pricing

Hourly billing – A dialogue with John Chisholm

In the concluding paragraph to a LinkedIn post he made Friday, 2 September – title ’10 rules about hourly billing for law firms’, in which he sets out the rules of US-based blogger Matthew Homann as they apply to hourly billing – my good friend, and sometime mentor, John Chisholm asks:

“Are we changing the “we sell time” mindset and business model of the legal profession? Are we changing it quick enough?”

I believe John’s questions to be important and worthy of a response. So here’s mine.

Are we changing the “we sell time” mindset of the legal profession?

“If aren’t selling time, what are we selling?”

Many would say that lawyers sell their expertise, knowledge, skill, and experience.

While I would have held that to be true pre-2008, in the new world order I no longer believe that to be the case and would hold that today this type of thinking makes it incredibly difficult for you to differentiate yourself from the pack. I’d go so far as to say that in today’s world expertise, knowledge, skill and experience are a given: they merely get you an invitation to the dance.

No, short of a nuclear event or a commoditised issue, what lawyers (and business development people on their behalf) sell today is access to the right expertise, knowledge, skill and experience. And we do this by fulfilling on all of the modern day clichés: – understanding our clients’ businesses, being client-focussed, always being available, always adding value to the relationship.

The problem though is that even if we know what we are selling, how we charge for it is a very different beast.

Are we changing the “we sell time” business model of the legal profession?

In the 2016 edition of ‘Law Firms in Transition’ by Altman Weil the researches asked:

“If your firm uses any non-hourly based billing, is your use of alternative fee arrangements primarily reactive (in response to client requests) or primarily proactive (arising from your belief in the competitive advantage of alternative fees)?”

72.2% of law firm leaders responded – “reactive“.

In an era where “Sixty-four percent of large firms have added a Pricing Director or staff equivalent” (see page (v) of the report), that’s pretty staggering. But it also goes to the heart of the problem: there clearly isn’t significant enough incentive to move away from what is in place (hourly billing) and towards something new – and the reality is we are only offering non-hourly fee arrangements under the very real threat of not being given the work at all!

And, to my mind at least, herein lies the crux of the issue John raises:- the problem is not that we sell time per se, but rather our business model rewards people for charging by it.

Indeed, if we truly want to know if the industry is changing from the “we sell time” reward model, then the Altman Weil report identifies all we need to know. In there it stipulates that law firm leaders clearly see:

“Efficiency and pricing [as] areas that firms can control to meet the changing marketplace and manage challenges and opportunities.”

And yet despite clearly seeing this:

“The one pricing tactic that has been adopted by a majority of large and small firms is developing data on the cost of services sold. Sixty-seven percent of all firms and 91% of large firms are doing this fundamental analysis, which should enable them to structure more customized fee proposals.”

And while I do commend law firms for trying to establish what a particular type of work might cost, this evidence clearly shows that firms remain stuck in a cost-plus method of charging for services rather than trying to determine what the value is to the client in doing the work – which actually would enable them to structure more customized fee proposals.

To close out this segment, I believe that the Altman Weil report touches on a central problem, and with it a possible solution, to the “we sell time” business model that currently exists in many law firms:

“…in too many firms personal, political and cultural obstacles are hindering pragmatic economic decisions.”

Are we changing it quick enough?

It should be obvious by now that my response here is going to be “no”.

But I wanted to finish by quoting a paragraph in the Altman Weil report that I believe sums up the profession’s glacial attitude to change far better than I can:

“If the strategy is simply to keep up with the pack, it misses the point that most of the pack is itself lagging and just a small increase in pace can distance a firm from its undifferentiated competitors. A firm can never get ahead by merely aspiring to keep pace with sluggish competitors. Vigorous pursuit of opportunities has always paved the way for competitive success.”

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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.

$180K for a First-Year Associate – so what!

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One of the big news items this week has been the decision by Cravath, Swaine & Moore to raise its starting salaries for first year associates to $180,000. Cries of “Not worth it!” and “What value do first year associates provide clients?” (answer: probably none) can be heard from all four corners of the planet.

My view on this though is so what? I don’t really care what you pay your first year associates. In the same way I don’t really care what you pay your other associates or partners. Nor do I really care what your rent is costing you.

Unless, that is, I get to thinking that: I am the one paying for all this. In which case, I suddenly become very interested.

But here’s the thing: I’d only really start to think that I’m the one paying for all your luxuries – the boat you have moored at the marina, the sports car you drive, the house you live in, the first year associate you can call on day and night – if I didn’t value the service you provide me. In other words: If I didn’t think I was getting value for money.

So if you’re one of the many private practitioners questioning the move by Cravath, Swaine & Moore, my only comment/question is this:

If you are providing your clients with a value for money service offering – and you are able to communicate this, why should it bother you?

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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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Altman Weil Flash Survey: Has the era of data driven pricing arrived?

Last week saw the publication of Altman Weil’s 2016 Law Firms in Transition Survey. Now in its eighth year, this survey continues to be a good indicator of the market forces law firms are facing and in recent years it has been a good indicator of the fee pressure clients are putting on firms.

So, how have firms been tracking when it comes to pricing pressure issues?

At first blush – well. When asked: “Is your firm doing any of the following to support its pricing strategy?“, “Developing data on cost of service sold” and “Training lawyers to talk with clients about pricing” rank head and shoulders (in first and second spot) above everything else.

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Clearly moving in the right direction then, reinforced by the overwhelmingly positive response to: “Is your firm proactively initiating conversations about pricing / budgets to better understand what individual clients want?

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until we get to this shocker…

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So, almost half (44%) of law firms are now training lawyers to have the pricing conversation with their clients, a whopping 88% of firms are proactively initiating that conversation – and yet three-quarters (72.2%) of firms only make use of non-hourly based billing methods in response to a client request.

