Money Falls From the Sky, Right? At Least That is What Associates Think!

This may be the first time in the history of this blog that I am preaching to the big-firm choir! Why would I do such a thing? While I am sure that the partners at BigLaw agree with the problem, I believe that the solution (communication and education) will actually work in our favor, of course. No pressure there!

Problem: Young attorneys entering the Corporate Law profession actually seem to think that money falls from the sky! They have no idea about the economics of law firms, how profitability is achieved, etc. Law firms are doing a horrible job explaining the economics to their young. What is the consequence of this behavior? Explore below:

Big Law firms are facing significant problems providing a lifestyle to their Associate attorneys. To the Partners, they find it distasteful that they are competing on price for the top associates from top law schools only to have them complain that they want a better "lifestyle." Apparently, they never heard the saying that price competition is a "fools game" so they continue to engage in the bidding war ever believing that the highest salaries are what their associates are really looking for, even when they have been screaming loudly for years that what they really want is to enjoy their work and see their children and loved ones every once in awhile. Are they mutually exclusive? YES!! The winning bidder in this auction is definitely the lifestyle LOSER because it is pure economics.

Partners need to wake up!!! They really should know better than to think that new lawyers are trained or even remotely aware of law firm economics. When I started Exemplar I recall the front page article in Lawyers Weekly, "6 years after big firm Partners promise better work-life sensitivity, it seems nothing has changed!" Why? What they are really missing is that they are engaging in a pricing practice (bidding war) that prevents them from being responsive to their people later on. Once Associates have been hired, it is far too late! Work-life balance is a problem of firm economics first and foremost. Partners know that an Associate must work 2-years before they are profitable to the firm. At the same time, firms have known for over a decade (see the ABA's Commission on the Billable Hour Report) that Associates would take a "large" pay reduction in exchange for a better work-life sensitivity. In order to retain their best talent firms will actually need to PAY LESS for them!!! Why? Money does no fall from the sky. . . it is one thing if Associates don't get it, but for Partners there is NO EXCUSE. Work-life balance means leverage/retention balance for Partners and they will need to first take a stand to adjust starting salaries to account for the needs of today's work­-force. Today's Associates are not law firm economic experts and having interviewed over 350 young attorneys I can tell you that they are counting on you to know (and act on) what is good for THEM (NOT JUST YOU)! They think money falls from the sky and have little appreciation for how law firms as a "business" are run. To be a Partner means, to me, that you owe a duty of care to Associates, like a parent, to look out for their well-being and professional development. New attorneys enter this profession and are counting on having training and guidance that can sustain them and the firm in the future. Partners at BigLaw need to STEP-UP or STEP-DOWN! It is time to act on your DUTY to CARE for the Associates will act on their right to vote with their feet.

Associates need to understand that money does not fall from the sky. . . that higher salaries in a billable hour firm will mean longer hours. It is simple economics when you operate on a cost-plus model like the billable hour. Don't be afraid to ask questions, demand answers, and don't count on Partners to look out for you or your careers. They have yet to do so in our profession and show little signs of changing. By the looks of it, they will die with their books of business before leaving them to you. We are the future and have the power to change it. Exemplar has taken a stand for positive change in the industry and I am right here behind each and every one of you who want to make it better. It all starts with believing that the power to change is within you and nobody else. . . You've got to stand for something or you'll fall for anything. Stand with me and let's create a better vision for the future of the professions!!

How Much "Time" Does It Take To Set A Price? Who the Heck Cares!!

I apologize for the dealy in writing as there has been a family emergency that required my attention.

Heather, who commented on my last post, wanted some ideas to bring back to a disgruntled lawyer who read my blog. The lawyer rationalized his dismissal of the value pricing approach by complaining that it fails to consider how much "time" it takes to arrive at a price. Silly man. I shall explain why in a moment. Here is part of her comment and my response will follow:

"One lawyer came back to me angered about your post. The example, he said, didn't take into any consideration the amount of time it would take to figure out a flat fee for the various and varied work our corporate lawyers do. With that in mind, he was very dismissive of the value-billing approach. How would you suggest I respond to this lawyer in furthering the argument for value-billing?"

