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5 posts from February 2013

February 27, 2013

Five ways to improve pricing

There is so much talk these days about value pricing and alternative fees that many people think of pricing simply as setting a fixed or alternative fee. However, you are pricing whenever you decide what to ask someone to pay for your services. When you set an hourly billing rate you are pricing, and when you discount that hourly rate, you are making a pricing decision.

Proven techniques from other businesses can help any law firm to improve the way it sets prices.  Here are five basic ideas that may be particularly helpful, based on Nagle Hogan & Zale’s classic text The Strategy and Tactics of Pricing, now in its fifth edition:

  1. Differentiate. You may have heard legal marketers use this word quite a bit, and it is just as important to pricing experts. According to The Strategy and Tactics of Pricing, “A product’s total economic value is calculated as the price of the customer’s best alternative (the reference value) plus the worth of whatever differentiates the offering from the alternative” (p. 19).  This differentiation value can be either monetary or psychological. Whatever features of a law firm add differentiating value, it is crucial that these features be communicated to the client. Are you different because your legal project management expertise makes you more efficient than others, or because you communicate progress better? Let the client know.
  2. Communicate value. Value is perceived differently in different businesses. Legal services are difficult for clients to evaluate when compared to products like light bulbs or computers for which buyers can more easily get price and performance information. “In our research, we have found that business managers rated ‘communicating value and price’ as the most important capability necessary to enable their pricing strategies” (p. 72).  They make special note of the value of an endorsement from a client known to be especially discriminating. For example, Kaiser Permanente has an excellent reputation for being an informed buyer in the health field. Thus “when other hospitals and health maintenance organizations (HMOs) learn that Kaiser Permanente has adopted a more expensive product or service, they assume that its price premium is cost-justified” (p. 75).
  3. Have a clear and consistent pricing policy. It is important to have a clear and consistent pricing policy and to avoid commonly granting price exceptions. In Chapter 6 of my new book, I advised being cautious about discounting to win business because that creates client expectations of future discounts. The Strategy and Tactics of Pricing says that “Good policies lead customers to think about the purchase of your product as a price-value trade-off rather than as a game to win at your expense” (p. 117).  In setting up your policies it is important to keep in mind that people are more affected by perceived losses than perceived gains and you should frame your pricing with this in mind. If the client is offered a service package, it is better to have a policy that allows a reduction in cost if a service is dropped (a perceived gain) than a policy that requires an extra fee to get that service (a perceived loss).
  4. Know your market segments. Clients are not all the same; they fall into different market segments. The Strategy and Tactics of Pricing gives an example of a company selling a scientific device to be used in DNA analysis. The device is a great improvement over existing competitor products, and the company estimated the differentiation value in order to set a price. However the company sold to two different market segments—the industrial market and the academic/government market. The differentiation value was not the same in industry and universities, so the ultimate pricing strategy involved different pricing policies in the two segments. As long as this policy is clearly stated it does not violate consistency requirements. Airlines do this all the time when they distinguish between business travelers and nonrefundable touring seniors. What are your market segments?
  5. Know your client types. Within a given market segment there may be different classes of clients, and knowing their classification may help you to deal more intelligently with each group. The Strategy and Tactics of Pricing divides clients into four categories:
    1. Value-driven clients have sophisticated analysis strategies for studying value added, and you will need to work to establish your value added for them.
    2. Brand buyers are also known as relationship buyers. For them, the cost of analyzing value added is perceived as too high. This “buyer will buy a brand that is well-known for delivering a good product with good service without considering cheaper but riskier alternatives” (p. 105).  This is an easier client so long as you do not disappoint her.
    3. Price buyers are looking for a specified service at the lowest possible price. Here you will need to “strip out any and every cost that is not required to meet the minimum specification” (p. 107).  It is also important to fence off this job, so that more lucrative clients who receive a higher level of service understand that this lower priced work is at a different level.
    4. Convenience buyers “don’t compare prices; they just buy from the easiest source of supply”(p. 108).  They know that they are paying a premium for immediate convenience and will not complain. 

Whether your pricing is based on value or cost-plus, and whether your typical agreements are hourly or AFAs, these general principles can help you set prices

 

This post was adapted from my new book Legal project management, pricing and alternative fee arrangements.

February 20, 2013

How profitable are alternative fee arrangements? (Part 2 of 2)

One of the biggest pressures on AFA profitability is the fact that in many firms, lawyers are paid more if they bill more hours. Several participants in the LegalBizDev Survey of Alternative Fees noted that without proper management, AFAs can be seen as a giant loophole, a place where lawyers who have too little to do can bill as many hours as they like, without risking client complaints:

It takes a lot of discipline to manage a contingent matter. When lawyers track hours on a traditional hourly project, they know that clients will review the results, and that creates a certain discipline. On contingent matters, lawyers may think no one will look at the hourly record for years.

