The price is right

The legal profession is beset with challenges as never before. The list is long: the global financial crisis; reduced demand for legal services; a growing number of law graduates saturating the market; Google investing tens of millions of dollars in online legal document solutions; increasing deregulation of the legal market in the UK and potentially the US; and a profession that often lacks the business acumen to compete on anything other than price.

The response to these dramatic changes will see every firm and practitioner occupying a spot on a continuum ranging between panic and indifference. I would encourage firms to take stock before they react.

The advent of new arrivals in the market has evoked an adverse response from many practitioners that is predicated on the assumption that the legal fee “pie” will remain the same size and will simply be carved up among a greater number of providers. However, the experience of the Australasian and US markets has been that the online providers in particular have actually expanded the market. There is no doubt that they have cannibalised some of the market, but many of their consumers have purchased online legal documents and services in circumstances where they would never have conventionally instructed a solicitor anyway.

Moreover, the statistical reality is that not all of the ABSs will be successful. Their mere existence and novelty does not guarantee their success.

Consumers of legal services do not share a common desire to procure those services in the same way. Some clients will happily interact with a computer screen for their legal advice or procure advice from a shopping centre kiosk, while others will be extremely distrustful of these.

My message is that experience has proven that irrespective of size, location or any other consideration, law firms that are willing to deploy intelligent pricing strategies can not only survive, but also prosper without having to compete on price.

Intelligent pricing

Part of the problem around having a constructive discussion on pricing is that various words, phrases and concepts have entered the legal vernacular with little attempt to reach a consensus on what they actually mean. The diagram above provides some structure.

Let’s agree now on some definitions.

• Alternative fee arrangements. These go by a variety of names. At their simplest, they can be regarded as any fee arrangement that does not have as its principal calculation or assessment methodology, hourly rates multiplied by the number of hours devoted to the task.
• Capped fees. These involve agreeing on a job specification as required for fixed fees. However, the difference is that the firm charges its normal hourly rates with the total cost being capped at the agreed figure, irrespective of the amount of time the firm has to devote to the task to complete it.
• Contingency and conditional fees. Contingency fees generally have some direct relativity to the financial result of a piece of litigation, often calculated as it is in the United States as a percentage of the pecuniary outcome of a successful claim. In contrast, conditional fee arrangements bear a relationship to the outcome of the proceedings, but the impact on the fee is generally a premium on what would otherwise be a “normal” fee. These arrangements are generally thought of in a litigation context, but in New Zealand and Australia they are used extensively in commercial and property transactions, with considerable appeal to lawyers and clients. Indeed, they lend themselves to virtually any legal work other than where they would be contrary to public policy, such as criminal law, family law and immigration.
• Fixed fees. This generally involves the practitioner providing a fixed quote to undertake an agreed series of steps or tasks.
• Fixed hourly rates. The means by which the fee payable by the client is wholly or predominantly determined by reference to the practitioner’s allocated hourly chargeout rate, multiplied by the number of hours devoted by the practitioner to the client’s affairs. Blended hourly rates involve averaging the hourly rates of all the professionals who will work on a file so that the client is charged the same hourly rate, irrespective of which fee earner works at any given time.
• Flat fees. These generally refer to the situation where a firm agrees to handle a “book” of cases or transactions (of a similar nature) for an agreed negotiated title. The agreement may cover a specific number of cases or transactions, or all cases of a specific type within a set time period.

Value pricing

As I have indicated in the diagram, the alternative billing strategies which consumers of legal services are increasingly compelling the profession to move towards, must have at their core, “value pricing” principles (I dislike the phrase “value billing”).

What then do we mean by value? In this context, we are talking about what economists refer to as the subjective theory of value (or “theory of subjective value”), which identifies worth as based on the wants and needs of the members of a society, as opposed to value being inherent to an object.

Applied to legal practice, value pricing means customising the price structure of a particular job for a particular client in a way that delivers a fee that represents fair value from the client’s perspective, but also fully compensates the firm for the value it has delivered to the client. This approach has nothing to do with cost of production, which the client is not remotely interested in.

If applied in a reasoned and principled fashion, a value-pricing approach enables practitioners to take a considerably more nuanced and granular approach to pricing, one that better reflects the value of the services performed for the client, thereby enabling better alignment of the fee with the perceived value. The result is that client complaints significantly diminish and the practitioner is properly remunerated.

Reduced dependence on hourly billing is misconceived by many as being the death knell for law firm profitability. Based on the consulting work I have undertaken with many law firms, barristers and barristers’ chambers, the complete opposite is correct. Increased profitability and significantly reduced levels of complaint are not, contrary to popular belief, diametrically opposed outcomes.

Eye of the beholder

So, how does a firm develop and deploy a value billing strategy?