Tell him to do his homework on value pricing theory. Clearly, time rules his world and that is all he can think about. You know. . . it actually reminds me of myself in a very limited circumstance. Every once in awhile I go to bed so late that I would only have 5 1/2hrs of sleep . . . Then, I would stay up all night worrying about how little "time" I have to sleep. What a waste of time, right? Clearly, the dog is chasing his tail in this instance. OK -- I have heckled the poor guy enough, now I will expose the point here:

He is clearly making the mistake of confusing Cost-Based Pricing from Value Pricing, which is Price-Lead Costing. Let me explain the difference and how it has shaped his perceptions.

Cost-Based Pricing models are models where there is a fixed margin from the start and the price depends on the cost. The LEAST Profitable companies in the world use this model for their pricing. The billable hour is a form of cost-based pricing. Clearly, they know how much each hour of time costs and they add the desired margin on top and "viola!" you have a price per hour. It is possible, albeit a deadly error, to attempt to execute on a fixed price model with this theory. . . . . which must be what the attorney in your office is thinking. . . . clearly, he thinks we are sitting around "guessing" how much "Time" it will take to do a job when we price. In fact we do not. It is not relevant to value. We value price, and such a model is based on price-lead costing as I will explain below. Your attorney is correct that if a fixed-price model were a cost-based pricing model then it would take a hell of a lot of time to price a job.

Price-Lead Costing is when you let the price determine the cost. This model is used by the MOST Profitable companies in the world. Value Pricing operates on this model. Any lawyer needs to do an intake, so you are inevitably going to have to spend a certain amount of time developing the relationship and understanding the need. Since we price legal work based on the perceived value of the work to the client, we know how to ask the right questions that get to the value proposition during the intake so that we do no spend any more "Time" arriving at a price at all. Once we discuss the pricing internally we determine together, knowing our efficiency and using our creativity, whether we can achieve the desired "outcome" for the client profitably. The margin need not be the same on every project, and we often discover ways to get the desired outcome in less "time" in the middle of the job. If the price is such that we will be able to achieve a "win" for the client at the same time as meeting a desired profit for the firm, then Houston . . . We Have A Winner! :-) We go back to the client and present a proposal (often giving options of many different ways to achieve the outcome and we are off to the races!

So, it does not take us any more time to arrive at a price. That being said, imagine this for a moment. Since we don't use time-based billing, we do not waste our "time" calculating every 6-minute increment of our life. (Imagine the value of all of that productive time that we have and you don't! Even better, print my picture from our website, tape it to your computer, and think of me every time you are marking up your time-sheet. I am smirking at you like Mona Lisa. Yes, that is me thinking you are silly for wasting all that time. NOW, Imagine how much money it costs you and your firm in uncollectables, accounts receivable, administrative staff who collect, account for your time, and send the bills out.. . . . not to mention their benefits and that they take up a lot of expensive space in your fancy office. Are you getting my drift? (Stinks, doesn't it?) We don't have those costs. NOW: Print my picture again and stick it to THEIR computer too. Prozac sales will double almost immediately (I just bought options on the stock!. . Yahoo).

You see, we can actually be less expensive than our billable hour counterparts AND more profitable all at once!!!! We actually have a life too. Who knew! :-) So, please tell him to stop counting in 6-minute increments. Increments are excrement! Cut the crap and start using a model that makes economic sense!

Sticker Shock: Dealing with YOUR Psychological Barriers and The Clients'

This blog continues a great discussion with an anonymous commentator regarding Sticker Shock and fixed pricing. (See comment to previous blog). In this post, I will explian some of the psychology behind "Sticker Shock" and the psychological barriers that you will have to overcome as a professional in order to deal with it.

I first want to address "anonymous" who asked about how to deal with the fact that competitors who bill by the hour will quote "lowball" prices to get the business (and then screw people later). The answer here is clear.

(1) General counsel and experienced consumers of legal services know that lawyers who bill by the hour and try to "quote" prices have lost their "estimating" credibility, because experienced consumers know that the project goes overbudget 80 percent of the time (unless they spend 20hrs a week managing outside counsel, and most people have better things to do with their time.

