Win-Win Alternative Billing Strategies – Part II

This is the second installment of a three part series based on my presentation on “Win-Win Alternative Billing Strategies” at the CBABC Sixth Annual Branch Conference in Las Vegas November 18-20, 2011.

Value Pricing – Part II

In Ron Baker’s book “Implementing Value Pricing”, he puts forward an eight-step plan on how to price a job up front on a fixed fee basis.

The concept of value pricing that he talks about is different than the value billing concept that lawyers have talked about for years.  Lawyers usually work on an hourly basis, and then try to charge a premium at the end of the file based on the extra “value” as perceived by the lawyer.  So on a $30,000 file, if a significantly higher recovery is obtained than expected, the lawyer may try to charge a premium of $6,000, or 20%.  The client’s response might be, “Why are you charging me a premium at the end of the file. We had a contract for an hourly rate, right?”  Ah yes, the lawyer says, but in the fine print of the engagement letter there is a clause that allows the lawyer to charge a premium of whatever the lawyer wishes on top of the hourly rate based on the lawyer’s perception of value provided.   The client either says no, or thinks twice about using that lawyer the next time.

Instead, the value pricing system calculates the value up front, not at the end of the file as value billing does.  A very important distinction.

Another benefit of pricing for value up front is that it also allows you to obtain a larger retainer up front as well.  If you have scoped out the work properly and provided a fixed fee quote, with some measure of certainty for the client on the total amount of legal fees to come, they will be much more willing to give you a third or a half of the fixed fee up front.  If there is uncertainty as there is under hourly billing, the client is much more hesitant to pay a retainer, or will only provide a very small retainer up front.

So you need to negotiate the value and the price of the legal work in a conversation with the client up front.  Ask the client what he or she values. That value will determine what price you can charge for your legal services.

How is value determined? 

Does the client or the lawyer determine value?  The answer of course is the client.  Notwithstanding that the lawyer may have many years of experience in the practice area, every client has a different perception of the value that your firm provides.

Ron Baker says, “Price the customer, not the service.”  So each client needs a different value/price proposition.  What that means is that you may charge a different amount for the same service to different clients. However, keep in mind that each client wants service provided in a different way.  So each client has a different value “package” that it requires.  One client may want a service guarantee, one may want a fixed fee, and another may want the service provided tomorrow, not next week.  Each service feature carries a different price tag.  So it’s like a new car, which is provided with several different option packages, and each client gets to choose the options she wants.

The most important point here is that it’s all about choice.  The client wants choice.  They may decide to go with either a fixed fee or an hourly fee, or a hybrid fixed and hourly fee, but they want to have the choice to select from.  You need to provide them that choice.

4 Main Ways To Add Value For Clients

– Increase revenue – such as increasing the recovery for a plaintiff in a lawsuit

– Reduce the payment required as a defendant

– Reduce risk for client with a fixed fee

– Enhance reputation, such as using a blue chip law firm’s reputation to secure public financing that you may not have received otherwise.

Costing Out The Work

Once you’ve determined the price for your fixed fee service, you can then determine what it will cost to do the job.  You will need to to budget costs to arrive at the desired profit.  If you can’t make the cost work in order to get the desired profit margin, you simply decide right now not to take the job.  Why get involved in a loser if you know the answer up front?

Another key to Ron Baker’s pricing on purpose is that timesheets are actually done up front, instead of as the work is done.  By doing your timesheets ahead of time, you are able to determine what your costs are for pricing purposes to obtain the profit margin you require.

Do you still need to track time?

Yes! You still need to track time in order to understand what your costs are on each file and whether you were profitable.  This is one area where I disagree with Ron Baker, who says he wants to trash the timesheet.  Timesheets are still important for costing your files, and ensuring that you price your future jobs to optimize profitability.

Keep in mind that as you get into alternative billing and fixed fees, there’s always a danger that you will get involved in price wars.  Don’t.  This is a race to the bottom, as there’s always someone who will do the job cheaper than you.  Instead, do whatever you can to distinguish your legal services from the competition, and “uncommoditize” them. Any service can be “uncommoditized”.   If not, and it truly is just about price, get out of that business and replace it with something else where you can make money.

Another rule to consider is the 80/20 rule of profits.  Under this rule, you make 80% of your profits from just 20% of your clients.  Read Ron Baker’s “Implementing Value Pricing” and you’ll see the study backing up this guideline mentioned in one of the appendices.