(1) Talk to the client to ascertain what value looks like to them. The implementation of a successful value pricing strategy has its genesis in a full and frank discussion to elicit the client’s value drivers. One of the most effective questions you can ask is: “What is it about this matter that keeps you awake at night?” Open-ended questions like this will generally result in the client disgorging those issues they attach greatest value to you resolving.

This information provides the practitioner with the most reliable indicators of what the client is willing to pay (and pay well) for, and conversely what they are willing to pay little or nothing for. Don’t be fooled into thinking that superlative technical skills are all that is required. More often than not, clients will pay a healthy premium for you to resolve issues that have nothing to do with the legal/technical aspects of the matter.

(2) Ascertain the client’s price sensitivities, risk aversion and willingness to pay. No two clients are the same, and even the same client will have different price sensitivity and risk aversion on different jobs. Acquiring skills and basic tools to identify and quantify these issues is essential in building a pricing matrix.

The ability to do this requires at least a rudimentary understanding of a relatively new discipline known as neuroeconomics, and its subset, neuromarketing. It combines research from various fields to help predict and manage people’s perceptions and responses to, among other things, pricing.

(3) Develop pricing options – choice is everything. Henry Ford was able to say “You can have any colour you like, as long as it’s black”, but lawyers no longer have that luxury. Pricing choice is an extremely effective negotiating strategy when it comes to agreeing on a fee. No one likes to be presented with Hobson’s choice. By developing a range of pricing options, features and service levels (think first class, business class and economy class on British Airways), the tension inherent around pricing discussions with clients is significantly defused. The client feels that they have the ability to exercise some control over price, and yet any of the developed options are profitable and acceptable to the firm.

(4) “Sell” the fee to the client. I’m loth to use the word “sell”, antithetical as it is to our perceptions of our particular skill set. What I really mean is communication. Many of us make the mistake of taking a client’s criticism, complaint or even gentle push-back on fees as an attack on our professional integrity and competence. However, to most clients, it is just another commercial transaction, and if they can get away with paying less then so be it. Lawyers need to develop a range of tools, competencies and confidence around the ability to front-foot a discussion around price.

(5) Document the agreed fee arrangement. This is potentially the easiest part of the whole arrangement, but where we tend to undermine all the good work done in the above four steps. It tends to be driven by compliance and enforcement considerations, resulting in a long and complex document that is anything but client-friendly. Remember that, in the final analysis, all the client is really interested in is:

• What are you going to do for me?
• Who was going to do it?
• When will it be done by?
• How much will it cost?
• What, if any, assumptions are the answers to the preceding questions based upon?

Any fee agreement should, within reason, attempt to confine itself to doing nothing more or less than answer those five questions. Consign the fine print to your website, where your clients can find it if they want to.

(6) Utilise project management strategies. When we talk about project management, we tend to think of engineering works and the like. However, pieces of legal work are also projects insofar as they have the three elements of a project: scope + time + cost = outcome. Lawyers do not want to and do not need to become project managers. However, a number of the alternative pricing strategies, including fixed pricing, make it essential that lawyers acquire some basic project management skills. Moving from a “We turn the meter on and it costs whatever it costs” model, to a “Here is our price; now we need to come in on scope, on time and on budget” model, means that some project management disciplines are essential.

(7) Manage scope creep and orders for change. The usual objection by practitioners to providing fixed pricing, particularly for complex commercial/property work and litigation, is that “stuff happens”. Yes it does, often, but other professionals involved in construction, engineering, software development and many other disciplines manage this effectively in four ways. First, there is a clear scope of work. Secondly, the client is continually reminded that the price relates to that agreed scope. Thirdly, the professional is well attuned to the insidious nature of scope creep and is alert to its occurrence. Fourthly, where scope creep occurs, whether at the client’s behest or through circumstances beyond anyone’s control, the scope and the price are modified and agreed before the additional work occurs.

(8) Debrief. Any pricing strategies or tactics employed by the firm should be regarded as a work in progress. The feedback generated, externally and internally, contributes constructively to the refinement of existing strategies and tactics and the development of new ones.

Opportunity awaits

This is a time of great uncertainty for the profession, but also, in my view, an exciting time of opportunity. Firms are wondering what they should be doing to respond to the new and challenging trading environment. I offer the following suggestions:

• Accept that change is coming and that doing nothing is not a viable strategy.
• Decide precisely what legal work your firm is good at, what legal work you all enjoy doing, what type of clients you enjoy working with, and then excel within those parameters.
• Accept that greater investment in technology and processes to increase efficiency will be essential.
• Take reassurance from the knowledge that despite the proliferation of online medical diagnostics and mail order remedies, the vast majority of people still want to sit down in front of their doctor.
• Understand that adopting intelligent pricing strategies has been shown to be the most beneficial change that traditional firms can implement, to preserve and enhance both law firm profitability and the quality of lawyers’ relationships with their clients.