Am I the only one who finds that incredible?

But really, why does it even matter?

Well, here’s your answer:

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There’s a clear lesson here for anyone that’s willing to listen to it: if you want your firm to be more profitable, be on the front foot when it comes to opportunities to provide alternative fee arrangements.

If you haven’t already, I’d like to recommend you download and read the full survey, if for no other reason than it contains this gem…:

 

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Which, if you believe, suggests that around half of all law firm partners are not even aware of the challenges their firms face!

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“Bill clients, get money”

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In my spare time, I’m a keen amateur photographer (note, I didn’t say “good” 🙂 ). Anyhow, because of this interest I follow a number of photography related blogs which, every now and then, include posts that crossover into my professional life.

A post I read this morning from the DIYphotography website (I say “from” because I use feedly as my rss feeder and read all my morning updates on the Ziner app) is just such a post. Titled, ‘3 Vital Tips To Help You Set Your Photography Pricing‘ by Gannon Burgett, the post takes up a call by Sue Bryce that:

“You can’t price yourself when you have no self worth.”

and goes onto suggest that photographers follow the approach of photographers Sue Bryce and Tiffany Angeles and, I quote,:

  1. Charge what you’re worth – be confident in your abilities and know what it is you offer, both in terms of products and aesthetics
  2. Never set yourself at market value – part of knowing what it is you offer helps you better understand what it is you can charge. Don’t base your price purely off of competition. Don’t be afraid to charge more.
  3. Value yourself and your work – this is more all-encompassing than a specific tip, but without the confidence and self-value, it’s going to be a much tougher job to set your pricing.

Amazingly simple and straightforward advice that many lawyers could benefit from – a fact brought home to me in the very next post in my Ziner app, ‘The deep discount attorney and other cautionary tales‘ by Carala Del Bove on the LexisNexis Business of Law blog.

In this post, Del Bove quotes from real life case studies Ms Ann Guinn cites of lawyers willing to offer discounts to clients because, to quote:

“it just felt greedy to me [not to].”

In the post Ms Guinn offers the following two pieces of advice I wanted to share:

“Don’t try to get into your clients’ heads, cautions Ms. Guinn. In other words, don’t let your clients determine the value of your work.”

rather, discuss this with them upfront when you are first asked to quote on the instruction; and

“Instead of worrying about what discounting legal fees will mean for your client, think about what it will mean to you as a small business owner.”

All in all, two excellent posts on understanding the value of the service you provide clients and the dangers you face if you don’t price, bill and collect revenue on your work appropriately.

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ps – I’d also like to credit Ms Guinn with the title of this post.

The Client Cost Conundrum: Legal Service Pricing in a Post-Recession Market – A White Paper by the ALA

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A post yesterday by Patrick Johansen, CLM, CPP, National Practice Manager at Seyfarth Shaw (on his ‘Patrick on Pricing‘ blog) alerted me to a newly published White Paper by the Association of Legal Administrators (ALA) titled “The Client Cost Conundrum: Legal Service Pricing in a Post-Recession Market“.

To start with, if you are going to publish a White Paper titled “The Client Cost Conundrum: Legal Service Pricing in a Post-Recession Market“, then, in my book, you have licence to write an absolute cracker.

Add to that your intent that:

“This white paper will identify economic factors that influenced relationship changes between clients and law firms after the Great Recession; pinpoint current legal service pricing best practices; highlight pricing strategies that can attract and retain clients; and help law firms learn to address efficiency and other factors that may affect many pricing scenarios.”

and throw in quotes from some of the industry’s leading pricing consultants – including Patrick himself, Colin Jasper of Jasper Consulting, Toby Brown of Akin Gump and Timothy Corcoran of Corcoran Consulting Group, and you’ve grabbed my attention.

So what did I find?

A very disappointing read, that had me both wondering what decade I had woken up in and really questioning whether the industry could survive for much longer.

What do I mean by this?

Well, judge for yourself: here are just some of the quotes from this paper:-

  • “Sixty-eight percent of law departments say they received discounts from firms in 2015. The number of law departments that received a discount of more than 10 percent has increased 4 percent in the past two years; the amount of firms receiving a 6 to 10 percent discount grew by nearly 9 percent”

–  Discounts are not a pricing strategy, period.

  • “In an effort to strengthen client relationships, some law firms are working to better understand their clients’ needs. Approximately 29 percent of firms say they’re working to identify each client’s unique pricing preferences to support the firm’s overall pricing strategy.”

–  29% of firms are working to identify each client’s unique pricing preference. Seriously, what are the other 71% doing: throwing darts in a dart board and hoping for the best?

  • “To better comprehend what clients want, 85 percent are initiating direct conversations about pricing and budgets.”

–  “initiating direct conversation”: as opposed to what exactly, being told?

  • “Twenty-two percent of firm leaders say they thoroughly understand their top 20 clients’ business models, earnings and growth strategy”

–  I have no idea what the other 78% are thinking of, but I’m suddenly very glad I cannot invest [financially] in a law firm.

  • “29 percent of firms say their knowledge of their clients’ business and client relationships give them a key competitive advantage”

–  what is the key competitive advantage for the other 71% I wonder?

  • “Sixty-one percent of firms say overcapacity is diluting their firm’s profitability.”

–  that’s too laughable to even be laughable. I mean seriously, are the other 39% saying it’s the Friday Night Drinks that’s the issue…?

And on that note, I shall end this post with this: read the White Paper, it is really well researched and a look at the Index itself is worth the download; just don’t expect to be blown away with how progressive the industry has become towards pricing.

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