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I was pleased to read the post on 3 geeks about
value billing as this is definitely a topic that needs exploring
further, not least because I'm astonished by the number of law firm partners
who continually tell me that it's for clients to find a pricing model that
works for the firm's services.
The common refrain from private
practice lawyers (especially those who know how I feel
about hourly rate billing) is that in-house lawyers who talk about value
based billing really just want to pay less, and are not really interested in
concepts like sharing risk. Opening a dialogue about pricing is simply an
exercise in getting the law firm to do the same work for less money.
I my have missed the point, but of
course they want to pay less!
The fact that the firm hasn't
developed a model that really meets their needs, or if they have the firm can't
communicate it in a compelling model does not turn this into the client's
problem. It's the private practice lawyer's problem. It's the firm's problem.
It's the profession's problem.
The market has changed.
Except for those highly
differentiated firms that have unique or otherwise genuinely marketing leading
skills and expertise, law firms are shifting to being price takers rather than
price setters in the market. As barriers to entry in the legal market fall, and
new models of legal service delivery emerge, clients have more choices about
how they resource work:
Fewer and fewer GCs respond well to
a conversation with a law firm that starts at a notional rate card, which of
course is all great news if you're a firm with some creativity and innovation.
To me, understanding value starts
with a conversation with the client.
Too many firms assume that clients
all want the same thing, but in my experience the range of client needs and
expectations are almost infinitely variable.
Organisations of a similar size in
the same vertical industry may look similar on the outside. They may have
similar sized legal teams which do similar types of work. But actually the
underlying businesses may have different operating models, different
shareholder expectations, different objectives, different risk tolerances and
of course different legal budgets. What they want from their internal and
external lawyers may be very different, in fact it might vary significantly
across the business.
There are a whole host of client
needs that might emerge from a well structured conversation, implemented
through some good questions.
The challenge for the law firm is
then to define the service that would best meet those needs, identify the
variables, work out what the cost implications of those variables are on the
overall cost of service delivery and then stitch the whole thing together into
a great value proposition at a compelling price.
Some of the variables might include
turnaround times, the style of advice (who is the ultimate recipient - business
person or in-house lawyer?), the level of detail, different types of
relationship management (dedicated team?) and the hours of
operation/availability for the external lawyers.
Thinking about how these factors
help the client's business, as well as the needs of the inhouse legal team, can
provide a deeper understanding of value - for example will a quicker response
time allow a deal to be completed more quickly? If so, what does that mean for
From this baseline understanding,
the firm can get creative, but to do so also needs to ensure they really
understand the cost and benefit to the firm of moving these "levers" (i.e.
changing the variables).
Cost is often not simply the
employee cost, but also may encompass opportunity
cost or the cost of holding WIP for specific periods of time. The flip side
is that the benefits to the firm can be broader than simply revenue - improved
cash flow, client reference ability, employee retention (if the work is
prestigious or interesting), replicability (the ability to reproduce the output
for other clients at lower cost/higher margin) are all benefits that have value
and can be quantified.
With all these factors to play with,
plus of course the dynamic of genuinely sharing risk and reward with a client,
I would be amazed if a firm couldn't find a pricing mechanism that works for
both the client and the firm. Once some pricing options (hint: that last word
is a useful one in these conversations), the overall value proposition for the
service offering can be pulled together and communicated. Law firm BD has
become increasingly sophisticated, and there are plenty of skilled
professionals who can ensure the resulting proposal is truly compelling and is
tightly tied to the value it will deliver.
So I'll grant you this - it's more
effort than simply negotiating percentage discounts on an hourly rate. It
requires you to understand the client's business in more depth, but also your
own. But surely both of those are worthwhile steps in any event.
And if you do get a client who is
genuinely not interested in this type of conversation (assuming you are not in
the commodity market where the price genuinely will be just about lowest
price), then maybe they're not the right fit for your practice?
Or maybe you need to go back and
tweak the model some more.....
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