The new rules of pricing

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Recently, I’m told, several GCs and senior lawyers of large law firms gathered in London for a high-level conversation about new billing mechanisms. One noteworthy observation to emerge from the meeting was the law firms’ insistence that whatever new mechanism was developed, it had to take into account chargeable time invested in the work. I wasn’t there to see the clients’ reaction, but if a few eyes were rolled, it wouldn’t surprise me.

Lawyers are going nowhere in this new marketplace unless they can lose this obsession with the effort-based valuation of work. At the heart of lawyers’ billable-hour infatuation, even beyond the attraction of low-risk pricing and the enablement of perfectionism, lies the basic belief that the harder you work, the more you should get paid. “It took me ten hours to do this, so I should be paid twice what another task took five hours to do.” The nature of the work, its relative simplicity or complexity, the knowledge resources it did or didn’t require, and the value or relative lack thereof to the client — all these variables are considered incidental to the effort exerted, the expenditure of the lawyer’s precious time, to accomplish the work.

Very few marketplaces, however, base price directly on effort and time.  Avatar cost 20 times what The Hurt Locker cost to make and took years longer to complete, yet my ticket to watch either Oscar contender costs the same. One real estate agent might make ten times more effort at finding the right buyers for a home than another, yet they both get the same commission upon sale. I can go to a global craft show and buy a beautiful hand-made shawl that an aged, arthritic, Guatemalan woman spent a painful three days to create for less than a family dinner at the local pizza joint will cost that same night. Price differences can emerge from expertise, or from quality, or from brand assurance, or from customer value — but they don’t emerge from how hard someone had to work to make something.

Clients truly don’t care what it costs lawyers, in time and effort, to do their jobs. All they care about is the price, and the aptness of any price is ultimately judged by the purchaser against the value that the purchase delivers. Price is what the buyer will pay; cost is the resource drain on the seller to make the product or service. Lawyers conflate the two and base their price on their costs in time and effort. Clients are saying: your time and your effort are not relevant to the value of your service to me. What the current unprecedented drive towards fixed fees for legal work really signifies is a marketplace slowly but steadily shifting from supplier-based pricing to customer-based pricing.

Lawyers are having a very difficult time with this, for three reasons. One, as stated, is the realization that their time and effort has little market value. A second is the subsequent realization that they now need to understand and control their own internal costs to a degree never before required, and at many law firms, that’s a nightmare scenario. But the third reason is likely the hardest of all to accept, a traumatizing underlying premise to the whole conversation: the value of lawyers’ work isn’t really for lawyers to decide. Ultimately, the price of a lawyer’s services is not something a lawyer can control — and loss of control is not something most lawyers can abide.

A lawyer without a client or a file has no marketplace value — that value exists only once the lawyer is engaged on a task brought forward by the client, delivered to the client and paid for by the client. Given that fact, it’s neither surprising nor unnatural that price should be determined by the client as well. A lawyer can exert a great deal of influence on her price if she possesses extraordinary skills or experiences, and perhaps if her talents are so scarce and in great demand, she really can name her price. But 98% of lawyers are not in this position. And the days when they can dictate their price unilaterally, and base that price on their level of exertion, are ending.

That’s why the legal profession is struggling — it’s trying to come to grips with an entirely new pricing paradigm. It’s going to take a long time, and many lawyers won’t grasp the reality of the new environment until it’s too late. The longer a lawyer holds on to the idea that time and effort translates into value in the legal marketplace, the greater the chances that he or she will be one of them.

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2 Responses to “The new rules of pricing”

  1. Rob Millard

    Jordan: You are of course absolutely right but I think many underestimate the magnitude of the change that is looming, or the level of effort that will be required of firms to adapt … or die.

