Editor’s Note: The author is the former editor in chief of The American Lawyer and a law firm consultant.
In law firm land, value pricing has achieved buzzword status, meaning that everyone uses the phrase with abandon and supreme confidence. (Actual adoption, of course, is another story.) But suspend disbelief for a moment: How might a legal market run on value pricing actually work?
First, it would be based on “outputs” — services rendered or results achieved — rather than “inputs” — time spent on a matter. Clients would pay for what they achieved (or think they achieved), not for the effort that went into completing the job.
Second, there would be more serious talk at the start of engagements. Lawyers and clients would agree on the scope of the work, and develop budgets, goals, and acceptable risks. Also, they would agree on a price.
Third, law firms would offer clients a range of prices, each tied to different levels of service, staffing, and timing. Clients would choose the one that best fits their needs, however they defined them.
Fourth, lawyers and clients would try to minimize surprises. They could alter their requirements or their prices but only after a new discussion. These would become known as change orders.
Fifth, costs would become a secondary issue. Prices would rest on what customers were willing to pay. Firms would manage their costs to achieve their customers’ goals — and maintain their profits.
Or, to put it succinctly, for good or for ill, the legal market would come to resemble the rest of the world.
That was the high level picture that developed out of a day’s discussion at the most recent Somerville Forum session held in early May. Now in its second year, The Somerville Forum is organized by Bernero & Press, the consulting firm where I am a partner, and sponsored by Bloomberg Law and RR Donnelley. The Forum brings together in-house counsel and senior law firm partners and executives to explore the state and future of the legal market.
The May session featured talks by Ron Baker, the founder of the Verasage Institute and the author of “Implementing Value Pricing: A Radical Business Model for Professional Firms,” Steven Harmon, deputy general counsel at Cisco and a founder of CLOC, the Corporate Legal Operations Consortium, David Fries, Orrick’s Senior Advisor for Pricing and Practice Management, and Silvia Hodges, the executive director of the Buying Legal Council.
Harmon, who has helped lead Cisco’s move away from buying legal services on an hourly basis, spoke of the importance of law firms, like other service providers, focusing on what customers want to buy. Almost as important: abandoning Unicorn-like thinking that “bet-the-company” work is what law firms ought to be seeking. At Cisco, at least, he said none was available. Cisco’s cash position is so massive — more than $50 billion — that no single verdict could undermine his company.
Fries, a former Orrick partner and general counsel at an investment house, says he sees the beginning of a “convergence” between Alternative Fee Arrangements and hourly billing, at least in so far as law firms have started doing better jobs of scoping engagements and preparing budgets. But there remains ample room for improvement.
Hodges, a former academic analyst, now runs the Buying Legal Council, which is an international group of procurement officers. In her view, the legal market is following a pattern set by architects and accountants. Companies that use procurement officers when retaining law firms tend to save money, her research indicates. (For a copy of her latest research, click here). But “the ultimate decision makers remain in the legal department,” she said. “Procurement will not change the game in the near future. For now, it’s more important when hiring ancillary legal services (than law firms.”)
The heart of the meeting was a wide-ranging, acute, and funny talk by Ronald Baker. A former accountant turned value-pricing advocate, he led the charge against the current state of affairs. “I am here to bury the billable hour and the time sheet,” he began. “The only place time should count is in prison… Time is a constraint, that’s all it is. You can’t hoard it or buy and sell it. (For knowledge workers) it’s like plunging a ruler into an oven to get the temperature.”
He was only warming up. Like a lawyer’s bill, he said, “we can measure labor pains in six minute intervals. But instead of focusing on the result — here’s the baby! — we bill for the contractions. These measurements obscure reality. A client always buys to satisfy a want. A client buys value.”
For Baker, finding and understanding value is the key piece of the pricing puzzle. Adopting a value-based approach promises, in his view, better alignment with clients and hence a better relationship. Also it will take the discussion from the impoverished arguments over efficiency to one he thinks that lawyers and other professionals should be having: how efficacious is our work? “Are we providing the maximum desired impact? We don’t care if our heart surgeon is efficient. We want him to be efficacious. Same with lawyers.”
In practice, how would this work? Baker sketched out an eight-step model:
- Start with the customers and what they value. Then move to price and finally to managing cost. This means having a robust conversation with clients to understand, among other things, what they are trying to achieve and how much risk they are willing to absorb.
- The next step is internal. Baker recommends that firms establish Value Councils to set pricing and enforce uniformity. For individual matters, the Council, after conferring with the relationship partner, would attempt to “price the customer.” That’s jargon for determining what the customer might be willing to pay. These are subjective decisions but then in Baker’s view, all value is subjective.
- The Council would recommend three options for the client that would offer varying levels of, among other things, service and speed. He says this is akin to American Express offering green, gold, and platinum cards, or airlines offering coach, business, and first class seats.
- Either a Council member or the responsible partner would present the three options to the client.
- The client makes a choice and the deal is “codified into a “Fixed Price Agreement (FPA).” The FPA would typically include information about the scope of the assignment, the staffing, and timelines.
- The law firm would apply state-of-the-art project management. For Baker, that’s a different skill than setting or negotiating a price. The purpose here is to manage the job and stay within budget. “This is important, no matter how you set the price,” he said.
- If the firm encounters extra work beyond what was agreed to — the dreaded “scope creep,” — the firm may ask for more money. Discussions will follow and if the client wants the firm to perform the additional work, a change order will be issued. This is crucial Baker says. Change orders are “communications tools. And they’re a reminder that work always must be authorized in advance.”
- After the work is completed, the firm performs an After Action Review. This helps the firm gauge its performance, learn more about its pricing, and build ties with its clients. This is standard operating procedure for the U.S. Army, Baker says. “If (AARs) can transform the military, they can transform a law firm.”
Baker also discussed the challenges of pricing risk (manageable), the advantages of taking a broad approach (look at pricing as a portfolio, not a series of one-offs), and the question of whether to start with new clients or existing ones (either). He was confident that law firms and other professional services organizations could perform better and was unrelenting in his critique. “At the car wash, I always get three options. Why,” he asked, “are car washes more sophisticated in their pricing than law firms?”
No agreement was reached on who would lead a move toward value pricing in the legal market. Fries suggested that as a practical matter, clients would have to insist on a move away from billing by time. Baker argued instead that pricing belonged to the provider. “Pricing comes from the supply side,” he insisted. Depending on the circumstance, it may come from either party, a step forward from our current experiment in paying the price of inaction.