Sunday, April 22, 2007

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!


Heather said...

Thanks for addressing my question! I'll forwarded your response to my disgruntled lawyer and I'll see if he further debates the model.

Anonymous said...

I am confused. Throughout your blog you mention that attorneys need to know their costs in order to have an adequate basis on whether to take on a job/client or not. Simple enough, get the accountants/bookeepers rolling and you have your cost basis per day/week/year.

The confusion sets in when you say that you must get away from a cost + profit margin model and go to the more ephemeral value billing proposition. Houston, we have a problem.

I get your value based theory, but I get lost on the details of arriving at "value" without factoring costs per day/week/year, etc. If what you are saying is like Lucky Brand - it costs them $5 per pair of jeans to make, but we as the client value them at $100.00 per pair of jean, then they have provided a value we are willing to pay for (don't get me going on Diesel or Sevens). Regardless, there is the value and then the price you are willing to pay for "fashion".

Is this what you are talking about? In your paradigm, is cost important to know the minimum amount you would take from a client and still earn a profit? Say you project that a case will take a year and a half - do you provide a year and a half of hard costs plus what the client is willing to pay for the result? Do you price it by staff you see working on it?

If two lawyers and a paralegal work on the project do you take into account their salaries or do you focus on fixed costs outside of salaries? Or, would you proceed to a point where you figure that two lawyers and a paralegal will work on this case, your hard costs for six months on the project would be $30,000 and propose to the client $100,000 if they are battling an injunction to stay in business during an infringement case?

What about an unlawful detainer case where you would have one attorney and a paralegal and you anticipate a 2-day hearing, up to two motions and a lot of time on the telephone negotiating? Would you then say that given the 60 days this is likely to take and the fact the client will have to shut down if you fail, you would then as for $50,000 if your costs for the 60 days were $20,000 between salaries and fixed office costs?

On the one hand you state - know your costs. On the other you state that costs + margin should be avoided. Isn't it always cost plus margin. If you know your cost and propose a value billing system to your client, wouldn't it be cost + plus margin with a different definition of margin? (No 30-40% mark-up).

I am a little fuzzy on your concept, but I appreciate the concept and would implement it if I could. It seems counterintuitive from a law perspective, but not so much when you put it in the context of clothes, handbags, shoes (ask my wife), cigars, or even baseball card collecting. I see where you are going, but am confused on the implementation of the idea.

A little guidance would be helpful as getting away from the billable hour would be a life goal and free up a lot of extra time to spend with people who will appreciate your time more.

Signed - Confused in Salt Lake City, Utah