With thanks and congratulations to our content partners of Legal Business World who published this very interesting and practical article first.
1 . Introduction
On Melbourne Cup Day 2018, I was in Auckland, New Zealand attending the Thomson Reuters Legal Leaders’ Forum; a full-day program covering a wide range of topics affecting the ever-changing legal landscape.
I was one of three international speakers and I presented a case study on how and why, my firm, Moores, moved away from the hourly rate and timesheet business model.
I had a lot of ground to cover in a short amount of time to impart to my audience how Moores eliminated time billing and developed an agreed pricing system; the advantages and restraints of implementing a new business model and how it impacted our client experiences.
The session was about our journey towards a pure value-based pricing model, highlighting the challenges and opportunities the new model presented us along the way, while also ensuring we remained profitable and continued to create value for clients.
2. The old way
A lot has been said and written about the hourly rate model. Recording time in minute increments is indicative of (with due respect) the production floor of a factory. Lawyers don’t produce widgets; they sell their intellectual capital just as other professionals do. To then be reduced to the equivalent of punching in their time card day after day is in my view, demeaning.
Equally, clients are frankly tired of being asked to pay for work undertaken by firms they (the client) haven’t asked the firm to do.
However, the lawyer / client equation can only be changed if one side is unhappy with the billing model. With some clients content to be charged by the hour and billed at the end of the month, law firms have little incentive to change. Indeed, one school of thought suggests, “If clients are demanding hourly rates, then law firms should give them what they want.”
Yet perhaps no other professional service industry conducts business on what is a 100 year old model of revenue generation! Charging by the hour, at best, a lawyer can only bill a client for 24 hours a day. That’s the ceiling they can hope to achieve.
I have read stories of lawyers who have charged 3600 billable hours in a year (that’s 41% of the total “available hours” in a year), leaving little “time” for anything else.
3. Value pricing – the new way
On the other hand, value based pricing converts the billable hour to a floor price. The new model involves scoping the work in conjunction with the client; determining the value of that work as perceived by the client and capturing some of that value in the price. You price the client, not the work.
Value pricing reverses the old pricing equation: a client’s perception of value drives price which in turn drives cost; not the other way around. It works best in a relationship where mutual trust and respect exists between the client and the firm.
4. Moores’ story
Back in 2010, the principals of the practice discussed the wisdom of being a full service firm and recognized that the firm couldn’t be an expert in everything. With the guidance of a facilitator (who is also an international pricing consultant) at their annual retreat, the principals were introduced to the concept of value pricing.
Over the ensuing twelve months, a handful of lawyers were given free rein to experiment with value pricing and feed their experience back to partners, who on seeing the results, decided to give value pricing a real shot.
Understandably, the change was not overnight and the firm started out with baby steps. A target was set whereby half of all new matters opened in the financial year were to be based on value pricing.
To change an entire business model necessitates strong internal leadership as it requires a brand new way of thinking; a paradigm shift in mindset, from an input mentality (how long will this job take or how many hours will be spent on this matter?) to an output, or more an outcome mentality (what is the value being created for the client?).
Value based pricing forced us to question the wisdom of being everything to every client that walked through the door; in that, we narrowed our focus and were selective in the work we wished to conduct for the clients we wanted. As a result, we divested ourselves of our most profitable area of law at the time, as it no longer fit the new business model and our long term view of the future of the practice.
The new model changed the client conversation to one which focused on identifying client value before scoping the work required and agreeing on the price; all this, before we actually started the work. Expectedly we had to let go of a few clients (and some lawyers) but we also attracted a particular type of client (and people) who were the right fit for us.
5. The Moores journey
We educated ourselves by reading widely on the subject and consulted with advocates in Australia and overseas. These were not just other law firms operating under a value-based pricing model and included other professional knowledge practices.
We challenged our old assumptions and changed our language. We experimented through trial and error, learning from both, our successes and our failures and continued to refine.
We are still learning.
One of the most common questions we get asked is: how do you arrive at a price in the absence of timesheets? In other words, how do you know your price when you don’t know your costs of doing business? Customers base purchasing decisions on the perceived value they put on a product or service. All prices are contextual and all value is subjective.
My reply to this question (even when I worked in BigLaw and was heavily involved in the annual fee rate setting exercise) has always been: why should a client be concerned with a firm’s costs?
We understood that the value of the work we conduct is determined by our client’s perception of value, not ours. Clients are interested in outputs and outcomes not activity and contrary to what some might believe don’t object to their lawyer making a profit.
So we agree our terms of payment up front but also provide some guarantees with respect to the work undertaken for the client.
