The problem with value pricing

A day in the life of the corporate legal market:

A law firm submits a bill to a client. The client doesn’t like the bill because the amount is higher than expected or seems incommensurate with the value of the service. The client contacts the firm and asks for the amount to be reduced.

What does the firm do? Eight times out of ten, it reduces the amount, at least according to all the accounts I’ve heard and read. The client pushes back, and the firm gives way. This happens every day in the corporate legal world, and when it happens often enough, the nature of the transaction itself changes. The “final” bill issued by the firm actually becomes the starting point in negotiations — short and one-sided negotiations, as it turns out, because the client says, “I will pay this much,” and the firm invariably says, “Okay.”

Why doesn’t the firm push back harder? Why doesn’t it take steps to demonstrate that the bill represented good value? Because, in most cases, the firm can’t. It can’t really explain why Lawyer A spent 37 hours on the client’s project, beyond “That’s how long it takes,” and why her billable rate is $275 per hour, beyond “That’s how much she costs.” Why does it take this long? Why does she cost this much? These questions are terrifying to lawyers, because their honest answer would be: I don’t know. Lawyers have never thought much about it, because they’ve never needed to think about it. That’s not how the legal market has worked up till now.

But, notice: The client does not normally offer a substitute value definition. The client does not say, “The value of the services you provided to us is closer to $X, an amount we calculated according to the attached methodology, so send us a bill for this amount.” Most clients can’t easily assess the value of the legal services they received either, but they’re pretty sure the firm’s bill is too high and they’re very sure they can get it reduced. So they’re likelier to simply say, “Knock 12% off the amount” or “Drop all billings for lawyers called fewer than three years ago” or some such. In practical terms, neither lawyers nor clients really know the value of the lawyers’ work. They’re both groping around in the dark.

Clients undertaking a careful assessment of lawyer value.

Lawyers have always measured and sold their services according to inputs — their hourly efforts, primarily — because it’s all they’ve had to go on. Lawyers can easily measure their inputs, but they can’t really measure outputs, because legal output value is entirely situational and subject to the client’s experience and assessment. Clients have never enjoyed paying lawyers on the basis of inputs, but it’s not like they had any better ideas. “Value pricing,” attractive as it is in theory, confronts clients with some hard questions: “How much are these services really worth to me? Do I want to take the time to find out? And if I do find out, do I want to tell the lawyer?”

Consider: How much is a contract worth if it never gets so much as glanced at by either party for its entire term? (This describes a whole lot of contracts.) Based on outcome and use, the contract arguably is worth almost nothing. How much is that same contract worth if it ends up helping to clinch a transaction worth $300,000? Now, what if a $300,000 dispute is avoided because the contract was so well-drafted? Would anyone ever know the dispute was avoided? If the client somehow found out, do you think he’s going to call up the lawyer and invite her to send him a new bill to reflect this higher value?

Or how much is a last will and testament worth? Set aside for a moment the insurmountable challenge of pricing the peace of mind that comes with knowing your loved ones will receive the assets you intend for them. Suppose the testator has assets of $10,000 — how much should the client pay for that will? What if the testator wins the lottery the day after he buys the will, and his estate is suddenly worth $10,000,000 — is the drafting of the will suddenly worth more?

The most frequent response to these objections, and it’s an entirely reasonable one — I’ve been making it myself for some time — is that the lawyer and the client should have detailed conversations about their respective needs and situations, develop a degree of trust in the other’s good faith, and arrive at an amount (or a framework for determining an amount) that strikes both sides as fair in the circumstances and attentive to each side’s needs. A fine example can be found in this insightful article in Bloomberg Business of Law, which describes Ron Baker’s excellent eight-step model for setting up a value-pricing system between a law firm and a client.