(2) Newer, less experienced consumers of legal services are the best, because they will either hire you right away because they recognize the "added" value you deliver and understand and value that higher than your competitor, OR they will hire you right after they went price shopping for their brain surgeon and realized that they got screwed. I love our customers who never had a lawyer before because they find what we do so intuitive. . . and after experiencing us they would never go to a firm that billed by the hour, but I also LOVE the customers who went to another lawyer who "estimated" some cheap price and then screwed them with all kinds of extra fees. . . because they will never trust a law firm that bills by the hour again. . . and I don't blame them. That business model is screwing clients by the thousands every single day.

Here, I want to draw a distinction between competing against a fixed price quote from a competitor and a fixed price estimate from a firm that bills by the hour. The result is both different and important from the viewpoint and psychology of the client. Assume the client chooses the lowest-cost provider in the market here:

1) Lowest Price (fixed price quote): Client who chooses this will do so because they are Wal-Mart shoppers. They know you get what you pay for and simply don't value or comprehend difference in the value of services between firms. So, if you lose this client it is either because you did a crappy job communicating the value you offer, you missed the value proposition, or because they simply want to go to Wal-Mart for their services. Exemplar NEVER competes on price. Price competition is a fools game. Our clients know they get what they pay for. Lowest-cost providers in a fixed-price model suffer from a problem called "Winners Curse." The bidding way drives prices farther and farther down. . . all the while making it impossible for the "winning bidder" to do the work profitably. Put differently, what did the winner really win? Higher Gross Revenue and LOWER Net Profits? Who the hell wants that? They can have it! :-) Ron Baker put it well in his book when he wrote: "It is possible to make pizza so cheap that noone wants to eat it!" -- AGREED! So, you get what you pay for. Exemplar is a Ritz Carlton. We send the Wal-Mart shoppers to the sweat shops where lawyers do mundane work 90 hrs a week for low profitabiliy!

2) Lowest Price-Estimate from a Billable Hour firm: Clients who choose this firm are NOT doing so on the belief that they are getting a cheaper product. Because the client is not the subject matter expert, the client would tend to think that the lowest bidder has some magical way to be more "efficient" and that is why the estimate is lower. You see, in this case there is an inherent trust in the integrity of the service provider. Once it is broken it can never be recovered. Let me give you an example of "winners curse" in this situation, but let's add this fact: It costs 5 times more to acquire a new client than it does to retain a current client. In light of this fact, which would you rather be?

A) The winner in a bidding war as a fixed-price provider against a billable hour firm that "underestimated" the bill. Result: Low to No Profit, a "cheap" brand perception by your client of your firm causing the client to forever be price sensitive? (It is easy to lower prices later, but very difficult to raise them). Congratulations! You just won a client that cost you plenty to obtain, you chopped your prices to hell to get them, he does not value you highly and will pay you so little for your expertise that you will barely be Profitable.

OR

B) The losing bidder to a billable hour firm that "underestimated". (I tell these clients "I want you to know that I am here for you when things don't work out") Then, they subsequently get screwed by my competition. I promptly write them a "thank you" letter but never send it. The client comes back to Exemplar pissed off about their predecessor counsel (now, I am on the receiving end of every gripe that clients have about their lawyers . . . valuable competitive intelligence for free). They no longer trust the billable hour model. They now value the fixed-price because of the integrity of the model, even if the price is higher, and become loyal clients!!!! Cost of acquisition? Significantly less because we are not dancing around in a bidding war with other firms . . . we are confident in our value proposition. furthermore, we are able to serve them a hell of a lot better because we have not had our margins decimated by a price war. Better service --> Happier Clients --> Happy Attorneys --> Better Outcome for Clients --> Higher Profitability

I don't know about you, but I would take Option B any day!! Price competition is a fools game. Beware of Winner's Curse. Know your value proposition, over-communicate it to clients, and stick to it!! Never conceded without taking value off the table. Sticker Shock is NOT a price objection, it is a value objection. The proper way to deal with Sticker shock is to communicate and build the client's perceived value, NOT to lower your price.

Sticker Shock or By The Clock: Myths About The Model Dispelled

This blog was inspired the a person who commented on my last post. He wrote:

"Making some sense, but still have the issue of client sticker shock. Other attorneys will talk $ per hour and that it ought to take X hours in getting a client, while as an experienced attorney I know it will take 4X hours, and that other attorney will charge 4x eventually. Client still has a hard time seeing the Value coming out of a full exploration of the legal matter."

