, see my comment in #3 re G&T.

As always, would be interested in your views.

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Okay you can keep the ‘Legal’ tag; but it’s just Project Management!

I’ve been ‘white-boarding’ legal matters since my days helping out on front-end major projects back in 1996; so the concept of ‘mapping out’ how a transaction might progress, what may be ‘in scope’ and ‘out of scope’, the approximate amount of time the transaction may take and how we are going to resource it are not new to me. In more recent times (largely following the GFC in 2008) the legal industry has formalised my approach of ’white-boarding’ matters to become Legal Project Management. 

While I was never really that sure over the years how Legal Project Management differed from the more general Project Management, I have been assured – on numerous occasions – that there is a difference. When asked how, the most common response I received was that:-

  • Legal Project Management is the discipline of project managing ‘tacit knowledge’ – as ‘knowledge workers’, while
  • Project Management is the discipline of project managing tangible products, e.g., the construction of a hospital.

And until the last month or so I thought that was a pretty good answer.

So what changed?

Well, in the last month and a bit I have attended a collective 5 day (2 day and then a 3 day) course on Project Management Fundamentals run by PM-Partners Group here in Sydney.

The two day Fundamentals (essentially, theory) session was outstanding and broken-down into the following nine (9) modules:

  1. What makes projects succeed (and by implication, fail)
  2. The essential project management philosophy
  3. The project life cycle
  4. Project planning – project definition and scoping
  5. Project planning – creating the WBS & schedule
  6. Project planning – estimating
  7. Project risk
  8. Project execution & control
  9. Project closure

In turn, if you were on a course where you learnt all about: 

  • scope creep
  • the difference between what a risk is and what an issue is (hint, one has happened and the other hasn’t)
  • how to do a business case and a project plan
  • the triangle of scope, cost, time and quality
  • the four dependency types [finish-start; start-start; finish-finish; and start-finish], and
  • you get to work on creating a Work Breakdown Structure and Estimating (Optimistic, Pessimistic and Most Likely – also looking at the Cone of Uncertainty)

Wouldn’t you think you had been on one of the best Legal Project Management training courses around?

Well, that’s exactly what the two day PM-Partners run Project Management Fundamentals course taught me and I have walked away from that course thinking to myself that you can keep the classify ‘Legal’, at the end of the day it’s project management and it’s this type of project management we need to get better at.

My biggest take-out though?

Understanding the difference between a risk and an issue, because anyone doing pricing should get their head around this because it really is as important (and probably goes hand-in-hand with) as what happens with scope creep [helpful extra tip: want to understand scope creep, look up what happens with the formula: n (n – 1) /2].

Get in touch if you want to hear/find out more, otherwise get yourself on a really good PM Fundamentals course because I can guarantee it will pay for itself!

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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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The pointlessness of the ‘billable hour’ set out in two charts

Overnight, Australia-time, the Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Legal Executive Institute, relying on data from Thomson Reuters Peer Monitor, published the findings of its ‘2018 Report on the State of the Legal Market‘. Reviewing the performance of U.S. law firms in 2017, as well as looking at the trends expected in 2018, this annual report is typically the “first” big report publication of the year and so a trendsetter of where we may be going as an industry over the next 12 months.

As has been the case in other years, the first chart I typically like to see in this annual report is the one setting out ‘Collection Realization against Standard Rates by Law Firm Segment‘ – Chart 9 in this year’s publication – to hopefully give me an indication of how an industry that largely relies on increases in hourly rates each year to boost top-line revenue is fairing.

As you can see, yet again the results here can best be described as ‘disappointing’:

Chart 9

AM Law 100 firms are tracking an ever declining realised recoveries of circa 80 cents in the dollar. All others aren’t doing all that much better at circa 85 cents in the dollar.

Either way, those levels of realisation would have most bank managers in a panic. And the reason they don’t comes down to one small issue: in law firms this collection rate – other than telling you that the market doesn’t see your hourly value as highly as you do – is absolutely meaningless.

What it is, is pie in the sky internal budgetary metrics against market reality cash in the bank.

So we turn to my second “go-to” chart: ‘Collection Realization against Worked (Agreed) Rates‘. This year this is represented in Chart 10:

Chart 10

As the name suggests, what this chart is showing us is “Collected v Worked (Agreed)”. I’m   assuming the “agreed” here is upfront, and I’m accepting that the picture is far from perfect, but there is a far better flatline realisation rate here of 90-ish per cent, or 90 cents in the dollar.

So, what’s my take-out from the two charts?

If you want to try and get a better handle on your projected cashflow, no doubt better to have an upfront conversation with your client about how much you are going to be charging them – however that is (fixed fee, hourly rates, etc) – than having an arbitrary, and less and less meaningful, ‘billable hourly rate’.

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Pitching: ‘Show me don’t tell me’ – is video tendering the future?

Happy New Year to all and welcome to 2018!

One of the more interesting articles I read over the holiday period profiled a Dutch company called Pitchsome.

Heard of them?

Maybe, but I doubt many have.

But they may just end up being a catalyst for of one of the biggest changes to the legal industry in 2018 – namely, how we tender for work in the future.

Under the tagline, “Show, Don’t Tell,” Pitchsome’s business model is a simple one: Show me how your product works in a video and don’t write reams and reams of marketing bluff and expect me to read it in order for me find out what you can do for me/help me fix my problem.

Supporting this business model, the article states that:

Cisco’s Visual Networking Index says video will account for 80 percent of all consumer internet traffic by 2019.

And that got me thinking:

80% of all consumer internet traffic by 2019 will be Visual Networking + pretty much 100% of Government and 70+% of ASX Top100 companies have legal panels in place

so, how long will it be before these government departments/agencies and companies decide to replace the long and tedious word/excel document tender responses with video tenders that ask law firms to:

  • profile key team members,
  • white-board how the law firm can assist the client,
  • evidence how Legal Project Management can be used,
  • visually explain the steps in the pricing,
  • have client referee testimonials,
  • have video of the pro-bono and community activities the firm is involved in, and
  • have other examples of how the value adds being offered are being implemented by other clients in the tender’s industry sector?

Will never happen I’m hearing many in Australia reading this say. “It’s not professional”. “It’s nothing short an advert”, etc., etc.

But I’m left feeling: what, just what, would have happen to the industry if those of us who started down this path in 2008 (and those of you who were involved know exactly what I’m talking about) continued the journey?

It very well may have been disruptive. And that word is a real catchphrase at the moment.

So maybe, just maybe, we will be seeing video tendering by the end of 2019 – and that leaves me asking: what are you doing now to make sure you can met this need?

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