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!

When Change Will Mean The Walls Come Tumbling Down: Why Big firms Will Never Change!

I just wanted to be clear that I am not saying big firms cannot implement VP because they are big, I am saying that an attempt to do so would likely cause them to dissolve.

At a macro level, please follow my logic and allow me to lay the foundation for my argument, first with questions, then with analysis:

Who get’s positional authority in a law firm? Usually the biggest rainmakers and billers in the office.

Who get’s promoted to Partner from Associate? Those who bill the most hours (a beauty contest of inefficiency) or come with a book of business

Therefore, who controls the organization? Partners (who got there by billing more TIME)

How do big firms attract top talent? Bidding wars, with winners curse.

What motivation in people does a bidding war attract? Those who are motivated by the money

How do firms attract lateral partners? By selling Partner positions for large books of business (Again, a highest-bidder problem . . .attracting money motivated attorneys)

How does a Billable Hour firm use work-flow to maximize revenue? Hoard work at the highest levels (systemic underdelegation) . . . have everyone in the organization bill for work that is well below their competence level because their rates are higher.
Implication of that practice? No delegation, Little challenge in work, therefore, little need to mentor, therefore, little workforce development and skill development in people AND no project management skills (or people management skills in attorneys on the team)

What are the IT systems designed to do? Minimize non-billable time, capture all billable-time well (NOTE: NOT minimize billable time, which would be to maximize efficiency)

Most Partners are? Old-white men, Close to retirement, risk adverse, financially comfortable and not in need of taking risks with capital to achieve greater returns. Particularly those in control of the firm hold the largest books and may be very close to retirement.

Note: Partners cannot maintain an equity interest in the firm after they leave, so there is no such thing as an “investment in the future of the firm” that extends beyond the term of their employment with the firm.

I could go on and on. Here is my point:

To be profitable in Value Pricing, you need to:

Have IT infrastructure that operates 180 degree opposite from the current infrastructure.
Implications? Significant up-front capital investment required before proof of concept. Since our industry is almost operating entirely under this model, great tools do not yet exist to MINIMIZE time investment for VALUE ADDED activities

Have a workforce that is willing to make less money while they work out the quirks in the system.
Do you really think they can do that? Consider this: If all of their talent chose the firm because of money, those will certainly NOT be the ones to approve a change to Value Pricing. None of us could argue that a change to this model from a billable hour model would be without an initial impact on profits and a significantly increased variability in cash flows (higher cash low risk- lower INITIAL returns)
Furthermore: the people who really are in a position to make that decision will not be around long enough to reap the rewards of the change in pricing model because they will be retiring within 5yrs. It would take a significant feat for the change in model to have a positive Net Present Value to Partners with such a short time-frame. PLEASE keep in mind that one rainmaker is supporting an entire department of these firms, and they occupy several floors of a high-rise for sure. . . . the departure of any one Partner can create an instability in a firm that is enough to destroy it. The Partners with the big books who are there because of the high-pay to begin with would likely move to a competitive firm that Is paying more (again, the same game that get’s em there, loses them in the end) while his old firm is “testing” the model and making less money for everyone. It won’t take to many of these to mark the end of a big firm as we know them today.

Have ATTORNEYS with Project Management Expertise:
Because delegation and use of lowest-cost-competent resources are critical, it will be essential that the leading attorneys have project management skills. This breed of attorneys simply does not exist today. I will bet you that most attorneys don’t even know that the hell project management really means in this context, let alone have an ability to manage costs in an organization.

Have attorneys who TRUST others:
Why do you think this is a core value at Exemplar? Most attorneys do things themselves because they really believe that nobody can do it better, or they want it done THEIR way! Problem? If you do not trust others to do the work competently, you certainly cannot project manage. This, unfortunately, is a character issue. You cannot change this in your people. They either have it or they don’t. Unfortunately, I believe that success in a Value Pricing model depends on this quality!

