pricing

‘Upfront pricing’: when is a ‘fixed fee’ not a ‘fixed fee’?

I recently read, with interest, an article by Emily McNutt in thepointsguy.com about Uber’s new ‘Upfront pricing’ model in the UK (see ‘Know before you go: Uber rolls out fixed pricing in the UK‘).

In short, as McNutt’s title suggests, Uber have introduced an ‘Upfront’ fixed fee pricing model option for its UK customers.

Wonderful news, and encouragingly McNutt writes:

“‚Ķwith the introduction of upfront pricing, both the rider and the driver will know the exact cost of their trip before they confirm”.

As someone who enjoys knowing what I’m paying for upfront, this is nothing short of brilliant news (even though I don’t live in the UK nor use Uber ūüôā ).

But…

there’s only one small problem…

which is,

more often than not the rider actually doesn’t know upfront what they are paying for.

Why do I say that?

Well, because Uber UK’s ‘Upfront pricing’ offer comes with four [very small but somewhat important] scenarios under which the agreed Upfront price may change.

McNutt’s article sets these out as being:

  • If the rider adds or removes a stop in their journey;
  • If the final destination is more than one mile away from the originally requested destination;
  • If a detour is taken and the trip is further (40% and 0.5 miles further) and slower (20% and two minutes slower) than originally estimated; or
  • If the trip is at least 40% and 10 minutes slower in duration.

Let’s take a closer look at these:

  • If the rider adds or removes a stop in their journey – okay, on first read this one seems fair. But then I re-read this and saw ‘removes a stop‘; and asked myself: ‘How does removing a step make my fare more expensive (unless the change element here is to reduce the fare – which would be fair go!)?’
  • If the final destination is more than one mile away from the originally requested destination-again, seems fair. But it doesn’t say if this final destination is the ‘original’ final destination. If that is the case, why am I paying more for your miscalculation (see below)?
  • If a detour is taken and the trip is further (40% and 0.5 miles further) and slower (20% and two minutes slower) than originally estimated-not sure what a ‘detour’ is, but having been in the UK just before COVID I can tell you we did a lot of detours!

And so we come to bullet-point #4 – If the trip is at least 40% and 10 minutes slower in duration.

Here I have LOADS of issues.

As McNutt writes:

In other words, if you hit traffic and your trip has been extended by a significant amount of time, the fixed cost will likely increase.

Now that sounds a little wrong. A fixed cost that is allowed to increase because of a time-based element.

Taking a step back here, McNutt writes that:

Uber says that it bases the fixed price based on the best-available route between the rider‚Äôs pickup and dropoff points. It uses the expected duration and distance of the trip to come up with the exact figure, while taking into account anticipated traffic patterns and known road closures. Costs for tolls and additional surcharges will also be accounted for in the upfront pricing figure. When demand is high, Uber says it‚Äôll account for that with ‚Äúdynamic pricing‚ÄĚ ‚ÄĒ a new take on surge pricing.

So Uber totally scopes the project, with information the rider likely doesn’t have access to (Google is good, but that good?), but then says: ‘If we got our calculation wrong, we get the right to readjust’.

To my mind this is essentially a ‘get of prison free’ card for Uber, which is fine – but let’s not then say this is Upfront fixed fee pricing, let’s call it out for what it actually is: a cost estimate at best.

And so why this post after so long away?

Well, no prizes for guessing what other (hint ‘professional services’) industry might have this type of fixed fee pricing mentality!!

As always, the above represent my own thoughts only and would love to hear yours.

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If you are going to discount: ‚ÄėDiscount with dignity‚Äô

In Episode 748 (7 July 2020) of HBR’s Ideacast podcast (23.04), Curt Nickisch interviews Rafi Mohammed, founder of the consulting firm ‘Culture of Profit’, on the topic of ‘Pricing Strategies for Uncertain Times‘.

During the course of the conversation Nickisch states that with COVID-19 service/product providers will be under intense pressure from clients/customers to offer discounts, to which Mohammed replies:

Clearly, in the short-run, you have to offer a discount. And what I would be focused on is what I call discounting with dignity in a manner that doesn’t devalue your product in the long run. And so, that’s really important because once you set a low price, it’s very hard to recover when demand eventually does come back.

And so we turn to how this really important concept applies to law firms

Blind Freddy can tell you that clients are under intense pressure to cut costs. I doubt there is a CFO out there who has not phoned (or even Zoomed) his/her GC and told them to cut costs.