    At the most fundamental level, the whole model of a modern law firm has evolved over the past few decades to align very precisely with the notion of very intelligent, highly independent professionals crafting bespoke solutions for clients and being compensated on an effort-basis. Changing it is not a trivial matter. Over the years, this has also been an extremely successful model. It is facile to argue (a finger pointed not at you but at others) that law firms are simply recalcitrant in not accepting change more readily. The magnitude of the change that is looming in this instance may be akin to what happened in the auto industry when Henry Ford introduced the Model T and assembly lines, driving manufacturers that were building automobiles by hand into bankruptcy or seeing them assimilated into other manufacturers that also adopted the new practices. It also easier for us to see the looming icebergs from our perspective at the masthead because we, as strategy consultants, pay so much attention to these issues, than it is from the perspective of our law firm clients whose lawyers toil in the innards of their ships, shoveling coal and serving passengers.

    This is precisely the dilemma that Clayton Christensen describes in “The Innovators Dilemma,” that emerges in the face of a disruptive innovation (and I have no doubt that what we are experiencing right now fits the description.) If Christensen is right, the solutions will come not from the established leader-firms but from the small splinters and start-ups that are not trammeled by established convention and who can move nimbly and change radically with greater ease. Those solutions, once proven, may well be replicated by the more forward thinking established firms. Those that do not follow suit will decline and be absorbed by the new leaders, or eventually go out of business.

    Over the next 3 – 10 years, I expect the landscape of the Amlaw 100 to evolve quite radically as these and other ‘icebergs’ wreak their havoc on those that will not / can not / do not change their course.

  2. Heather Atkinson

    Jordan: You have articulated the dilemma facing many legal professionals, both in private practice and in house. If legal value is based solely on time spent in court, on a transaction, or alternatively only on how many papers cross a lawyer’s desk, there is no incentive to deliver quality, to function efficiently, or ethically.

    On the other hand if the traditional professional qualities of integrity, judgment, confidentiality, professionalism and ethics are not factored into a lawyer’s value the job can be done by anybody (for example a paralegal) who masters the mechanics of organizing data and disseminating information. A lawyer’s true value to his/her client is the ability to connect with the client’s needs and guide them through a maze of complexity that they could not otherwise do, or have no interest in doing for themselves. A true lawyer is a confidante. In this situation of trust, most clients are happy to pay a lawyers negotiated rate.

    The issue of value billing has become complicated because most professionals have high overheads (insurance, rent, continuing education, training, professional fees etc.) that paralegals do not. As a consequence a conflict of interest sometimes develops between the attorney and client because the lawyer is forced to see his profession as a business and try to pass costs on to the customer. Additionally, the widespread availability of non-proprietary information digitally, coupled with a potentially qualified global workforce means that the argument about legal complexity has lost some luster as we move into an age of transparency.

    Further, clients are sometimes unwilling to absorb legal overhead in their billing structures if a paralegal can simulate the function for much less. Some clients have not been educated to buy into the high value of attorney confidence, privacy, or security in a transaction. Their view is, why pay more for the brand if you can buy a non-branded product (paralegal) for less.

    The solution to this dilemma lies in a basic tenet of business. As attorneys we need to re-cultivate, re-brand and re-educate clients on the value of our services. We also need to truly serve our clients needs (by this I do not mean serve the client representative who cuts the check to pay us. He or she is often different from the client). More importantly we need to ensure that we condition the client’s reasonable expectation of our services while over-delivering on quality and job satisfaction.

    There is a famous saying that “some people “know the cost of everything but the value of nothing.” If clients and or attorneys only emphasize money, cost and billing while losing focus on professionalism and “value”, or service driven relationships, then the lawyer client relationship disintegrates. Then, it will only be a matter of time before our entire legal system disintegrates into stress and valueless billing! Shakespeare said it best, if the objective is mayhem, then “Kill all the lawyers.” Most people do not recognize that there was a caution and consequence in the quotation. As lawyers we need to re-establish the bar (pun intended).

    On the other hand as lawyers we should realize that our profession is not held in the esteem that we would like it and we are responsible for correcting this.

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