Have Pricing Competencies:
Decision-makers at BigLaw have been practicing under the billable hour model for decades and simply lack the ability to see what they do in the context of it’s value to the client. They are not wired to think this way and I have found it to be extremely difficult to try to change this mentality once it has solidified in an attorney. At best, attorney-pricers will go back to a cost-based pricing method and estimate time to arrive at a price because it is within their comfort zone to do so!!!! THIS IS A RECIPE fOR DISASTER – Why? Because fixing a price has shifted the risk to the service provider (higher beta), without increasing the potential return (because it is still based on time). The result is a guaranteed lower profit every time. As for pricing committees? Can you imagine getting a bunch of partners who are trained to only value time they can bill for to get together and talk about value in a meeting that is not billable?

Have Communication Skills
Sorry to say it, but success in the current model does not require one to be socially normal or have good communication skills. In Value Pricing, it is CRITICAL. If you add value without communicating the value you added, then you should not have quit your day job! Pricing profitably BEGINS with an ability not just to comprehend value, but to communicate value! Again, this is a core skills that people either have or they do not. Even so, they could not learn this skills quick enough to keep the firm from falling apart.

OK – There are about 50 more reasons, but I do have to sleep every once in awhile!

Interview with Chris Marston: Exemplar's Genesis

This week I thought I would post my response to an interview I did this week with a colleague in the legal industry:

In the forming of Exemplar Law how did you or other members of the group see things differently from other firms?

It started with me. I took a look at the business model under which corporate law firms operated and it was inconsistent with my common sense or “gut” about what good business means. For instance, I saw nearly EVERYTHING differently from most law firms because they all operate under the billable hour model, which affects management, power, structure, work-life balance, diversity, culture, and nearly everything else in a way that is inconsistent with by convictions, my education, and my experience about what it means to do business in this economy.

How did you re-frame your understanding of the market in a way that you saw your firm as viable and beneficial to clients?

You know the saying “treat people the way you want to be treated”? I believe the customers of law firms do that . . . they give us a fixed-price for their services and they don’t nickel and dime me by billing me for food, photo copies, and phone calls. I deal with CEOs all the time and have done so long before becoming a lawyer and nobody does business this way. I didn’t need to reframe my understanding of the market because my understanding of the market (non-legal) is the way I think it should be. If you google the words “Billable Hour” you will find that nearly everyone hates it!

Was it challenging to see things differently, or communicate or sell the idea to others that didn't see things the same way?

For me, it was intuitive to see things that way. Regarding whether it was difficult to communicate to people who did not agree I have this to say: I learned at a very young age about optimism and its power. My mother was a pessimist. Before I knew any better I thought she was doubting me and that really made me angry. In my rebellion years I channeled that anger into a passion to succeed and, even, to prove that I could do anything. It was after several straight successes in my endeavors that I saw the power I had within me to affect positive change with raw conviction to succeed and pure optimism. When I got older I learned what is really going on with pessimists and never took offense again to the doubt they project. You see, pessimists are not doubting that others can do something . . . that is just how their world view manifests itself . . they are projecting their own self-doubt onto others. Therefore, the view of a pessimist says more about them than it does about me. I have known this since I was a young adult, and ever since then I knew what I was looking at then I met a pessimist . . . someone who will never reach their potential.

Did you have a manifesto, philosophy, values statement or guiding vision? Was it in writing?

Absolutely: There are several philosophies and a set of eight core values that guide or vision. Myself and each new member of the team are guardians of these values and philosophies. They are our foundation and our constitution and cannot be compromised at any cost. They are in writing at the moment.


2. Appreciating the Positive

Lawyers tend to see the obstacles to a new idea, or the flaws in an argument or proposal, rather than focusing on what is working well, or appreciating the positive. What were/are some of the positives that you focus(ed) on that led you to launch and pursue an entrepreneurial model? Was it challenging to focus on the positive when lawyers are trained to find the vulnerabilities?