And I suspect there are few GCs out there who have not responded by calling, zooming or even emailing the law firms on their legal panel to tell them to reduce rates by X%.

And, having lived through the Asian Financial Crisis of 1997 and the GFC of 2008, I suspect there are few law firms partners who have not passed along this request to their Finance Department with a note to “make it happen“.

But if this sounds familiar, and if a law partner you know would or has done this (*because it is never us*), then you would be missing out on Mohammed’s very powerful ‘discount with dignity‘ concept.

Because, as much a I hate advocating or agreeing to discounts, Mohammed is right:-

If you offer a discount to customers/clients merely because we are going through turbulent (or should I be saying ‘unprecedented’ ūüôā ) times, then what you are really doing is devaluing your service/product in the long term.

Because what you are saying to your customer/client when you unconditionally agree to a discount request of this kind is that “you have been over paying me all this time” – I’m not really worth what you have been paying me.

A Suggested Alternative Approach

Much like scoping in Legal Project Management methodology, when it comes to discounting (and I’m realistic enough to know that there needs to be some consideration of discounting in current times), you need to be considering what you take out of the basket when you offer that discount.

Which is to say it isn’t a ‘like for like’ for less conversation – you don’t get the same for less. If you take 15% off, you take 15% out of the basket. And you look to alternatives to how that can be sourced – either in-house or some other way (including LPOs/ALSPs).

And, if it really does need to be ‘like for like, but for less’ then it needs to come with a risk sharing collar. For example, I will accept 80% of my fees, but if we get past COVID-19 and your share price returns to pre-COVID highs within 6 months of completing this deal, then you agree to pay me 120% of my fees.

And, in the very worst of scenarios, your invoice should include a line item that states the discount being given is a one-off COVID-19 discount (and Mark Stiving, of Impact Pricing, has an interesting thought on this issue).

Regardless of what it is, you do need to do something. You cannot standstill for less. Because we will get past COVID. And in the ‘new world’ (even if that is a world where we merely live with COVID) there will be a ‘new, new normal’. And if you have agreed to discount your rates now without taking anything out of the basket, then what you have actually done is recalibrated your value in the new world.

And you won’t recover from that.

As always, the above just represent my own thoughts and would love to hear your thoughts.

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This week’s photo credit is Chrissie Kremer on Unsplash

When does the law of supply and demand not apply? – when you’re running a law firm of course!

The Law of Supply and Demand
The law of supply and demand is a theory that explains the interaction between the sellers of a resource and the buyers for that resource. The theory defines what effect the relationship between the availability of a particular product and the desire (or demand) for that product has on its price. Generally, low supply and high demand increase price and vice versa.

Results published in Peer Monitor’s Q2 2020 Report last week suggest that the broader economy has a lot to learn from running a law firm.

Why would I say this?

Well, what would you think would be the logical outcome from:

  • Average demand for legal services decreasing by 5.9%, and
  • Productivity across all fee earners declining by 7.2%?

In normal circumstances you would be given credit for thinking that prices would come down, or at least hold firm. But as we know, running a law firm is anything but normal circumstances because as the Report goes on to state:

  • Average worked rate charged across the market was 5.2% higher than at the same point last year.

That’s worth repeating: Higher! 5.2% Higher!

If you are wondering how that can even be possible, the answer is relatively simple: ‘partners [of law firms] have begun completing a higher proportion of [the] work by volume.

I would be the first to admit that one possible reason why this [partners doing more of the work in a leverage model – see my post here on leverage] can be the case is because the type of work being done by law firms has become far more complex since the onset of COVID-19 and this requires more grey-haired advice with a higher proportion of leverage at partner level. After all, none of us have lived through a pandemic of this nature and so there really isn’t much precedent for young lawyers to go looking for and so partners and senior lawyers are needing to be more hands on when it comes to file time.

But the cynic in me also thinks that’s a likely to be load of rubbish. Law firms (like many in the economy I will add) have been furloughing staff and making staff redundant during the pandemic. On the flip-side, budgeted number of billable hours for individual lawyers do not appear to have been reduced (other than pro-rata to the number of days lawyers may need to be taking off).

And so we find ourselves in this position where individual billable hour targets still need to be met, but overall demand for legal services is falling.

So what happens when this happens?

If we learnt anything from the data of Great Recession it is this:

In times of signifiant economic downturn, holding individuals to individual budgets results in an upstreaming of work.

  • Partners will hoard work in an attempt met their budget first
  • Special Counsel will hoard work in an attempt to met their budget second
  • Senior Associates will hoard work in an attempt to met their budget third.