So what that means is that you have to be ruthless in evaluating the profitability of your clients, and cut the bottom 20% on a regular basis and replace them with more profitable clients.  The first step is to determine profitability of each client, however. We’ll talk more about that in a future post.

Win-Win Alternative Billing Strategies

This is the first installment of a three part series based on my presentation on “Win-Win Alternative Billing Strategies” at the CBABC Sixth Annual Branch Conference in Las Vegas November 18-20, 2011.

Current Situation

Alternative billing has been done in conjunction with commodity work for decades in Canada.  Fixed fees are common for personal services commodity legal work such as residential conveyances, wills, etc.  However, alternative billing is not common for most business law and litigation work in Canada. Canadian law firms are not proactively offering alternative billing to their clients either.  And clients aren’t happy about that!

Alternative billing is growing rapidly in the US and Europe, however.  Large clients are pushing big firms to offer alternative billing and they’re getting price discounts of 20% +.  This is what’s coming to Canada soon as well.  So you need to get ready for how to deal with that.

The New York State Bar Association “Report of the Task Force on the Future of the Legal Profession”, published in April, 2011, has a set of recommendations on alternative billing, and it predicts that alternative billing will be the dominant form of billing in the future in the legal industry. Clients are pushing for it, and Bar associations are supportive.

The Association of Corporate Counsel (ACC) is going to be setting up shop in British Columbia and Alberta soon, so it’s coming very fast.

What Do Clients Want From Alternative Billing?

Clients want lawyers to provide more value for money.  Legal chargeout rates have risen dramatically in the last decade, and clients want a price rollback!

Clients also want more predictability in legal costs.  They want fixed fees.  They want to be able to budget their legal costs as close as possible in order to satisfy their CEO’s desire to reduce overall legal costs.

Clients want law firms to share the risk when working for them.  At the moment, clients have all the risks under hourly billing.  Clients want to pay for results, not hours spent. If results aren’t achieved as planned, law firms should be sharing the downside as well.

Many clients are looking for lower overall legal costs.  Legal costs are spiralling out of control, and clients are fed up.

What Do Law Firms Want From Alternative Billing?

Law firms want to maintain or enhance profitability when doing alternative billing.

Law firms want to manage risks, and may prefer not to take on all the risk, but are willing to share risks with the client.  But the risks are a spectrum, and there is a different price all the way along the risk spectrum.  The more risk, the higher the risk premium, just like a stock portfolio.  The higher the return, the higher the risk.  Clients are willing to pay a premium for less risk as well.

Law firms want to retain clients, so they need to offer alternative billing, as clients are looking for it now.  And you want to offer alternative billing before your competitors offer it and steal your clients away.

Law firms want to satisfy clients, and alternative billing offers ways to satisfy clients even more than you are now!

Value Pricing – Part I

So what’s your unique value proposition?  What do you offer that no one else offers for the same value as you do?  Many firms do not focus on this question, and it’s the most important question you need to answer, because it’s the first question a client will be thinking about.  Why should I use you instead of your competitors?

You will need a unique value proposition in order to succeed with alternative billing.  If you don’t, it’s just about price, and that’s a losing game in the end.  You have to distinguish yourself from your competition in order to price at a premium and achieve profitability with fixed fees.

Ron Baker is a CPA who has been talking about the concept of value pricing for over 30 years.  He is the real guru of alternative billing.

Ron presents the formula: Value = Customer Profit minus Price.  What this means is that Value equals the impact your legal work has on a client’s profit less the price of your legal service.   Everything you do for a client will have a positive or negative impact on a client’s bottom line.

Some of the value you provide will be in the form of a tangible benefit, eg. hard dollars recovered or saved, and some will be intangible benefits such as enhanced reputation eg. client gets public financing with the help of your law firm’s blue-chip reputation.

The document “51 Practical Ways To Add Value” on the ACC website is an excellent overview of how you can add value for clients.  It is from a large firm’s point of view, but many of the points are relevant for small firms as well.

For example, ask the client what their strategic plan is. Many clients are very impressed by firms that actually talk to them to find out what their company goals are.  From there you can find out what the client values, and organize your legal services and resources in a way that can truly benefit the client.  And when you start thinking about the client’s profits before your own profits, then you really add value.  If you can help the client become more profitable, your profits will flow naturally as a result.