Law is actually 1 of 2 professions of 104 professions where pessimists perform the best! I am an optimist by nature. I know my strength is as a visionary and not someone who would be mired in the details of deal. I have interviewed more than 300 attorneys in person and over 500 by phone in 2 years. You ask if it was a challenge to focus on the positive when most of them are trained to focus on the negative. To me the answer is absolutely not. Why? Because I knew what I was looking at when I saw it. Lawyers to focused on weaknesses or barriers to success were doing me a favor a self-identifying as people that would never be a part of our team! Not only that, I am sending them back into the market to go work for the competition and create barriers to success over there! I knew with a marketplace full of pessimists at the country’s largest firms that a truly visionary and positive firm could rise to heights never seen (we have years, if not decades to go mind you). I take great wonder and amazement in the fact that many law firm partners think a fixed-price model will not work because they are too ignorant to understand that hourly billing only started in the late 1950’s and was an accident. Most of them had no idea that corporate law was fixed priced for hundreds of years!


Clearly, you started your firm because you saw an unfilled opportunity in the market. What was that opportunity, and why do you think you saw it and others have not?

I will answer the last question first. I was not the first to see the opportunity. Visionaries in the professions such as Ron Baker, author of “The Firm of the Future” saw the market opportunity long before I was thinking about it. In fact, the problems with the billable hour have been increasingly at the forefront of discussion in the legal profession over the last decade or so. The difference is that this world is in not in a shortage of revolutionary ideas. It is in a shortage of revolutionary leadership. Now, I saw that the opportunity was enormous because there are so many systemic problems that can be solved simply by changing the business model. . . one change, . . . and it impacts so many problems . . so many people . . . so many lives:

- Competitive, Individualistic work environments.
- Attrition rates at all time highs
- Work-life balance at all-time lows
- No Mentoring/Lacking Mentoring
- Bill Padding (Unethical practices quietly promoted by partners)
- Continued lacking in diversity and women in leadership
- Client Hoarding problems
- Power Struggles at partnership level
- Self-accommodation in the compensation committees
- Class System: Terrible treatment of Associates
- Inhumane Business Operation: New hires are used as leverage with NO visible up ladder, goal-setting, or leadership development
- It is clear that today’s Partners will DIE with their book of business. . . . they are sending
this signal loud and clear to Associates because they are not developing new leaders . . . they are simply allowing those who provide the most leverage to stay while the real leaders walk out the door. The future of such a business is bleak at best.

I can go on and on.


Some attorneys can re-frame a situation, appreciate the positive, and even recognize a market opportunity, but haven't a clue what to do about it. As you were planning your venture (and implementing it), did you clearly see the steps to take to launch the practice? Did you have a plan with specific, workable, time-specific steps? If not, how did you go about starting your entrepreneurial venture? Did you have a business plan? Did it work out the way you envisioned it?

Yes – I did 6 months of full-time research and wrote a business plan before I did anything. I was how all of the parts interrelated . . . which parts were critical, and had to understand all of the conditions precedent. I knew that I was embarking on a life-long adventure and it was even larger than I had imagined. As for your last question, it certainly did not go exactly as planned. It never does. But what entrepreneurship means is that you have to balance a solid plan with the ability to roll with the punches. Our weakness as people are that we tend to think people are like we are. I went into this marketplace with complete conviction and belief in what we are doing. . . . as a leader. I thought there were more people out there who would burn the ships for a vision of a better way. . . . . at first I was disappointed . . then I came to realize that the same cause of my disappointment was the reason for my being the first to undertake the challenge . . . this industry needs leadership, and when I saw what was out there it just reinforced why it had to be me. We are everyday seeking leaders at different levels to explore their talents, the market, and a vision within Exemplar’s vision and intend to remain an entrepreneurial organization for the life of our firm. Then again, the dearth of leadership in our industry only magnifies the market opportunities for those who have the guts to create the future. There is a saying “The people who get on in this life . . . if they do not find the circumstances they are looking for, they create it” That is the essence of Exemplar. We are creating the Firm of the Future. The way we envision it to be. It has been the most rewarding experience of my life. Never a dull moment!

