Pricing Psychology Part 1: Why Many Attorneys Lose Money with Fixed Pricing

I am surprised at how many attorneys think it is difficult to be profitable on a fixed price model. There are several misconceptions that many of them have that I would like to address in this blog. Here are some of them and why they are incorrect:

1) Our pricing is menu prcing.
Response: No. It is certainly not. You cannot be a premium player in the market with menu-based pricing. If you are pricing on a menu basis, then you are engaging in a form of cost-plus pricing, which is no different than the billable hour model (only worse because you shifted the risk to the firm without the corresponding reward.) Menu priced players are almost certain to be working on the lower end of the value curve.

2) Our pricing is an estimate of hours times our billing rate.
Response: Certainly not! Why would we do such a thing? Again, that is yet another form of cost-plus pricing like billing by the hour. These pricing models are based on Karl Marx's long-refuted labor theory of value, which supposes that a good or services derives its value based on the labor (or time) input. I don't know about you, but I certainly don't tip the stewardess or captain $50 for every 1/2hr longer that it takes my flight to reach the destination. . . . . . yes, it certainly costs them a hell of a lot more money in gas, lost connections, unhappy customers, etc, but if anything the value to me goes down over time, but certainly NOT UP! (Yes, yes, people, of course you have to operate a profitable busines, but for God's sake you don't have to be 30% profitable on every 6 minutes. I would rather be 40% profitable as a business than guarantee that I am 30% profitable on every 6-minute increment . . . . . guaranteeing profitability at this resolution has a very high cost and no return to the investors.

3) It is hard to make money Value Pricing
Response: No. If it is hard for you to make money value pricing then it has nothing to do with your pricing model . . . . you just have no concept of your own value. Many professionals actually believe that what they do is provide a commodity service. If you believe this then you will never make money value pricing. This is because you believe that you cannot add more value than anyone else providing a smimilar service. A product only becomes a commodity when you believe it to be a commodity. Think of water, for instance. It is the most abundant resource on this earth . . . . while the rest of you bozos are thinking it is a commodity some genius was out there putting it in little bottles with a pretty label and making millions of dollars selling it for $1.50/bottle. Where are you now? Well, he's rich and you are now sitting at your desk drinking bottled water that costs you more per barrell than oil and still thinking that you are providing a commodity service. The problem is not your pricing model, it's YOUR HEAD!

Furthermore, even if you believe you can add value, most attorneys are TERRIBLE pricers. First of all, I have sat in a room with hundreds of attorneys in the past 2 years and watched them try to price a hypothetical case. They always go back to time and effort, or they discount their own value and try to argue why the client would never pay more than a certain amount. If that is what you think, you certainly will never command a premium for your services. Again, the profitability problem is not in the model, IT's IN YOUR HEAD! At Exemplar, we get together and talk about how many different ways we can add value to the client and make great things happen that noone else can! After that, we realize just how much better and unique our value added services are compared to everyone else. Then, we think of all of the reasons why the customer would be crazy to chooses anyone but us . . . because we are that confident in the value we deliver. We back it up with a guarantee, and then ask for a tip if we do a great job! (Keep in mind, we select our clients. . .and we are prepared to walk away from clients who are satisfied with "average" legal counsel. We let them know up front that Exemplar is not for clients who want to shop at Wal-Mart for legal counsel. This is the Ritz. It's not cheap, but people love it here!)

The real problem here with attorneys and fixed pricing is that most of them suck at it. You see, inventory in a store does not feel unappreciated if it sits on a shelf for a year. Attorneys, on the other hand, have fragile egos. There is nothing worse for those egos than to be sitting in your office with no clients who want you. The way that most of them deal with this problem is lower the price so that they can feel "wanted." Then, they very carefully raise prices as they get busy, but never very far. Why? Because lawyers hate being rejected. It is much easier to charge a price that noone will argue with than to have to explain yourslef and actually justify the value of their services to a customer. All other businesses have to make this value proposition to clients, but lawyers HATE explaining their value. They think they are too good for that, or that it is somehow beneath them to do so. Consequently, most attorneys who try fixed pricing are more interested in protecting their delicate psychology than actually being profitable. If you cannot GET OVER IT you certainly cannot be profitable on this model. A great family law attorney I know who uses fixed pricing put it right: Be confident and be expensive. The best things in life are expensive. Exemplar wants to be on of the best things in your life. We are not a cheap firm, but we are good, we can provide services that you cannot find anywhere else, and we can each customer attention and a true experience that cannot be acquired at any price at an "average" firm. Average prices are for average lawyers and average customers. There are plenty of those in this country and we don't need any more. Hopefully, some of my colleagues will find the courage and creativity to add more value, be different and better, and charge what they are worth. Then, you will unlock the secret to profitability in a fixed-price model. When you really want to try, send me an email and we'll talk.