I’m confident that this model is extremely effective, and for those lawyer-client relationships that have managed to put it into practice (mostly those with large volumes of repeat business, I’d imagine), it seems to be delightful. But I’m also confident that many firms and clients alike would consider it to be a significant outlay of effort and resources. It requires a lot of time, expertise and goodwill on both sides to make it happen — a degree of exertion that rarely scales and that most people, lawyers and clients alike, aren’t interested in making. (I’m not saying, to be clear, that they shouldn’t make the effort. I’m just saying, in practical terms, most won’t.)

So close to unprofitable.

This is the real reason, I think, why value pricing has been slow to make headway in the legal market: It is incredibly difficult to calculate the value of lawyers’ services. It’s a huge hassle. Many people want something easier to understand and simpler to implement, even if it’s less reflective of actual value. The billable hour is not hanging around because it’s a brilliant pricing mechanism. It’s hanging around because we haven’t come up with anything equally simple but markedly better.

And these are just the easiest examples. How much is it worth to help someone escape an abusive marriage and keep a violent ex-spouse away? How much is it worth to help someone stay out of a brutalizing federal penitentiary? How much is it worth to help someone flee certain death from religious persecution by enabling their emigration to a liberal democracy?

The value provided by lawyers in family, criminal, and refugee law is off the charts — yet they’re some of the lowest-earning lawyers in the profession, because the value of their services routinely outstrips their clients’ ability to pay it. The “value pricing” argument cuts both ways, and not always to the client’s benefit. And anyway, in none of these situations does either the client or the lawyer have the time or inclination to develop a trusting relationship that can enable fair pricing.

The real value proposition of most legal services is an enigma, one that can be solved with great effort over a sustained period of time — but my expectation is that few people will consider this kind of effort worthwhile.

So how can we better price lawyers’ services? “Input pricing” is a fiasco: the price bears no relation at all to the value of the work, and the client bears all the risk of errors and inefficiencies by the lawyer. “Value pricing,” as I’ve tried to demonstrate, is theoretically appealing but is often unworkable without a significant investment of effort in each client transaction — an effort that in itself will raise the cost of the lawyer’s services and complicate a process that most clients desperately want to streamline.

For these reasons, I’m coming to think that the likeliest pricing system to emerge for legal services will be simply “market pricing” — that is, how much the client is willing to pay the provider. I don’t pretend that this is necessarily a desirable system — it’s a highly imperfect one, and potentially regressive. But as the legal market continues to evolve and legal supply continues to diversify, I think “market pricing” will be able to deliver more fairness, value, and expedience to the pricing of legal services than we have today. More on this in a follow-up post, “The rise of market pricing.”

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Law is a Buyer’s Market: Building a Client-First Law Firm is available here at Law21 (in print) and at Amazon (as a Kindle e-book). “This is an exceptionally clear book, brimming with practical help, and humorous into the bargain,” says Richard Susskind, author of Tomorrow’s Lawyers. “Jordan’s assessment of the legal market should be read carefully by clients and lawyers everywhere.”



14 Comments

  1. Dan Currell

    How much time do economists spend figuring out the relationship between value and price? None, I think – value is unrelated to price, but in law we are stuck circling around the question as though it were real. The value of water is infinitely high (if you think life is infinitely valuable), but the price of water is low. Value has nothing to do with it – product prices are a direct function of the next available substitute price. Or, supply and demand. Value is something that swirls around in the mind of the buyer (utility, to economists) but its only measure is the revealed preference of what someone is willing to pay. Or so says our normal economic model. So yes, market pricing. What people are actually willing to pay.

  2. Martic Bragg

    Market pricing is in effect what happend now when the client pushes for a discount on his invoice ‘just because he can’.
    Surely the key point is to agree price up front.

  3. Craig Burley

    All pricing is market pricing; it’s just that the market is often quite elastic.

    I’m lucky; I can demonstrate quantifiable value (reducible to a dollar amount) for over 80% of my clients. The rest are mostly really frightened people.

    I know that on value I could charge twice what I do for my services. But I would lose a large part of the client base that gives my work context and meaning. I’m happy with where I am at the moment, but several months of thinking about pricing models has be considering a change to my hourly rate for those clients preferring that model. (I make flat-rate services available, at what I tell clients is a likely premium, to almost everyone.)