I find this to be a wonderful and interesting topic. Here is my response:

1) Everyone knows that you get what you pay for. Sticker shock may be natural, but your concern is rooted in the acceptance that what you are selling is a commodity. . . . that your competitor selling X is selling the same product as you. . . who is at 4x. You should know better than that, right? Think about it this way, someone who is looking for a Mercedes Benz does not go to the dealer and get sticker shock! They know what they want, that they want a high-quality car, and they know it is expensive. When WILL they get sticker shock? When they go to one Mercedes Benz dealer and see price X and then go to another and see price 4X! What is my point? My point is that you are not selling cars or commodities. . . you are not selling what the "other guy" is selling, you are selling a unique service, your decades of unique experience, insights, background, etc. So, don't be afraid to be expensive. The best things in life are expensive.

After all, what would a Mercedes Benz dealer if a bus pulled up full of Wal-Mart shoppers who were stunned at the high car prices and were trying to negotiate? They would tell them if they wanted Wal-Mart quality and prices, they should go to Wal-Mart, and send them back to the store they came from! Sticker shock is natural, but your job is to educate the client on your unique value (the "can't get that anywhere else" effect) and if they are still in shock you need to put them on a bus headed toward the nearest Wal-Mart!!!! That's what we do!

2) Right concern, wrong application of value pricing theory. One of the problems with the billable hour is that one arrives at a price completely backwards from profitable businesses. . . . Lawyers let the cost determine the price. That is backwards! The most profitable businesses go ask their customers what features they want in a product and how much they are willing to pay for it, then they find the most cost effective way to deliver that to the customer in order to increase profits. OK -- Now you want to know what I am saying in English: I am saying this: for once, stop thinking about your time . . . your client don't give a crap about your time. . .
A) they want to buy an outcome.
B) You know you can achieve that outcome for them.
C) You KNOW that they are willing to pay something to achieve the outcome (and that there is also a threshold that they cannot and will not exceed).

Given this information, if you really want that business do you want to:

A) Do you what you do and just multiple your rate by the number of hours you expect to work and tell them a price? OR

B) Discover how much they value the outcome, give them a price you know that is in their acceptable range, and be resourceful, creative, and efficient in the utilization of resources to achieve the outcome for the client?

Sorry folks, but to me, a business person, this is a no brainer. B is the ONLY way to go. So, I anticipate the questions: What if my effective hourly rate is lower? I go back to this: Who gives a hoot what your effective rate is? Did it NOT EVER OCCUR TO YOU that you can be MORE profitable and actually have a lower effective hourly rate at the SAME TIME? (Clearly not. . . remember, I only ask questions I already know the answers to). How can it be? Well, first let me be clear that I think value pricing allows you to actually have a higher effective rate, but I will answer the question of profitability anyhow. Let me answer by example:

BILLABLE HOUR EXAMPLE
Hourly Rate: $400
Effective Rate: $400 (since you bill for all of your time)
Hours Billed: 1000
Billings: $400,000
Cost of Administration (to bill, collect, etc): 80.000 (salaries, equipment)
Lost Billable Time due to keeping timesheets: 20 x $400 = $8000
Uncollectable Bills due to post-billing sticker shock: $30,000 (Remember, you would rather have them get sticker shock before you deliver the service, not after when you have no collection leverage)

RESULTS: $298,000 Left in the Pot

VALUE PRICING EXAMPLE
Effective Rate: $335 (since you bill for all of your time)
Hours Worked: 1000
Billings: $335,000
Cost of Administration (to bill, collect, etc): 20.000 (salaries, equipment)
Lost Billable Time due to keeping timesheets: $0
Uncollectable Bills due to post-billing sticker shock: $0 (Remember, you get your money front in this model)

RESULTS: $315,000 Left in the Pot

Do you get it now? ? ? ? Your Goal, Your reason to exist in this world as a business is NOT to increase your effective hourly rate!!!! Your goal is to increase the profitability of your business. If you are even counting your effective rate you are using the wrong metric to measure the success of your business. You need to examine your overall profitability. So, stop counting time. Stop wondering whether something is "worth" your time, and start asking yourself if you can do work profitably!! Clients want outcomes, not time. They will happily pay for VALUE, not hours. Take your stop-watch-hand-cuffs off and you will realize that you can deliver value to clients and be more profitable at the same time!