And if you are outside of the gold, silver or bronze medal positions you’re pretty stuffed!

So what can we do about this?

For those sitting around wondering what can be doe about this, the answer is appears to be pretty clear – do away with individual utlisation and budgetary targets. Even in the best of years these so-called budgets are arbitrary in determining law firm profitability (primarily because they work on an opportunity cost profit basis rather than a real in the bank profit analysis), but more importantly because they create silos – individuals in law firms with personal incentives that outweighs those of the group/society.

And, they sustain bad behaviour in firms – ‘me’ over ‘us’.

But critically, firms that work like this create ‘Motels for Lawyers’ – not law firms.

As always, the above just represent my own thoughts and would love to hear your thoughts.

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Photo credit Alexander Mils on Unsplash

Not every step is an equal step

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When it first became apparent that COVID-19 was a pandemic – and one that we truly needed to be concerned about here in suburban Sydney, my doctor gave me a call. The call went something like this:

Doctor: “We need to make you ‘COVID ready’ Richard”.

Me: “Okay Doc, what’s COVID and how do we go about making me ‘COVID ready’?”.

We all now know what COVID is, and for a number of reasons – asthma, lack of general fitness and age group – I fell relatively squarely into what my doctor termed: the ‘vulnerable‘ (it sounded a lot less sinister then than it does now – now it’s actually a worrying tag).

His plan for preparing me to be ‘COVID ready’ (or at least better prepared) included walking 10,000 steps a day (and if you are wondering how far that is, it’s roughly 9kms).¬†To help me (actually more importantly my doctor) track my success at achieving this daily task, I downloaded an app onto my iPhone and off I went.

Being the grumpy old man I am however, it didn’t take me long to come to the realisation that not every [walking] step is equal – a step walking up a steep hill takes a lot more effort than a step walking on a flat tarmac road.

But to the app they are the same. The app doesn’t distinguish between the effort of a step, it merely counts the number¬†of steps!

So if you are still reading this – and you’re roughly 200 words in – you’re probably thinking:

“Fine, but what does this have to do with the business of law?”

And so here is my point – without trying to belittle the situation we are in at the moment:

If you are a lawyer and record your time by the billable unit, and have some kind of software to help you track that time, it won’t recognise the time and effort of the task you are undertaking: it will merely record the unit of time.

So much like my walking app records each ‘step’ I take, your billable software will record each [typically] six minute unit of time. It won’t give you any additional credit for the ‘effort’ (read difficulty) you put into that unit.

In fact, quite the contrary.

My walking app – and by extension my doctor monitoring it – gives me more credit¬†for walking 15,000 steps a day on a flat and even surface than it does for walking 8,000 steps a day up a very steep inline that takes me three to four times more effort and for which I will ultimately be penalised by my doctor because I’m still 2,000 steps short of my daily target – despite the fact that overall I’m getting fitter, which is actually the ultimate goal!

So which of the two options do you think I go with?

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Photo credit to Bruno Nascimento on Unsplash

Altman Weil Survey: 98.7% of hourly rate fees are discounted

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One of the most surprising take-outs from this year’s Altman Weil ‚ÄėLaw Firms in Transition 2020‚Äė report is how little full freight fee collection is happening.

Keeping in mind that the collectable information in the report would have occurred pre-COVID, it is absolutely amazing to me that 98.7% of all hourly rates fees are now at “discounted hourly rates“.

Pricing Discounts copy

To be fair, the term “discounted rates” is not defined and most law firms would argue – in this day and age – that they rarely get full freight rack-rate.

But it does make me wonder, if only 1.3% of your firm’s hourly rate legal fees are not discounted…

…why bother?

If becoming more progressive about how your firm prices is of interest to you then right now is the time to start thinking about this; because if all you are getting is 1.3% of your hourly rate fully realised…

it’s time to start thinking outside the hourly rate pricing box!

As always, the above just represent my own thoughts and always interested to hear the views of others.

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Photo credit to Damir Spanic on Unsplash

 

 

 

 

Does your firm use data as a profitability management tool?

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I‚Äôve just finished reading the latest Altman Weil ‘Law Firms in Transition 2020‘ report.

With all things COVID the Report (as it has done in any event for the past decade) makes for interesting reading.

But, the response(s) to one of the questions in this year’s Report  I found particularly concerning.

When asked:

“Which of the following statements describes your firm’s use of profitability data as a management tool?”*

16.2% of respondents replied:

“We don’t want to use the data because it is potentially controversial or divisive.”

