Friday, November 30, 2007

Productization versus Commoditization in the Legal Industry

Little has been said about the problem of the perceived commoditization of legal services. It is clear that professional service providers are suffering from a perception that what they do is a commodity. The problem is so pervasive that many professionals actually believe they are a commodity. Here are some of the contributing factors:

-- The ratio of lawers to non-lawyers has doubled since the 197Os [there are twice as many competing for half the business]

-- The adoption of a pricing model that commoditizes the product (Lawyers sell time. . . even though clients don't want to buy time, they are left in a position of attempting to compare professionals based on time and rate,

-- The behavior modification of the hourly billing model that creates a disincentive to invest time up-front in order to differentiate or educate the client on the "real" product, which is the solution that will be achieved through your expertise

-- The lacking business savvy and diversity of attorneys in general, perpetuating the perception that lawyers are all "the same"

-- The belief of attorneys themselves that they are indeed a commodity.

-- The focus on expertise/experience as the sole basis used to convince clients to hire them. Remember, clients are not in a position to know what level of expertise is required for their job. By leaving it to expertise alone as a criteria, you are causing the client to have to make a decision based on their law opinion, which can be dangerous.

Law firms and attorneys really need to address this problem to remain relevant in the future. The purpose of this post is to suggest that the productization of legal services can be an effective way to deal with this issue and help the clients to understand your "Unique Value Proposition" and make an informed decision. At first glance you may think that producization would contribute to the problem, but in fact it helps to reduce it. Clients are simply not in a position to compare products they do no understand. Attorneys do not, generally speaking, invest the time to educate the client and set out a road map of the case or strategy with them to get buy in on their process before proceeding. There is nothing more amorphous to a law client than a legal engagement. . . . most clients don't know exactly what is happening. . . . to them, their problem goes into a black box and sometimes comes out with a solution, but costs a hell of a lot anyhow.

By creating a product [bundling valued services] together you are turning a mystery into a known quantity. It is now something that is understandable to the client. What's more, you can use your diversity, unique skill, and creativity to craft an offering that simply cannot be acquired anywhere else. In this case, clients have peace of mind, are able to make decisions based on the benefits to them rather than attempting weigh comparative values of attorneys by time and rate against a lay person's own perception of how much expertise they really need to begin with. To date, very few corporate firms have attempted to differentiate on this basis. Few have put together fixed-price packages on the low end to entice clients to use the firm, which is a false promise and cold shower for clients when they realize their next engagement they will be buying more of that amorphous "time" again rather than something they can actually understand!

Wednesday, November 14, 2007

The Difference Between Value Pricing and Price Gouging: The Difference Between Apples and Oranges!

I find it rather interesting how many professionals confront the possibility of adopting a new pricing model. I find that many professionals make simple-minded mistakes when evaluating alternative models as if they are looking for reasons to rationalize why it won't work rather than actually using their BRAINS to think about how it DOES work. for instance, value pricing is based on the subjective theory of value, an economic theory which requires study and understanding. It is not one that is readily comparable to a cost-plus pricing model on a dollar for dollar basis. Many professionals have lost before they have begun when their limited thinking and binary analysis paralyzes intellectual curiosity at the expense of our great profession. Let me give you an example:

Most attorneys ask the following question: "Well. . . if value pricing is so great, tell me. . . does it end up costing the client more money or less money under that pricing model than it does under the billable hour?

The question itself demonstrates a dangerous level of ignorance about what Value Pricing really is about. The answer is BOTH. The problem with the question is that it does not seek understanding, but it is rather a trap door. You see, the professional is asking a question with only 2 acceptable answers already knowing how to rationalize the dismissal of the pricing theory NO MATTER THE RESPONSE. For instance:

LOWER: If I said it was lower the professional would dismiss the practice on the basis that they will make less money or be less profitable under the model so they will not do it. What they see is the risk of a new pricing model, the risk of error in estimating their time (which is incorrect because value pricing is NOT based on a time estimate], and a lack of financial motivation to change.

HIGHER: If I said the cost would be higher to the client, the professional would dismiss the model on the basis that they already know and feel like clients are getting SCREWED by the billable hour, and that it would be somehow unethical to charge MORE than they already do.

You see, professionals who ask the comparative question have already made up their mind. They are no seeking answers. They are seeking validation for a conclusion they have already made. For those professionals who do seek understanding of a better way and want to become educated on the model, I am hopeful and that you understand that the answer to the question is: BOTH. (Not higher nor lower, but BOTH] Here is why:

Cost-Plus pricing is pricing based on time. It ASSSUMES that all time is valued the same since it is priced the same. Such a silly model cuts directly against a universal principle of the LAWS of DIMINISHING RETURNS. Anyone with an iota of business sense understands this. So, what happens here is that there are times when a professional's pricing is grossly below what they are truly giving in value and also times when it is GROSSLY above the value. Look within yourself for a moment and you will discover the psychological proof of this:

1 - Sometimes you feel like to added much more value than you got paid for, don’t you? (This is because you know the value of the 25yrs of wisdom you just gave away in 15 minutes for only $15O was many thousands of dollars!]

2 - Sometimes as you are billing a million hours for a simple brief you also worry about whether the client really can afford or values all of the time you think is necessary to spend on a case. You wonder whether they will get pissed off or not pay . Somehow you know the client does not value you the way you price yourself!

You see, the cost-plus pricing practice of billing by the hour produces bad results for BOTH the client AND the professional because it is NOT based on VALUE. Sometimes you are getting ripped off and sometimes the client is getting ripped off. It is a value imbalance. And all imbalance produce undesirable results for one party or another.

Value Pricing is about pricing on the margin of perceived value and bringing into balance the transaction between the buyer and the seller. In that instance, you as a professional will feel valued because you are pricing correctly and the client will never go away feeling ripped off. This also aligns you with your client and provides an incentive to ADD VALUE to the client and actually care enough about them to discover what they value and creative ways to accomplish an outcome. You are more than a drone. You are not a commodity so stop pricing like one!

The moral of the story is that professionals need to truly understand the competing economic theories rather than use simple-minded tactics to compare and dismiss competing practices. Philosophers that shaped our world did so with thorough deliberation and thought, not with passing gestures of curiosity. I am shocked that I must challenge our professions to THINK . . . . but if we are serious about progress and positive change, we should try to get back to our roots of being a THINKING profession that considers timeless principals rather than droning on in 6-minute increments in a state of perpetual skepticism. It could change your life. It certainly has changed ours!