More questions? Bring it on! :-)

Sometimes You Just Want To Fly Coach!!!!

What lawyers don't seem to understand is that sometimes clients just want to fly coach! I am always surprised to hear our clients complain about their lawyers who just can't help themselves . . . they lawyer everything to death! They keep beating the dead horse . . . and all you can do is watch . . . knowing that whole time that you hired them to save the horse and win a trophy, not beat it to death and then beat it some more!

Lawyers suffer from many afflictions and so many of them are at the expense of the client. Some try to justify the defensive practice of law under the guise of "excellence." They are not listening to the needs and wants of the client, but are rather acting on their own defensiveness in order to avoid "perceived" potential liability. The funny thing about this whole concept is that most lawyers I meet simply cannot wrap their brain around anything else. . . . they actually think their clients are incompetent to consent to flying coach or business class. Wake up lawyers! Sometimes clients just want to fly coach!!!

What does this mean in real terms, you ask? Well, here is the disconnect:

Attorney point of view: We are being thorough for the client. . . we believe in excellence and perfection and want to avoid every single pitfall possible because that is the best way to represent our client. They don't know any better so we have to know for them.

Client point of view: Son of a XXXX, would you take a look at this bill? The value of the entire deal is less than what I have to pay my lawyer. First, this guy was not listening to me when I told him that (although I have money) I have bigger battles to fight than to nit-pick details on this small deal and that I just wanted to make sure there were no "glaring" errors. Second, he spent $10,000 to save me $5,000 in "potential" liability. . . I mean seriously, even if it were a 5% chance of $50,000 in liability I might have taken my chances. . . he never asked me if I thought it was worth it before he just went filling in every pot hole in the road! Who does he think he is? The only thing I can do with this "perfect contract" if frame and hang it on my wall because at this point the deal is a loser . . . thanks a lot!

Who is right here? (Hint: I never ask questions I do not know the answer to) The client is ALWAYS right!! This is a service business folks, and you chose this profession. If you do not want to serve your clients, then get the hell out of this profession! The clients are absolutely reasonable in their perception that most lawyers have no concept of the risk/reward matrix that forms the basis for business decisions. Even Fortune 500 Companies have contracts and deals that are not worth lawyering to death. Usually, companies reserve these deals for in-house counsel, but in small to mid-sized companies who do not have in-house counsel, they need attorneys who are strategic and who are acutely aware of the risk/reward relationship at every turn and with each engagement. This really puts the client at ease and helps them to focus on what they do best and not on managing their lawyers "runaway train."

At Exemplar, this "strategic" approach to the practice of law has served our customers very well and has made them happier than I can imagine. Why? More than anything, because we are listening to them. Like an airline, we understand that sometimes our clients want to fly First-Class, and sometimes they want to fly Coach. (Let's not ignore Business-Class. . . we offer that too!). We empower our clients to understand their options and we immerse ourselves in the business to be the strategic partner that they really need and want. The defensive practice of law is not necessary when you are in a true partnership with your clients and have good communication with them. We find that they really appreciate being informed and able to participate in the legal strategy . . . flying Coach to some destinations with us, and First-Class to many more! Exemplar is listening to their customers while the rest of the industry tells them to pay up or "get off the plane!" When customers realize they have a choice, Big-Law Airlines will have to start understand what it means to serve clients (not themselves) if they plan to be in business a decade from now.

What? You Mean Customers Deserve to Have Options?