  4. Ron Baker

    Jordan, Thank you for this post, and mentioning the Aric Press article based on my presentation to the Somerville forum. I think the confusion here is the lack of understanding of what value means. It’s not a number, it’s a feeling (and totally subjective). We need to stop trying to calculate it precisely. Hourly billing tries, but it’s precisely wrong (based on inputs, as you say, and silent with respect of external customer value). I’d rather be approximately right rather than precisely wrong.

    There’s no such thing as “market pricing.” What’s the “market price” of a computer? Well, are we talking Dell, or Apple? How about a theme park? Disney, or Universal Studios? Big differences. Market prices vary tremendously, even for a bottle of water. Buy one at Costco and compare that to one at a hockey game.

    This is about more than pricing: it about brand, purpose, strategy, positioning, etc. We’ll never be able to calculate value, but we can infer it if we price in advance, and offer the customer options. But this can only be done in advance of doing the work, not after the fact.

    Is it hard? Sure, but so is training for the Olympics. So what? I can’t think of anything that’s worth doing that isn’t hard (passing the Bar?). But pricing is now a profession. Most large companies have entire pricing departments, refuting your argument that it’s not scalable. It certainly is scalable, as airlines, hotels, cruise ships, and other large entities have proven. Just look at the list of members of the Professional Pricing Society.

    Why are companies making these investments? Because pricing is the number one driver of profitability in any business, bar none. No other strategy–not cost cutting, rainmaking, efficiency gains, etc.–comes close to matching pricing’s impact on bottom line profit.

    Value pricing leads to better customer relationships and a higher level of service. It’s how we buy everything else in our lives, and lawyers (and other professionals) defy these economic laws at their peril.

    If market pricing were a reality, we wouldn’t have a pricing profession. We could simply rely on computers. But pricing is more than numerical analysis. There’s an enormous component of spiritual value (meaning it cannot be measured, but it’s there). Like the old IBM slogan: no one ever got fired for buying IBM.

    You can bet IBM wasn’t the cheapest in town, and was able to capture more of its value. And you can also bet Watson isn’t being billed out by the hour.

    There is no “market.” There are only customers. Only humans buy things, not companies, or firms. Pricing is about human psychology as much as economics. It’s a entire academic field (you can get a PhD in it). And it’s worth the investment because it creates more value overall for all stakeholders.

  5. Thomas Bowden

    Not to pick nits, but the statement “Lawyers have always measured and sold their services according to inputs — their hourly efforts, primarily — because it’s all they’ve had to go on” is false on its face. Even with the rise of hourly billing, a large contingent of the profession has used contingent fees (see what I did there) and through most of the 20th century, bar associations set prices (until the Goldfarb case in 1975 -https://supreme.justia.com/cases/federal/us/421/773/case.html). Justin does accurately describe the vast majority of lawyers in medium to large firms, however, because they have never known anything else, and have been taught that it’s business-like and smart-sounding to say things like “I can’t take that work because they won’t pay my rate and I’ll lose money.” I’d also point out that while Ron’s process is indeed arduous at times, it’s a lot easier than creating and maintaining the systems that track time, and then arguing about the results with your clients, who ultimately beat you up and leave you to make excuses to your partners when you don’t hit your “utilization and profitability” numbers. I speak from experience having done it both ways. Heck, I even created a billing system for my first law firm using Lotus 123 macros. It was a thing of beauty to me at the time, but in retrospect, it was no more than Rube Goldberg contraption that took made-up numbers, applied them to made-up rates, and then compiled them all into nice looking made-up statements that were nothing more than invitations to argue with our clients, which, in most cases, was not chargeable activity. As usual, Ron is right. It’s better to be vaguely right than precisely wrong.