Letting Down The Next Generation: Why Today's New Attorneys Don't Know How To Draft A Contract

Are today's firms letting down the next generation of attorneys? After all, lawyers are amongst the most highly educated professionals in the country, and thousands of the very best of them are hand selected by big firms to endure years of document review and thousands of billable hours mired in discovery hell. More interesting to me than the pure lack of intellectual challenge provided to these attorneys is the fact that mentoring is at all time lows. At the very same time firms are spending millions of dollars on knowledge management systems that allow the young attorneys to get contract templates of every variety from their databases believing they really are getting "smarter". So, with practically no mentoring and access only to templates, we are faced with a generation of attorneys who lack the skills to draft an agreement! Why? Have you ever heard the saying "give a man a fish and you feed him for a day, teach a man to fish and you feed him for the rest of his life?" Of course you have. Here, have another fish. . . and enjoy your last few bites because the senior attorneys today are more likely to die before they teach how to feed yourself. They are too busy filling their own buckets!

The senior attorneys attorneys at big firms today are NOT passing their knowledge down to the young attorneys. You see, contracts that were written by other attorneys do not constitute knowledge transfer just because they are in a database that is accessible to them. Contracts do not contain knowledge itself, they contain the product of one's knowledge. A young attorney does not simply look at a contract and innately understand why a clause is phrased a particular way and how case law has shaped the language over the years. The key to being a successful practitioner is having the knowledge itself, not simply the product of knowledge, to produce good legal work product. How can they fix the problem? Well if they cared enough they would get their senior attorneys to turn their tacit knowledge into explicit knowledge by documenting and communicating WHY they do what they do (in addition to doing it) or they would train and mentor like they did in the "olden" days. Of course, this would take significant time away from their billable hours and thus their profitability. If you are a young attorney at a big firm, do you really think that the partners are going to do that for you? (or are you just tired of eating fish?) I believe that the younger generation needs to knock on the partnership door and demand a fishing rod . . . . because you know they are not going to teach you to feed yourself unless you insist, and if you don't . . . you will soon realize that our generation got ripped off by the greedy partnerships that send "fish dinners" to your office every night while you bill your 15th hour of work . . . . . for the 6th day in a row. Don't wait until you have a free "billlable hour" to think about it . . . they will surely make sure you have none to waste.

Get Your Calculators and Spreadsheets Out. Ready . . . Set . . . Hurry Up and STOP!!!!

I was speaking with a journalist today about our partner compensation system and how it differs from a traditional system. During our conversation we were discussing how some of the most important things in an organization cannot be captured and analyzed in a spreadsheet by a compensation committe. Forget for a moment that spreadsheets exist. Better yet, forget that such a thing as math exists in the world. With those limitations, I want you to make a list of behaviors that you think are valuable to the organization and that ought to be rewarded. Here are just some of the items on my list and why:

Mentoring --> Better knowledge transfer = more challenged workforce = happier people = higher intellectual capital in the firm = lower attrition rates = savings

Internal Referrrals --> More service to clients = firm is more valuable to them = higher loyalty rates = lower "cost of sales" = savings

Leadership --> Good role models = positive influence of people = more productive workforce = profitability

"Good" Business Origination --> Acquiring high-quality clients = challenging work that attorneys enjoy working for = higher productivity = happier clients = higher loyalty = profitability

Service-Orientation --> Better service = happier clients = lower uncollectables and higher loyalty = profitability

Effectiveness --> Better ideas/solutions = better return on invested time = profitability

Trust --> Higher trust levels = higher internal referrals = more services per customer = profotability

Respect and Collegiality --> Mutual respect = better working environment = happier people = lower attrition and higher productivity = profitability.

I could literally go on an on. Do you disagree with any of these? Do you see the link between many of these behaviors and profitability? (If you don't, see an eye doctor immediately, you are likely blind or dangerously close). Take, for example, respect. You all know that it only takes one Grinch to ruin Christmas for a lot of people. . . one partner who is a jerk to make your life miserable. The biggest Gallup study of profit centers ever done shows that people do not leave companies, they leave managers. If your manager is a jerk, you are likely to leave. So, think of an org chart -- If you get one Grinch higher up you are LIKELY to lose top talent in the entire space below them on the org chart costing your firms millions of dollars per year.

Now, if you agree with some of the factors I listed above and you were creating a comp system, you would include them. That is just common sense. So, why is there such a divergence between what we all agree is so important to profitability and what is actually measured and counted in firms? OK -- so you cannot put it in a spreadsheet, so suck it up and realize that letters cannot be turned to numbers. Just because you cannot count it does discount it's significance to your bottom line. Yet, almost invariably the factors that are difficult or impossible to quantify (and at least as important) are not taken into account at all in firms or significantly discounted in weight. As a result, you get an industry full of people just chasing numbers like hamsters on a wheel. Hey Fido, Go Fetch! If they came to Exemplar, they might be asking "Who moved my cheese?"

At Exemplar, we believe that as intellectuals we do not need to dumb down reality "into a spreadsheet" in order to understand its significance to our business. We do not accept the assumption that the most significant performance factors in our business cannot be captured and rewarded. By investing the time to understand what truly matters, we are telling our people that we care about them. . . about recognizing everything they do to drive the business forward. Each person on our team brings to bear their owns strengths and talents and they manifest themselves in many different ways. I would much rather have a team of attorneys chasing their own strengths and talents knowing at every step that we understand their value rather than attorneys who are chasing billable hours and originations because their firm made a value statement that those are the only things they care about. If you were an attorney entering this profession, where would you want to work?