One of the lessons [we’ve] learned is that somebody has to be the point for cost control. It often happens that alternative fee matters, particularly large ones, [end up being] a dumping ground for individuals who may not be fully employed because you are reportable to the client for the result, not the cost. [When lawyers work unnecessarily on a project] your profitability looks bad, so in order to really determine the profitability, we need to deal with that issue.

Some relationship partners we’ve worked with encourage associates to put in extra hours on AFA matters. Associate salaries are a sunk cost, the partners reason, so they might as well put in extra time to assure quality and client satisfaction on fixed fee matters. It’s more productive than googling or staring out the window.

In the short term, they have a point. But in the long term, this type of thinking is highly counter-productive. It reinforces the bad habits created by decades of hourly billing, and substantially increases the chances that AFAs will be unprofitable.

It is not surprising that systematic data on AFA profitability is hard to come by. Law firms are notoriously secretive about their finances, sometimes even with their own partners. And nobody likes to publicize their losses.

The best data currently available comes from the 2012 Law Firms in Transition Survey, in which Altman Weil asked managing partners and chairs, “Compared to projects billed at an hourly rate, are your firm’s non-hourly projects more profitable or less profitable?”  Twenty-nine percent said non-hourly matters were less profitable.

Of these 29%, there is no data on how many turned out “really ugly.” But based on many stories I have heard off the record, I would guess quite a few. I also suspect that the true number of less profitable deals is much higher than 29%.

In college, I had a friend who spent a lot of time at the racetrack. He seemed to remember the times he won much better than the times he lost. I suspect many lawyers have a similar talent for forgetting deals that turned out badly. Especially when they answer questions in a survey.

Of the other respondents in the Altman Weil survey, 14% said non-hourly arrangements were more profitable, and 40% said they were about the same as hourly. The remaining 17% were “not sure.”

Even more interesting were Altman Weil’s findings about which firms profited.

Some law firms have for years proactively used AFAs as a way to increase new business, and invested in training and systems to make them more profitable. For example, at Morgan Lewis, says Richard Rosenblatt, the operations partner for the Labor and Employment Practice, “AFAs invite the client to engage with us and increase the ties that bind. We’re now on the same team, and more likely to get the next engagement. This is an opportunity to get a bigger share of a shrinking pie.”

When Altman Weil asked, “Is your firm’s use of alternative fee arrangements primarily reactive (in response to client requests) or primarily proactive (arising from your belief in the competitive advantage of alternative fees)?” about one-third said they were proactive (33.2%) and two-thirds classified themselves as reactive.

When Altman Weil compared AFA profitability for the two groups, they found that it pays to be proactive: “Firms that are proactive rather than reactive in their use of AFAs are more than three times as likely to enjoy higher profitability on their non-hourly work.”  For more about this proactive approach, see Chapter 11 in my new book.

 

This post was adapted from Legal project management, pricing and alternative fee arrangements.

February 14, 2013

Announcing the publication of my new book

Press release

Boston, February 14, 2013: Today, LegalBizDev published the new book, Legal Project Management, Pricing, and Alternative Fee Arrangements: What Firms Are Doing, by Jim Hassett, Ph.D., the founder of LegalBizDev. 

Unlike any other book about legal project management (LPM), this 258-page volume relies heavily on interviews with partners at several dozen law firms across North America who have recently adopted LPM techniques. Much more than an introduction to the subject, this book contains reports from lawyers in the trenches who have used these techniques to plan their projects efficiently, develop budgets, price their legal work appropriately, and gain advantages over their competitors.

“This new book will help lawyers understand the theory and the practice of legal project management,” says Hassett. “Law firm partners will see how LPM can assist them on a day-to-day basis by building on the lessons that have been learned at large firms and at small ones.”

As Hassett points out early in the book, “The reason LPM is growing so rapidly is that it helps law firms meet client needs and their own needs.”

The key portions of the book are Chapters 3, 4, and 5. Chapter 3, “Eight key issues in LPM,” describes the fundamental concepts that lawyers must learn if they are to adapt successfully to the “new normal” relationship between large-firm lawyers and their corporate clients.

Chapter 4, “A variety of approaches to LPM,” gives brief accounts of the different ways nine law firms have begun to adopt the principles of legal project management. Chapter 5, “Case studies in behavior change,” describes how four additional firms have offered targeted training in LPM and changed their approaches to planning, budgeting, and managing their matters.

“I appreciated the casual conversational nature of the writing, along with the formality and detail of the citations to other sources. It is a nice mix that makes the text a quick read, but also a resource guide for more detailed research and study of the topics,” says Paul A. Williams, a partner at Shook Hardy & Bacon.

Says Kim Craig, director of the legal project management office at Seyfarth Shaw LLP, “Jim’s book is a true testament to the changing legal landscape supported by numerous case studies and facts representative of firms in various states of their LPM maturity. For an industry historically known for asking, ‘What is everyone else doing?’ this book answers that question and ignites a sense of urgency for lawyers and law firms to pay attention to the drum beat of the cultural transformation taking place within the legal industry.”

What is unique about this book, in addition to the case studies, is the way that Hassett integrates the latest thinking and research on the relationships between project management, pricing, and alternative fees.