YES! Customers absolutely deserve to have options. In fact, if you don't, your competition certainly will. . . . or will they? Lawyers are notorious for telling their clients that what their singular strategy should be, stating their billable rate, and getting to it. Client after client that we encounter talks about how horrible they felt when their attorneys told them they only have one way to go "which made no economic/business sense" (a symptom that they are not really listening to what the client is trying to accomplish) or simply was not solution-0riented enough to find a path to success as defined by the client. Many attorneys I meet have pre-conceived notions of what success means based on the legal system we work within. This structured framework causes lawyers to think "inside the box" and fail to be responsive to client needs. For instance, what I find most important in client service at Exemplar is listening loudly for what the client perceives as success, and then thinking of all of the business, legal, political, social, and tactical ways that we can accomplish the goal for the client: To what end? To empower the customer with CHOICES. The fact is that if customers have come to you they are essentially shopping in your store. If you only have one product in your store then customers are going to look at the store next door to see what they have too. The fact is that you simply have to offer your customers options so that they find what they are looking for within your organization. They will appreciate the fact that you respect them enough to offer them choices and will not feel compelled to look elsewhere.

The Tail Is Wagging The Dog!

The Tail Is Wagging The Dog!

Backwards. That is how many people describe the way law firms operate and the billable hour. The tail is indeed wagging the dog. What I find very interesting is the direct link between low professional satisfaction (not just in hours worked, but in terms of the "type" of work that legal professionals do and the billable hour model.)

All of the best management books tell you that the best companies and managers legislate the ends, not the means for their people. This is how they get the very best out of them. I completely agree with this. After all, which boss would you rather work for a boss who tells you what to do? Or one who tells you what goal you have to achieve? What management experts say quite clearly is that you can NEVER get the best out of your people by legislating the means. . . it is just poor management. Consequently, an organization that does so is destined for mediocrity. What does this all have to do with the billable hour, you ask? EVERYTHING. The tail is wagging the dog, and the billable hour is to blame. Allow me to lay the foundation and you will see!

Everything is about cause and effect, right? When you do something, make changes to policy, choose to promote someone, it all has an effect on the organization. Well, implementing the billable hour model certainly did. In the 1960's the legal industry was full of general practitioners. Even those who had specialized expertise had a broad enough knowledge to be useful in a few areas. Prior to the institution of the billable hour in the late 50's and early 60's clients were buying outcomes . . . RESULTS. Then, those whom we served were legislating the ends and letting the attorneys use their talents to achieve the best result for the client. Then came billable hours . . . we started to sell units of time. Clients don't want time, they want results, but if all we are selling is time then what do you think is going to happen? All of a sudden, you are making it your clients business what you do with every bit of your time, and by the way, they will want everything done faster (I don't blame them! I don't want to buy time either). Cause: Billable Hour, Effect: Pressure to get it done faster, which is the cause of the super-specialization of attorneys who then go back to clients and claim that through their infinite wisdom they can get it done faster (though a 3x the rate). CAUSE: Super-specialization EFFECT: The dumbing down of the legal profession by way of over specialization. Like in manufacturing, in order to claim to be faster you get people who do the same task over and over again, suffering from intellectual atrophy and doing work well below their competence level just to tell the client they can go FASTER. They have commoditized themselves and made talent and skill irrelevant and Tail is Wagging the Dog! We have created a model where clients, who really want results, are forced to legislate the MEANS and not the ends because attorneys insist on billing time. They scour over your bills and start picking at what you do with every minute of your time . . . because you want to bill time . . your clients are running your business . . . . your clients are managing your people . . . and the Tail is Wagging the Dog!

What, then, becomes of the unique talents and skills that attorney might normally use to effect a winning result for a client? NOTHING! Why? Because you have to justify "value" to the client who is not present with you in 6 minute increments on a timesheet that is presented often months later. It is not only nonsense, it is simply ridiculous. As a firm that does not bill by the hour and gets results every time, I can tell you that the most value added activities we can do for clients are not ones that a traditional firm would consider "billable." Most attorneys do not want to do one thing and only one thing for the rest of their lives. Attorneys are people too, who find meaning in diversity of work, challenge of work, and the freedom to set free their talents to achieve "you can't get this anywhere" kinds of results. They are people who do not want to be slaves to a model that dictates what they do with every minute of their time, wondering if that 6-minute increment they are on right now will end up with a red line through it on the clients bill! That is no way to live. . . it is no way to manage and develop your people and it is certainly no way to run a business. Our well-rounded attorneys use every bit of their unique skills everyday and combine them in ways that get results for clients that cannot be found anywhere else. Clients do not want to buy our time. They want results. They do not care if we have a team meeting to strategize their case (they don't care if there are 5 attorneys in the meeting because we are not billing them for 5 attorneys x $400/hr). They care when the business deal is done, when their dreams come true, when the battle is won. And our people? They care that they are building an organization that cares about result, not tasks. One that let's its people leverage every unique bit of who they are to achieve a positive end for the client, and one who does not artificially force them to over-specialize for the sake of doing the same repetitive task again and again and again. It is time for the Tail to Stop Wagging The Dog! At Exemplar, this happy dogs wags its tail to the end of the billable hour tune! Wanna play?