16.2% of respondents believe sharing and using data in 2020 can be ‚Äėpotentially controversial or divisive.‚Äô

I find that rather sad.

And don’t even get me started on how it is possible that over 13% of respondents don’t even know how to use the data!

As always, the above just represent my own thoughts and always interested to hear the views of others.

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* see page 50 of the Report

[This post first appeared on my LinkedIn feed Thursday 2 July 2020]

Survey: Production returns; Billings fall; Firms need to find new ways for clients to pay

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Having reported a cliff-fall in new matter instructions post-COVID in its¬†Legal Trends Report¬†Briefing #1 in May of this year, June’s updated¬†Briefing #2¬†by Clio shows a subsequent significant upward spike in new matter instructions that have, effectively, netted out year-on-year the number of new file matter instructions.

While, at first glance, a return to quasi-normal file opening matter numbers look to be good news for law firms, as the latest Briefing numbers also shows, if you scratch the surface you’ll soon see (diagram below) a far bigger underlying problem is starting to emerge – namely clients’ inability (or possibly unwillingness) to pay!

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While the above wheel-chart is, at first glance, alarming, it’s also worth keeping in mind that a¬†client’s ‘ability‘ to pay a legal fee pre and post the pandemic is not necessarily the same as its ‘willingness‘ to pay that fee. Which is to say there may be (and likely are) other underlying reasons as to why clients are saying they are not willing to pay fees – including a re-evaluation on the part of the client in respect of the perceived value being provided.

Of more concern to law firm management, however, should lie in the second of these two charts, namely the fact that rather than chasing fees 25% of firms are electing to forfeit the revenue.

Again, there could be a whole raft of underlying reasons why a firm may decide it would rather forfeit some of its billed revenue, and without undertaking a root-cause analysis we left to guess these (including my favourite – trying to preserve the relationship), but we should be left under no illusion that discounting and write-offs will have the biggest impact on profitability*.

A willingness to look at alternative payment methods

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For me, a somewhat surprising take-out from the latest Briefing was the statistic that 72% of consumers would prefer to pay their legal fees via a payment plan. Again, the term “consumer” isn’t defined and so we are left wondering if this is B2C or B2B; but even then, that only 53% of firms are equipped to offer payment plans seems odd.

Take away?

So what’s my top 3 take outs¬†from this latest Briefing from¬†Clio?

  1. Once things settle down, law firms will be as busy as ever,
  2. Cashflow will be king and clients are struggling with their own cash-flow, so
  3. Think outside of the box when it comes to pricing and how you ask clients to pay and you should be okay.

As always, these just represent my thoughts and always interested to hear your views.

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*¬†N.B. If hourly billing is the way you work and you want to get a better understanding of the effect that discounting/write-offs has on your firm’s profitability, take a look at this post by Patrick Johansen that profiles Stuart Dodds’ ‘1-3-4 Rule

 

Survey: The 6 most important criteria in-house counsel consider when evaluating law firms

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In last week’s post I looked at the Top 5 Reasons Clients Switch Firms¬†as recently reported by¬†Wolters Kluner.¬†Conveniently¬†this same Survey also reports on the ‘6 most important criteria in-house consider when evaluating law firms‘ – so here’s a quick look at what they are:

The in-house view

1.  Specialization

In recent years I have heard it said on a number of occasions that in-house counsel no longer differentiate lawyers/law firms they ask to do work for them on the issue of ‘specialisation’ – it is a given that you know your topic and this merely gives you a seat at the table.

The results of this Survey clearly show that impression to be wrong – specialisation (at 23%) remains top of mind to in-house.

Unfortunately the term used in the Survey is ‘specialisation’ as opposed to ‘niche’. While there may not appear to be much of a difference between these two terms, for many there is and I would be interested to see the results if this was an option.

2.  Technology

The fact that a lawyer’s ability to use technology ranks equal top (23%) with specialisation shouldn’t be too much of a surprise in a survey conducted on technology adaptation in law firms.

That said, the use of technology in collaboration efforts should raise some eye-brows as it clearly shows, in my opinion, further evidence that in-house counsel want shared platforms and that knowledge sharing among law firms who continue to develop stand-alone technology platforms are likely wasting their money.

3.  Ability to understand client needs

At first the fact that ‘ability to understand client needs‘ came third in the list at 19% surprised me.

But then I thought: not many clients truly know what their needs are – maybe this question would have been better phrased as: ‘Understanding our business/sector?’

4.  Price Рand 6.  AFAs

Price gets 16% of the vote. AFAs gets 9%. If you combined them, they get 25%. And would top the table.