  6. Gary Luftspring

    And when my former dearly departed partner Wolfe Goodman was asked what his hourly rate was “I am not a plumber”. Long long ago in a place that seems far far away lawyers billed on the basis of what the file was worth and did very well. Building a database of other files for other clients on similar matters is a start. In Jordan’s scenario if the come back were we have done 30 of these transactions over the last 3 years and the fee range was between x and y and this matter is completely within the range you might have a different discussion. Of course if there were a conversation up front with a budget and one could say we were within an agreed budget there might never be the conversation at the end! But alas that might involve talking to the client up front about such things.

  7. David Wells

    Great post Jordan. At Moores, we built that value pricing model you refer to with direct assistance from Ron Baker and indirect assistance from a host of other dedicated professionals like Tom Bowden who have generously shared their intellectual capital with us over 5 years. It’s not easy and it comes at a cost in the short time but the results are so rewarding in terms of enduring relationships with clients and referrers who are the right fit. Although it sounds a bit corney, Ron Baker is right when he says that “there is an enormous component of spiritual value” (which can’t be measured). It does have to be “fair” for client and lawyer but any practice that is prepared to seriously commit will experience positive transformation.

  8. Carlos Valls

    I think that, if value is difficult to measure, and it depends on perceptions, then we people at this industry should try to convey to society that what we offer is valuable. It surprises me why some consultants or gurus (a typical example can be seen with Mr Richard Susskind) try to he hired as advisors to law firms and yet their discourse is based precisely on diminishing the value of what lawyers do, as if they were overestimated. Strage way to get notoriety, which is to devalue the profession that one wants to serve. I know that this is not what is intended by Mr Furlong, who in his posts one can see that he has a love for the legal profession, but the risk is there.

  9. Matthew Burgess

    Dear Jordan

    Thank you for contributing to such an important discussion.

    As you may recall, our firm eliminated timesheets some years, with significant mentoring from Ron Baker and the VeraSage community.

    3 observations –

    1. The depth of disruption you have long warned of in the profession means that models that avoid things that are ‘too hard’ are at serious risk – if you do today what others won’t, you do tomorrow what others can’t (Rice)

    2. Value pricing is not code for ‘let’s unilaterally increase prices across the board to what the lawyer deems as the fair’. The argument that lawyers ‘routinely deliver value that far outstrips a customers’ ability to pay’ is only relevant if you are trying to recover an arbitrarily set hourly billing rate. We, as have many, leverage technology to turn what other incumbent law firms complain are ‘low value’ solutions into our highest margin work – net profit is the measure of right (Hobbes)

    3. It is disappointing that the inextricable links between time recording and depression are not a key focus of your analysis. Depression is arguably the single greatest problem in the profession, and to iterate an Indian proverb – we do not inherit the profession from our predecessors, we borrow it from the next. Some argue coherently that to actively sidestep the ramifications of time billing on mental health is unethical. Perhaps though that debate is becoming irrelevant – insightful providers are taking affirmative action; and ustomers are following.

    Regards
    Matthew

  10. Leah Beckham

    Thanks Jordan for your post and to all those who contributed to this conversation in your comments.
    It has been my experience that there are four primary components that create value between lawyers and clients:
    1) Relationships are paramount. When lawyer and client establish shared transparency, confidence, and loyalty, a substantial intangible value is created.
    I think this may be the “spiritual value” described by Bob Wells.
    3) Commitment to be competitive where the growing client demand to illustrate value in the CLIENT’S language. Willingness to ask clients what they need to achieve success professionally.
    4) Partner willingness to become more engaged in learning about what their competition will be in three years and leading their firms with this in mind.

    Being a “great lawyer” and providing good “customer service” is no longer a value proposition.

  11. Peter Rouse

    Thanks, Jordan, for your post and for provoking the responses expressed here.

    I remember a simpler time (late 1970s when I started in the Law) when bills were drawn up by specialists who counted letters in, letters out, phone calls, etc and priced accordingly; there was, believe it or not, a practice of ‘weighing’ a file that involved simply holding a file in an outstretched hand from which the experienced could make a pretty good guess at the billable value.