Managing People: Taking a Close Look at Yourself!

As our firm is growing fast, there is a critical need to make sure that measures are in place to ensure that we are being good managers, not just that our new team members are performing. Why is it so important? (Other than the obvious). Well, if you think of it . . . it is the same reason that the logic for starting a firm like Exemplar is so compelling. How do you know there is a compelling problem that needs to be solved? Look around at what everyone in the marketplace is complaining about and writing about. As for Exemplar, you need only Google the words "billable hour" and see pages upon pages of clients and lawyers alike complaining about how it is the bane of their existence. Problem? Clearly! Solution? Exemplar. So by this time you are asking yourself what all of this has to do with managing people, right? It has EVERYTHING to do with managing people. The next time you go to the book store take a stroll down the business section and take a look at how many books are out there on managing people. Book after book (and, not surprising, person after person that I know) complains about how bad managers tend to be at managing people. Problem? Clearly! Solution? Well, here is what I propose:

1) We need to have an open and candid environment among our managers to talk about our strengths and weaknesses in our own management process and "look in the mirror" every once in awhile so that we can improve our management process.

2) We need to not only make sure that direct reports are empowered and performing, but also that our managers are not just managers because they stuck around long enough, but because they are GOOD MANAGERS. To me, this means trusting them and treating them like partners from the START rather than being skeptical and treating them like they are on trial. . . you have to be in idiot to think that your people can't feel the difference. The rules of psychology apply!Make success a self-fulfilling prophecy for your people. This is not a chicken or egg theory problem. Believe in your people FIRST and you get performance. If you don't, then at least you will know for sure that you got a dud! :-)

3) We need to sit down with each new person and set goals together with them. Then, we need to do everything we can do empower them, position them to stretch and leverage talents, and get the heck out of the way. At the end of the day, we want our people to have every reason to perform (and the only way to do that is to ask ourselves the tough questions . . NOT to look at them and wonder why they are not performing. . . I guarantee you, much of the time the answers become clear by taking a critical look at the management process) It is only when we do everything that we can that we can then look to our direct reports for accountability!

4) We need to pay close attention to each new person in order to identify the difference between each member's strengths, non-talents, and weaknesses. Do you know the difference?
-- Strengths: You are great at these. It may not be as obvious as it sounds, because someone who is not performing may be non-performing because they are not positioned by their employer to leverage their strengths. Are you? After all, I think it is our job as employers to make sure we position our people to leverage their strength before we can hold them accountable for performance. You can't expect better performance out of someone who sucks at something. With talents, it is our job as employers to look at each person and find out just how much we can get them to focus on these strengths, create stretch goals that are dependent on leveraging them, and doing what we can to support them

-- Non-talents: Often confused with weaknesses, these are areas where there is no natural talent or significant skill development, but where performance is average at best. If the skills need to be developed, this is where we set goals with them to work on the skills that they need to perform in a well-rounded job.

-- Weaknesses: You suck at these. The worse companies with the worse managers in the country have managers that always focus on people's weaknesses. They get you on these stupid "weakness improvement programs" which the employees absolutely dead. After all, most people NEVER want to be good at a weakness! This is a symptom of 1) POOR MANAGEMENT, and 2) an organization that is destined for mediocrity, because winning organizations focus on people with leveraged strength, not strong weaknesses. What kind of company do you work for?

