Tag: Commodity legal work

Pricing the Client, Not the Work: A More Flexible, Value-Driven Approach to Legal Billing

I often see lawyers debating on LinkedIn about the merits and disadvantages of hourly billing versus value-based pricing. I don’t see it as a question of doing it one way vs. the other. Each client will have their own unique needs regarding how they prefer to be billed. And it doesn’t have to be just one way. The right way to price/bill is the one that best meets your client’s needs.

We need to start offering options: that could mean two or three different options, including hourly billing or value-based pricing, or a hybrid billing option, which includes a monthly retainer plus hourly billing, etc. This is my twist on “Price the client, not the work”, as Ron Baker recommends.

Clients Have Different Needs, So Give Them Different Options

Some clients still prefer hourly billing. Others want predictability through flat fees or monthly retainers. Some are open to value-based pricing or outcome-contingent models. A few are even willing to pay a premium for guarantees or guaranteed availability.

All of these models can coexist. Your job is not to convince every client to fit your preferred pricing/billing method. Your job is to understand what the client values, then design a fee structure that reflects that.

In Implementing Value Pricing, Ron Baker lays out a clear, eight-step process for moving firms toward value-based pricing models. But even Baker doesn’t argue that it’s all or nothing. Instead, it’s about moving along a continuum, away from pricing based on effort, toward pricing based on value.

Hourly Billing Isn’t Going Anywhere, But It Shouldn’t Be the Only Option

Let’s be realistic: hourly billing isn’t disappearing anytime soon. And that’s okay. What we can do is evolve from relying on it as our only pricing model.

Hybrid models are often more practical and better aligned with both firm and client interests. A client might be on a monthly flat fee for routine advisory work, with defined scope projects priced at a fixed fee, and a litigation file on a success-based arrangement.

The point is flexibility. And when you build tailored fee structures, you change the conversation from “what’s your hourly rate?” to “how can we work together in a way that makes sense for both of us?”

Unique Pricing Drives Unique Value and Breaks the Race to the Bottom

If your pricing model looks like everyone else’s, then you’re just another commodity. That’s when clients start comparison shopping based on price alone.

But if you’re structuring your pricing based on deep knowledge of the client’s goals and preferred ways of working, you’re no longer interchangeable. You’re delivering something tailored and valuable. You’re a legal professional, not a plumber.

And most importantly, you’re helping the client win, which means you’ll win too.

Track Your Time Even When You’re Not Billing It

One more essential point: I believe you should still record time, even when using non-hourly billing models.

Time tracking isn’t just for billing. It’s how you understand your internal costs, opportunity costs, and profitability. If you abandon time tracking altogether, you lose visibility into whether a fixed fee or value-based arrangement is actually working for your business.

Think of it as managing a portfolio. You need data to know what’s sustainable and where the value really lies.

Value Pricing Doesn’t Mean Taking All the Risk

A lot of firms resist alternative billing because they think it means giving up control or taking on all the risk. But that’s not the point.

A good pricing model finds a win-win. The client gets predictability or performance incentives, whatever they need most. The firm gets fair compensation aligned with results and client satisfaction.

Bartlit Beck LLP, the original poster child for alternative billing, still did 50% of its work on an hourly basis in the early years. Why? Because not every client was ready to make the shift. Some simply weren’t comfortable. And even the most visionary firms need to meet clients where they are.

Stop Arguing. Start Listening.

We don’t need to keep arguing about which model is superior. Hourly billing is not the villain. Value pricing isn’t a panacea. What matters is what your client wants and needs.

If you build pricing options around that, you’ll build trust and long-term success for both you and your clients.

References and Further Reading:

  • Ron Baker, Implementing Value Pricing: A Radical Business Model for Professional Firms
  • The American Lawyer (1995), Diamonds Are This Firm’s Best Friend – Profile of Bartlit Beck and its hybrid approach to alternative fees

10 major trends impacting Canadian law firms in 2015

Global firms such as Norton Rose and Dentons have moved into Canada and more are on the way. They have swallowed up mid-tier law firms such as Macleod Dixon, Fraser Milner and Ogilvy Renault. Heenan Blaikie is another casualty of the competition being created by these global giants as corporate and securities deals now have more major players vying for fewer deals. These global mergers also create breakoffs of groups of partners who don’t want to be part of a worldwide firm run from New York, London or Brussels. This creates opportunities for small and midsize firms to absorb these disaffected partners, with their institutional clients, which are greatly desired by small firms, and can be run profitably from a smaller, more efficient platform.

Since the financial crisis of 2008, clients are demanding fee discounts of 10% to 50%. They are under pressure from their CEO’s to cut their legal costs and discounts are the easiest way to accomplish that.

Clients are also pushing for alternative billing as they want fixed fees and some certainty on their legal costs and as a result firms must focus on becoming more efficient.