    During a consulting project decades later, I came up with a model I called ‘The Five Ps’: Clients come to lawyers for reasons of Profit, Protection or Principle (or combination of these); they want the lawyer’s Power to deliver the result they wish for; and the question is how much will they Pay to get it. Another applicable ‘P’ is Perception – the all important perception of value in the desired result and, later, of the service experience. This, as I understand him, echoes what Ron Baker has said about subjectivity.

    One more ‘P’ might be Process, one area of legal service that is rightly vulnerable to the ‘commodization’ that we have heard so much about, thanks to Richard Susskind, and the target of many legal tech ventures.

    As Jordan and others point out, what is needed is proper dialogue with the prospective client at the outset, including grown up talk about money. Trust is built on expectations and a central expectation that must be managed is that of cost. Both the prospect and the lawyer must have the opportunity to walk away before engagement begins if the deal isn’t right for them.

    Clients can and do shop around, now more than ever. Law firms that know they are in business as well as practice work to build their perceived Power and enhance Perception of value.

    The hourly rate still serves a purpose as, for example, companies are in many cases doing little more than renting a lawyer’s time as needed and accept, just as if the lawyer were working in house, there will be varying ways in which time is spent including in collaboration and coordination with others. Hourly billing can still be useful when it is combined with planning, time/cost budgets and agreed service modalities. A common source of unhappiness and delusion in law firms is the notion that recording lots of hours equals success and profitability.

    Relationship is all.

  12. Joel Barolsky

    Great post and follow-up discussion.

    To me, value pricing is just one of a range of pricing models. I don’t quite understand the strategic logic of forcing a client to choose one approach. Surely, a better approach is to offer the client a range of options?

    Many of the senior buyers of corporate legal services that I speak to say that in some instances hourly rates are the fairest system to split the value created. In other cases, pre-negotiated fixed fees work well. Other situations facilitate skin-in-the-game options.

    The principle of having a pricing / value discussion before a matter commences is a great idea. The fact that the parties might happily and spiritually settle on hourly rates is also great. They may also go for a cap and collar deal. Or possibly a KPI-linked bonus. All cool with me.

    Why should there be only one model? I don’t quite get it.

  13. David Wells

    Joel, thanks for asking the question as to why there should only be one model. Operating multiple models may possibly work for some practices but there is a host of reasons why operating only one pricing model is preferable. To name a few:
    1. Not all lawyers are sophisticated enough to offer all the models as options. At some practices, clients have been annoyed where one group offered value pricing but the next group didn’t.
    2. Options are good, up to a point. Sometimes, too many options can confuse clients.
    3. To do value pricing consistently well takes time and effort. To the extent that we are practising other models, we are missing the opportunity of getting good at pricing for value.
    4. I want to operate as few practice management systems as possible.
    5. We all know that professionals who want to survive need to become experts and narrow their focus. That applies not only to work mix, but also to client mix and business model. Value pricing is a business model.
    6. A client who wants to dictate to me how I should run my business, is unlikely to be a client who is a good fit. We say “no” to clients for many reasons. I am very happy saying “no” to clients who insist that I record time, despite the fact that the work might be interesting or that the client can pay my invoice. Similarly, a practice that is content charging by the hour should feel free to reject any client who insists on a fixed fee (even though that may be commercial suicide in the long term).
    In summary, trying to be all things to all people is problematic. I don’t think it is sustainable but the GP’s out there may disagree with me.

  14. Mike O'Horo

    I’ll respectfully disagree with Peter Rouse’s summary claim that “relationship is all.” Every day, companies are replacing lawyers and firms with whom they have great relationships with other suppliers whose methods, operations, and pricing align better with the company’s goals and strategy.

    If my friend remains stagnant and allows himself to become outdated to the point where he’s the business equivalent of a buggy-whip maker, he’ll still be my friend, but his irrelevance means I can’t continue to do business with him.


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