Redwood Analytics

As I stated in my previous post, I believe the majority of legal services can and should be offered on a fixed fee basis.  Before I post on the proper way to arrange your firm to handle and manage fixed fees, I wanted to briefly write about the debate between value and cost based approaches to pricing.

Scan blogs all over the Internet and you will find a wealth of information on the topic.  Ron Baker, Verasage Institute founder, is a believer in pricing based on value.  Read his work and he offers up excellent points on setting prices on the value perceived by the client.   One of his main suggestions is to stop the tracking of time as it is counter-productive to the goal of value based pricing.  If there are performance metrics driving the tracking of hours then the incentive for lawyers to price based on value instead of cost driven metrics is lost.  A couple firms have taken on this approach letting the client dictate the price based on the services delivered.  This concept of letting the client decide what to pay would certainly turn the industry.

Although value based pricing is thought provoking and exciting, I have always been a firm believer that you cannot boil an ocean and years of experience are tough to toss away.  Firms are slow moving when it comes to switching to alternative arrangements and to go straight to "true" value based pricing is a difficult proposition.  As I mentioned in my previous post there is a lot of fear from both general and outside counsels.  I spoke with a good friend of mine who helps manage matters at a large DC law firm.  He believes value pricing is a joke.  I do not agree with his strong statement, but he made some valid points which I concur with.  Most general counsels want to see the break down in hours to know if the fixed price you are charging them is providing cost savings.  In addition cost based pricing gives us a good stepping stone in moving toward fixed arrangement management. 

I am not proposing inflated fixed fees that have added profit onto existing profit and do not save clients anything.  I am advocating proactive analysis of your costs to find a price that provides savings and value to the client while mitigating some risk for the firm.  To understand how to price fixed fee arrangements you have to be able to go back in time and analyze matters to find where you succeeded in project management and where you failed.  As of right now the best way to do that is by examining costs, hours, and client feedback.  Many firms are struggling in a tough economy and to completely toss out cost based pricing without proper education could be catastrophic.  Value based pricing is a great idea that may change the legal industry forever.  Yet using the tools and information we have will be a vehicle to satisfying our clients' needs.  As a "closer to home" example I am having a home built and am getting many different quotes from general contractors.   I have an idea on what I think the house should cost but I have such a large array of offers that I want to know the breakdown on why the price is what it is.  Where do I find the real value?

An interesting idea is where options are provided to the client that allows a choice between the fixed fee price and the standard hourly rate times hours worked.  This gives the client the ability to see the break down on work and take the lower price at the end of the matter.  I would think that many clients would still pay the fixed price if the quality is sustained and reward the firm for their efficiency.   This may also address client's fears while firms take the time to hone their pricing and management skills. 

Up next - A guide to find success with fixed fee arrangements