There’s also a rise of innovative NewLaw business model firms providing legal services with much lower overheads, up to 50% lower than large firms and they are stealing work away from large firms because their charge-out rates and fixed fees are also up to half as much as large firms. This puts a lot of strain on maintaining realization rates and profitability in an increasingly competitive legal market environment.

Legal services are increasingly being commoditized in line with the competition created by more players in the legal market, and more lawyers are being pumped out of law schools that aren’t needed to meet the demand. Clients realize that often lawyers aren’t needed to do many simpler legal tasks, and they’re pushing for work to be outsourced to other cheaper jurisdictions or countries, or pushed down to paralegals, contract lawyers or outsourced general counsel to be done more cost-effectively. The mystique of law firms being the only ones who can do legal work is fast fading. There are many other non-law firm competitors in the legal industry now.

Realization rates are dropping. In the Georgetown Law 2014 Report on the State of Legal Market the average overall realization rate in 2014 was 83.5%, which was down 8% from the 92 percent rate reported in 2007, so that’s a big drop in realization over the past seven years. Clients are rebelling against law firms’ steady increase in their charge-out rates over the past decade, and they’re fed up and just will not take it anymore. Large firms have increased their charge-out rates much more than small and midsize firms, so that’s another opportunity for small and midsize firms to steal clients away from large firms.

Technology focus – LegalZoom and other automated legal service providers are quickly picking up market share and commoditizing most routine legal forms and documents. Law firms are automating more of their predecents and routine legal documents to increase their efficiency for fixed fee quoted commodity work.

Client focus is a term you’re hearing more and more, as clients demand that law firms think about client needs and profitability, not just their own. Clients want law firms to focus on their KPIs and their strategic goals.

Finally, mid-tier law firms are under continuing cost pressures as global firms are pushing hard from the top and NewLaw firms are nipping them from underneath. Mid-tier firms such as Heenan Blaikie, Macleod Dixon and Ogilvy Renault didn’t have the sophisticated management structure or the resources needed to compete with the global firms, and the NewLaw firms have cut their overheads in half. So mid-tier firms are increasingly in a Catch-22 situation, with nowhere to run. They will either be swallowed up or blown up, unless they change their business models.  Again, here’s another opportunity for small firms and midsize firms under 50 lawyers to steal clients away from their larger counterparts and hold the NewLaw firms at bay by reducing their overheads and updating their business models.

The Small Firm Advantage

Originally posted on Small Firm Innovation 

Large law firms today are in a real bind.  Their large clients are looking for lower legal costs, but large firms have big overheads, lots of partners to feed, and little experience in providing alternative billing solutions.  They have increased their chargeout rates significantly in the last decade, and large clients are understandably upset.  The rise of the Association of Corporate Counsel (ACC) is an indicator of just how upset they are and their need for retribution.

Small firms, on the other hand, are sitting in the catbird seat.  They have what large clients want.  They have low overheads, their chargeout rates are significantly lower than large firms, and they have lots of experience with fixed fee billing for commodity work.  They’re also hungry to get their hands on large firms’ institutional client work.  Large clients are interested in what small firms have to offer, since large firms aren’t responding to their repeated requests for alternative billing.

The time is ripe for small firms to turn their better value offering to their advantage and steal good work away from large firms.  It’s there to be had, and large clients are looking for options.  Take the advantage now.  The economy is in tough shape, and the opportunity won’t get any better for small firms. Put together an alternative billing strategy and lure away large firm partners looking for more flexibility and better work/life balance.  These partners can make more money in less time with a lean platform that’s already in place in a small firm. They can be the big fish in a small pond.  And many large firm partners are doing just that.  They’re jumping ship from large firms that have retirement policies that force them to retire in their prime practicing years.

Why not take your clients with you and create something new, that’s truly yours, and not be treated like an employee in a mega-firm where you have no say? No oppressive rules, no national firm overheads, no one telling you what to do.  Be creative, experiment a little, and have fun.  What more can you ask for?  Use the technology you want without the constraints imposed by some large firm tech department.  Use LegalZoom technology, outsource to the best lawyers available, work virtually and create virtual teams of like-minded partners from other large firms who are ready for a change.

The legal industry is in turmoil, and that’s a real opportunity for small firms. Develop a new strategic plan with a unique value proposition.  Offer value pricing and make clients very happy.  The Valorems of the world are already doing it, and have done all the groundwork for you.  Market yourself as the expert in your field on your terms, and no one else’s.  Use social media as you see fit, and take advantage of this very effective and inexpensive marketing technique that large firms just can’t seem to do as well as a small firm can.

Make your legal working life a lot easier and more fulfilling.  Work with like-minded people who want to create something new, something exciting, and something that can allow you to make twice as much money in half the time. Now that’s real work/life balance!

Related articles