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March 14, 2012

Legal pricing (Part 5 of 8): Ron Baker’s eight steps of value pricing

In Part 4 of this series, we reviewed basic concepts of value pricing from Ron Baker’s influential book Implementing Value Pricing: A Radical Business Model for Professional Firms.

The first four sections of that book review a great deal of interesting theory and a number of arguments against hourly billing.  If you want to focus on the “how to,” you can jump directly to Part V, which describes Baker’s “Eight steps to implementing value pricing”: 

1)      Conversation. Talk to the client to determine her wants and needs. This requires genuine communication, so you must listen actively and comprehend what is on the client’s mind.

2)      Pricing the customer: Questions for the value council. Pricing is of such importance that Baker says each firm should have a value council which studies the results of the value conversation, and considers the best strategy for pricing each matter.

3)      Developing and pricing options. The analysis in steps 1 and 2 can lead to an internal discussion of several different options to offer a client, at different price levels.  According to Baker, this can help the client to think about what is really of value for him and help the firm close a deal.

4)      Presenting options to the customer. Then it is time to effectively present the options to the client, and address any objections.

5)      Customer selection codified into the fixed price agreement. Baker assumes this conversation will lead to a fixed price agreement, which must be written carefully to “memorialize the meeting of the minds between the firm and the customer.”  (p. 289) Chapter 32 includes a sample fixed price agreement.

6)      Proper project management. Once the agreement is signed, the firm must manage the matter to live within the agreed upon price. (If you are familiar with our Legal Project Management Quick Reference Guide and our nine project management training options, you may not be surprised to learn that we stress the importance of this step.)

7)      Scope creep and change orders. In today’s dynamic business environment, changes in requirements are almost inevitable.  The firm and the client must have plans in place to decide when changes in scope lead to a change in price, and to resolve any problems or disagreements.

8)      Pricing after action reviews. The US Army has a policy of after action reviews to evaluate missions after the fact and learn from what happened. This same type of retrospective review is helpful for setting future prices.

Each of these eight steps is described in depth in its own chapter.  For example, in the chapter on Step 1’s conversation, Baker talks about:

  • Twenty-seven questions you could ask the client (page 241).
  • How to start the conversation and effectively point it in the right direction.
  • How to listen carefully and hear what the client wants without dominating the conversation.
  • How the firm should deal with clients who try to conceal information about how much your services are valued or what other firms may charge.
  • How should you discuss risk with the clients?

Whether you agree with Baker’s rejection of hourly billing or not, the information in this chapter can be very useful in finding the best price.  Similarly, Chapter 29 goes over the key elements of Step 2 –what to do when you get back to the office and work on your pricing strategy based on that conversation. Again there are long lists of useful tips:

  • What constitutes a good price? On page 245 there is a list of sixteen items to consider –including “Not allowing your dumbest competitors to set your price” which is related to the issue of avoiding price wars, as discussed in Part 3 of this series.
  • What questions should you ask yourself before setting the price? There is a list of thirty-five questions on page 247.
  • Four types of buyers – price buyers, value buyers, convenience buyers and relationship buyers – and how to deal with each.
  • What are the psychological factors that affect the price sensitivity of the client?

Every lawyer can find valuable ideas and tools in this book, whether you agree with Baker’s rejection of hourly billing or not.  However, you may question his optimism about what the market will bear for value pricing.  On p. 275 in the section on “Dipping your toe into the water” for fixed pricing, Baker suggests calculating your initial fixed price estimate with a budget based on what you think your normal billable hours would be and then adding a premium of 50% to 90%.  That would be great way for law firms to do it, if they could find clients who were willing to pay 50% to 90% premiums in the current marketplace.  A few firms may.  But from what we’ve seen, most clients are looking to cut costs, and the firms that win fixed price deals these days often get no premium at all.

While we are not aware of any AmLaw 100 firms that have gone so far as to appoint the Value Council mentioned in Step 2, we did write an article for Bloomberg Law Reports recently entitled “The Rise of the Pricing Director,” including interviews with senior lawyers and staff at Baker & McKenzie, Fish & Richardson, Mayer Brown, Vinson & Elkins, Reed Smith and Winston & Strawn which described what law firms are doing to address a number of the issues described in Baker’s book.  Our next two posts will reproduce that article, and then a few weeks later we will return to this series and a description of other approaches firms are taking to pricing. 

 

This post was written by Matt Hassett and Jim Hassett.

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Comments

Matt and Jim,

I really appreciate you summarizing my book, but I must object strongly to your assertion that I'm merely suggesting a firm tack on 50-90% to hourly rates.

You don't explain any of the value strategies I detail extensively in the book for how firms can achieve price premiums--service guarantee, unlimited access, payment terms, customer service, etc.

Value drives price, and my work focuses on maximizing value. You are only reporting what I say about pricing and not what I say regarding creating more value. Hence, my work is being misrepresented here.

Professionals need to understand the "why to," not just the "how to." The subjective theory of value dominates value and pricing. There is no formula, which is why we want people pricing who understand human behavior, not mathematical models and inward looking project management.

There's obviously more to say, but I'm willing to let folks read my entire book, in context, and draw their own conclusions.

Lastly, for the record, the reason I'm optimistic is because there are thousands of firms operating under my model. The fact that there's no AmLaw 100 firms doing it proves nothing. Revolutions always happen from the bottom up, never top down. The large firms are dinosaurs that eat their young, and they will be amongst the last to change the business model of "we sell time." It's hard to get millionaires to change their business model, as Richard Susskind points out.

Cordially,
Ron Baker, Founder
VeraSage Institute

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