But they are not combined.

They are seperate.

Which make me wonder: Why?

Also: if your law firm is really offering value – price, whether it be hourly rates or AFAs, would be the last thing that matters.

5.  Process innovation

I found the fact that process innovation only got 10% of the vote interesting, because if you read the rest of this survey a core message is that law firms need to get better at demonstrating efficiencies.

This result somewhat undermines that message.

The law firm view

I was pleasantly surprised how consistent the law firm view was to that of their in-house clients.

Of course there will always be one significant difference of opinions between law firms and their clients (in the law firm’s mind) as to why they were chosen: ‘Price’.

And what this Survey shows, as many before it have, is that law firms need (finally) to start moving away from that needle.

As always, these just represent my thoughts and always interested to hear your views.

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Survey: Top 5 Reasons Clients Switch Firms

If you’ve recently lost a client to a competitor and have been wondering how that happened, wonder no longer. The recently published ‘2020 Future Ready Lawyer Survey: Performance Drivers‘ by Wolters Kluner has the answer.

Surveying 700 in-house and private practice lawyers across the US and EU in January 2020, this is probably the most comprehensive survey post COVID (although most of us were not entirely sure what this meant in January so I look forward to a survey report that has been conducted post March this year).

The Top 5 reasons cited as to why a client might leave your firm are:

  1. The client no longer trusts your firm can meet their needs,
  2. Your firm doesn’t specialise in the area of law needed by the client,
  3. Your firm failed to communicate its value proposition properly,
  4. Your firm did not demonstrate efficiency and productivity, and
  5. Your firm’s leverage was/is all wrong.

And three of these are essentially because you messed up on sourcing, communicating and delivering on your pricing promise.

Take-away top tip: want to make sure you keep clients and keep them happy – make sure you (and your team):

  • understand(s) your value proposition and are able to communicate this,
  • get your team’s leverage right [hint: don’t hoard work at the top end just so you can meet budget this year!], and
  • understand the scope of what you are being asked to do and project manage both the scope and the client expectations (especially if out of scope creep occurs).

Manage this well, and you’ll be three-fifths of the way to keeping your client happy!

Demonstrate Efficiency

As a bonus, think about how you demonstrate efficiency to your client.

  • Is this by saying you have the relevant expertise/experience so that you can do this faster than others,
  • Is this by saying you have the appropriate IT systems that allow you to get the job done faster, or
  • Does efficiency even really matter – should the conversation not be about being an effective lawyer?

As always, these just represent my thoughts and always interested to hear your views.

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Now is the time to focus on your existing relationships


I read an article on Inc.com last week by Damon Brown in which Damon writes that if you run a business in a post COVID-19 world ‚ÄėYou Need More Customers, Not Higher-Paying Ones‚Äô – which [as someone with an interest in pricing] caught my attention.

There is no doubt that right now the appeal of diversifying your customer base and revenue stream is going to look appealing. As Damon writes, “your business needs varied and multiple customers” for essentially three reasons:

  1. Diversify income streams
  2. Lessen the over-dependence effect – security in numbers
  3. Protect your business against Black Swans

My mother would have called this: “avoid putting all your eggs in the same basket”.

But while insulation from risk is undoubtably core to a lawyer’s heart, right now – appealing as it may seem – would be the wrong time to be looking to expand your client base. And I say this for the following three reasons (in inverse order to Damon’s):

  1. This is a pandemic, not a Black Swan, event: in that none of us have a clue how we got here or how we will get out of it – we are not here because of strategic issues.
  2. Pareto: notwithstanding how large your client base is, the facts are in -: 80% of your revenue comes from 20% of your clients. Expanding your client-base isn’t really going to have much beneficial impact on this, rather it’s going to suck-up much needed diminishing resources.
  3. Diversify income streams: isn’t a customer-based issue in professional services firms. If you truly want to diversify your income stream you don’t need to expand/diversify your client-base, you need to expand/diversify your product offering. That’s a whole different problem (and one which could be achieved).

In short, you don’t need to be expanding your client-base, what you need to be doing is focussing and developing your relationships with those top 20% of your clients.

Or, as Ron Baker has written: “It’s one thing to get more business, it’s another thing to get better business”. And while predictability and certainty of revenue is great:

“…if you bring in those customers at the wrong price, you have done nothing but add layers of mediocrity to your firm”.

Some thoughts to consider before you start chasing rabbits down holes…

Again, these just represent my thoughts though and always interested to hear your views.

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