Several hundred copies have already been pre-ordered by dozens of law firms before today’s publication date. 

The book is available now from LegalBizDev (info@legalbizdev.com, 800-49-TRAIN). An excerpt and an order form can be downloaded from: www.legalbizdev.com/projectmanagement/lpm-pricing-afas.html

A Kindle edition is available now on Amazon, and the printed book will also be available soon through Amazon and Barnes & Noble.

February 13, 2013

How profitable are alternative fee arrangements? (Part 1 of 2)

The ABA Commission on Billable Hours Report predicted that the non-hourly approach would be a financial boon to law firms: “Alternatives that encourage efficiency and improve processes… increase profits” (p. ix).

Some consultants love to spread this good news message, and when law firms and law departments talk publicly about the topic, they too often focus on the upbeat side. For example, in an article entitled “Alternative Fees for Litigation: Improved Control and Higher Value,” James D. Shomper and Gardner G. Courson argue that “if properly structured, an alternative fee arrangement should result in a win-win scenario for client and law firm.”

To cite just one more example, a New York Times article about alternative fees quoted Carl A. Leonard, a former chairman of Morrison & Foerster, about AFA profit potential:

In one case... Morrison & Foerster negotiated a fixed fee for defending a company in court, covering work up to the point of a motion for summary judgment.

On top of the fee, if the case settled for less than what the company feared having to pay if it lost in court, the law firm got a percentage of the amount saved. The arrangement made sense when the goal was to resolve the dispute quickly....

Lawyers on the case negotiated a settlement for much less than the client’s worst-case number, Mr. Leonard said. “The effective hourly rate was something like 150 percent of our hourly rates,” he added. “We made money, the client was happy."

I think such examples are the exception to the rule and believe it can be very hard to turn fixed prices into win-wins, especially in a highly competitive market. My view has been shaped by my personal experience running fixed price and hourly projects in my own business. For more than 25 years, I have found that consistently profiting from fixed fee work is an enormous challenge, and a struggle that never ends.

In the hundreds of fixed fee projects we’ve performed, the vast majority were a zero-sum game. In the short run, when the project was over, one party did better than they would have on an hourly basis, and the other party did worse. Usually the client had power over the deal terms, and we were the one that did worse.

Fixed price projects begin with planning a budget upfront and then managing the work to keep within that budget as the project proceeds. When my company was billing by the hour, I found it relatively easy to maximize billing and profitability. If an employee had nothing to do on one project, I could usually find something for them to do on another, and keep them billing.

But during periods with a significant amount of fixed price work, it became extremely difficult to juggle dozens of projects with ever-changing deadlines in such a way that everyone remained billable and projects stayed within budget. And during mixed periods, when some of our projects were fixed price and some were billed hourly, it was an absolute nightmare. Employees quickly understood the never-spoken message that while they needed to be efficient on fixed price projects, inefficiency was winked at or even encouraged in hourly projects. For some employees, this inconsistent message created a conflict that threatened to make their heads explode.

Lawyers have been rewarded for their entire careers for putting in extra hours to analyze every risk from every possible angle. Many will have a hard time learning to deliver the quality they are comfortable with when they must work within strict funding limits. And law firm managers will have an even greater challenge when they try to juggle staff on dozens or hundreds of projects with constantly shifting deadlines. Traditionally, most firms expect lawyers to bill 1,800 hours per year or more. If firms shift a significant portion of their work to a fixed price basis, many will find that goal unreachable.

When both inside and outside counsel talk about alternative fee arrangements, I predict they will continue to accentuate the positive, and focus on win-wins. People will speak most freely about the matters that make them feel good and look good. But in my experience as a business owner, in fixed price deals one side usually wins a revenue concession and the other side does less well.

When I wrote about this a few years ago in my blog, Jordan Furlong, now a consultant at Edge International, made this incisive comment:

It may come down to how we define “winning.” I think a win-win alternative-billing scenario right now might look like this: the client wins because it reduces its outside legal spend, or at least improves its legal cost certainty, and the law firm wins because it gets to keep the client for one more day. That’s not the kind of victory lawyers are accustomed to settling for, but I think they ought to get used to it.

Next week, in Part 2, we will review the data on who is making more with AFAs, and who is making less.

This post was adapted from my new book Legal project management, pricing and alternative fee arrangements.

February 06, 2013

Business development tip of the month: Prioritize relentlessly

When lawyers ask us for the single most important piece of advice in legal business development, the answer is simple: Ignore good ideas. Lawyers are much too busy to spend time on ideas that are only good. To maximize the chances of success, each individual must focus on the very best ideas for their practice, their personality, and their schedule. This requires relentless prioritization, and constantly returning to the question, “What should I do today to increase new business?” 

 

The first Wednesday of every month is devoted to a very short and simple tip like this to help lawyers increase efficiency, provide greater value to their clients and/or develop new business. This month’s tip was adapted from my book the Legal Business Development Quick Reference Guide.