However, creating and more critically, communicating value are fundamental and we continue to learn and coach our lawyers in this area; not just in having the value conversation with clients but also changing internal processes and templates which facilitate the articulation of value being created for the client.
At Moores, no one prices their own work and no one prices alone. For matters above specified thresholds, lawyers need to present their matters to a panel of pricing experts from a cross section of the firm. Until recently, this panel was known as the Pricing Council.
And so in continuing our learning journey, we recently renamed the council to Value Council to emphasize the purpose of this group; which is not just to provide advice to lawyers on the most appropriate price to offer the client, but in doing so, also help the lawyer frame the value conversation; i.e. how to articulate the value being created for clients, when proposing the price.
Our new way of working compelled us to assess what we are or can be experts in. We were no longer a firm with a taxi rank client base and we got better at client selection.
Indeed, in monthly management meetings a standing agenda item is for us to share the “No file”.
Pricing our work upfront and in the absence of hourly rates meant we had to become disciplined in project management. This meant we needed to improve our knowledge management capabilities and systems; not only so we weren’t reinventing the wheel each time but also tapping into this repository of information gained through after action reviews which would feed into our decision making on future projects.
6. New processes, measurements & rewards
Ditching time sheets and hourly rates, also lead to a review of our performance management systems and processes.
No longer were lawyers measured on daily, monthly and yearly fee targets with corresponding incentive bonuses attached.
Value based pricing makes for a more cooperative working environment in the absence of individual targets. It is not to say we don’t have fee budgets; however, these are allocated to teams not individuals. This fosters a culture of collaboration than file-hoarding.
New performance competencies gave rise to a new definition of “KPI”; we are now more interested in leading, key predictive indicators than lagging, key performance indicators.
We identified nine core competencies for Professionals across four categories of Principals, Special Counsel, Associates and Lawyers who are measured against new and more relevant and meaningful criteria of: client management, project management, teamwork & leadership, business acumen, business development, technical & industry specialization, knowledge management & learning, innovation and ethics & risk management.
7. What can you expect?
a. Performance measurement
Understandably, value pricing will ensure your debtors reduce drastically. A nice but undesired side-effect of the new model was the redundant nature of our dedicated credit control function, a role which was not replaced when the team member left to seek new pastures.
No timesheet equals reduction in work in progress. When you price upfront you don’t need to spend hours chasing fee earners to get them fill in their timesheet with missing hours.
So you will measure less; no more boring utilization, missing timesheet, productivity statistics; you will report on less and fret about less.
Also expect to turn your back on benchmarking, noting that all value is subjective. No two clients are the same.
b. Client feedback
Expect client complaints to come down; at the very least in terms of bill shock. When all work is priced upfront before work is commenced, the result is a win-win for the client and the firm.
Value pricing will provide clients cost certainty and increased incentive for a firm to complete the work as effectively and efficiently as possible without worrying about the time it takes them to do the work.
You become better at client selection when you narrow your focus. Consequently, expect relationships with the right clients to be strengthened. You will have fewer but better clients and will conduct a lot less work for clients who don’t appreciate value.
c. Your people
Let’s be honest; most lawyers don’t like time recording. Timesheets do not foster collaboration and encourage the very opposite; file-hoarding in order to meet daily, weekly, monthly and/or annual targets.
Under value-based pricing, team morale will improve and collaboration within and between teams will be strengthened; when you think about it, this is unavoidable to meet deadlines and deliver projects on time and on budget.
Without file-hoarding, true teamwork is played out and cross referrals are bound to increase.
As the word would suggest, teamwork requires everyone to play their part so you can expect the crew to deselect those who aren’t playing as part of a team. On the flip side, progressive people with drive and initiative will ask you for more work and challenge you with new ideas.
As stated earlier, you will obtain quality work which may mean saying no to some clients who do not appreciate value.
As Tim Williams of the Ignition Group states, contrary to what some might think, you actually expand your business by narrowing your focus and not being a “full service firm” i.e. an expert in everything.
Change will always involve resistance; so expect to be free of those who do not believe in your new way of conducting work for clients. They will involve some clients and some of your own people.
I said earlier that you will report on less and fret about less. This is indeed true of unhelpful measures highlighted earlier; however, a new way of doing things affects the entire firm and so you will require a review of and revamp of systems and processes.
Remember though that there is no silver bullet solution. We still require lawyers’ help to review and record accurate data to provide meaningful predictive indicators. While greatly desired, know that there is no algorithm for value-based pricing (at the time of writing this but with the pace of disruption in the industry, you never know!)
I have met and spoken with many about our value pricing journey; and while there has never been a shortage of fascination and interest and indeed a strong desire to change, you will need strong internal leadership and it does involve, while not blind, a leap of faith.