5) We need to do everything we can to educate our organization that being a manager is a job unto itself, and that it comes with responsibilities, accountability, and tremendous power to influence the future of the organization. The largest Gallup study of profit centers ever showed that people do not leave companies, they leave managers!!! Does this surprise you? It shouldn't'! In big law firms, every time an associate walks out the door it costs them more than $250,000! On the other hand, the best companies in the world use good management as a tool to develop the future of the company in a way that makes them millions of dollars each year.

6) Finally, at the end of each day, we need to take a close look at ourselves, ask ourselves "did we do the best we can to position our people? How can we communicate better with our people? What can we do better to inspire each other to greatness? As managers, we have more power than we understand. Most have no clue what to do with it.

Those are the human capital goals to which I aspire. Ambitious? Certainly! Nonetheless, you never go higher than you aim. As Excellence is a core value that must never ring hollow in the halls of Exemplar, I will certainly do my part and expect our great people to to aspire to the same level of Excellence in management . . . a standard that, if set, will define the future of law practice as we know it.

Fixed-Pie Thinkers Need Not Apply

Some people go through life thinking it is a zero sum game! They have a fixed-pie mentality. It is like they are born this way . . . with fixed-pie-disease! Sometimes life throws these people little crumbs of bread . . . and they all stomp on each other like pidgeons to get a bigger piece of the crumb. Sometimes when I walk down the street I throw pennies and watch people with fixed-pie-disease rush to pick them up for fear that someone else might get them. Half of them are lawyers, I'm sure. These people don't know a thing about value creation. The one's I like are the ones who pick up my pennies while whistling to a tune, feeling like it was their lucky day. They understand value creation. You see, my penny wielding experience is proof that value creation exists and that the economy is chugging along in a healthy fashion. For me, the reason I throw the pennies is because it is worth more than a penny to me to either 1) watch people infected with fixed-pie-disease frantically chase my pennies as they bounce happily down the street on their ends, OR 2) enjoy that warming feeling of watching someone who appreciates value pick up my penny and feel lucky, if only for that moment! For them, it was clearly worth more than a penny to bend over and pick it up. . . it was almost the principle of it! Value creation is such a beautiful thing.

Every day infected lawyers go to work and fight over origination credits, pad their time sheets or try to out-bill their colleagues in order to get one of the "fixed" number of partnership positions at the firm. Firms get into bidding wars over the "fixed" number of graduates in the top 2% of their class (as if such a designation were the ONLY redeeming quality of significance to a firm). What are you working for? There are only 24 hours in the day . . . the game is "fixed" folks! You don't win in a competition where the prize for the pie eating contest is . . . well . . MORE PIE! That is, unless you are infected with fixed-pie disease. Somehow they just never learn. . . and so I will continue to watch them chase down my pennies much to my amusement (fortunately for them . . I mean my pennies . . . they will never be out of a job!) Life will continue to throw these poor souls crumbs of bread and the rest of us will watch them posture for their crumb slices as those of us who truly understand value create loaves of bread from air!

Changing Lives . . One By One . . Until We're All Done!

Several months ago I ended my blog post with a statement that people who think Exemplar is just about fixed pricing have missed the point. I went on to say that Exemplar is about changing lives, one by one, until we're all done. While many posts have been about the economic theory behind our pricing model, psychological barriers, and mechanics of fixed-pricing, I wanted to take a moment to talk about what we are really about. . . changing lives. This journey called Exemplar has changed my life . . . it has given me meaning in what I do as a professional. I am personally connected to the outcomes that we help our customers to achieve every day. I have not in two years counted my time, my "effective" hourly rate, and I actually have no clue how many hours a work a week. I know only one thing: I am truly happy and I would not trade a moment of this experience for anything. What does all of this mean? For me, this model is about giving professionals meaning in their work, valuing people, leveraging talents, inspiring our young, giving back, loving life, and doing well by doing good. At first, it may not be clear how connected the billable hour really is to the problems of our profession, but a closer look reveals that they are hopelessly intertwined. For instance, I see the following:

I see attorneys who's practice is all about going from crisis to crisis. They live their lives this way. It desensitizes them and it takes a crisis to get their attention. They let their personal lives reach a point of crisis before they pay attention to it . . . many of them getting divorced or falling apart altogether. These professionals either face enormous pressure to "Bill time" to meet quotas or they feel tremendous pressure to "fill time" by "billing time" when work is light because of the beauty contest that our industry has created by comparing the "spreadsheet" of numbers of each attorney against one another as means of determining their value to the firm.

I see attorneys who are so entrenched in counting their entire lives in 6-minute increments that they go home to their loved ones and think of time with their family as an "opportunity cost." These people know exactly how many billing units they are giving up by attempting to have a work life balance, and the very attempt to balance life is offset by a cloud of guilt and worry, knowing that they simply cannot beat the clock.

I see minority attorneys at large firms who readily state that they feel like "tokens" and are ONLY invited to client meetings when the client is of the same race. Since all attorneys are treated as fungible billing units, their unique value is not considered or leveraged. At the same time, the white-male partnership is ignorant of the fact that their own people feel this way and have yet to make meaningful headway in valuing diversity in their firms.

I see the most wonderful and talented female attorneys leaving the practice of law because of an inflexible business model that values "putting in more time" rather than "being effective for the client." At least these women are smart enough to vote with their feet and stand up for what they believe in when they realize that work-life balance is not and never will be a priority of their firms when profits, by definition, are increased by "billing day and night." This has been happening for YEARS and only reinforces that fact that firms are not addressing the real issue! They just keep hiring new young female attorneys to keep their "statistics" up so that they look good in the beauty contest!

I see young lawyers suffering from low professional satisfaction due to under-delegation, low client contact, competitive-individualistic work environments, little to no mentoring, and a partnership that is NOT grooming the next generation to be leaders of their firms tomorrow. The signal they are sending to their young is loud and clear . . . they would rather take their clients to the grave with them than pass on relationships to maintain viability of the firm in the future.

I see a traditional partnership model full of ego-driven, bottom-line oriented (to the exclusion of all else), untrusting professionals who have all but abandoned the next generation when it comes to professional development and addressing the needs of today's workforce. . . clinging on to a dying billing model that is based on a long-refuted economic theory. If you did not know the definition of "Lip Service" when you read this blog, look at a partnership. Nationwide, the partnerships have made promises to embrace diversity, be sensitive to work-life balance, address client-hoarding, mentor their people, and give their people a clear sense of what it takes to make partner, when they will be evaluated, and help them to achieve that goal. What has come of the their promises? Their lips are moving but nothing is coming out!

These are only a few of the things I see in our profession. What I see I do not like. I read a quote in the book The Firm of the Future that read "the people who get on in this life, if they do not find the circumstances they are looking for, they create it." and it really resonates with me. This is an appropriate month to quote Malcolm X, who said "If you are not a part of the solution, you are part of the problem." It is revolutionaries like these who make change by first believing it is possible, and then taking a stand with an uncompromising conviction to succeed in creating the new vision. Exemplar is about a new vision, founded on a faith in what we can be and do together, and grounded by our conviction, our values, our character, and our unending desire to do well by doing good. We are changing lives indeed . . . one by one . . until we're all done!

Understanding the Subtleties: Fixed Pricing That Works & Fixed Pricing That Wont!

This post is to respond to a fellow practitioner who spent the time to write me an email asking about the finer point of fixed pricing. Here, I will explain how to execute on a fixed price model that will result in profits and explain the common flaws in establishing a fixed price.

ABC's of Profitable Fixed Pricing
1) Price based on VALUE TO THE CLIENT (NOT Value of the Deal)
2) Clearly Define the SCOPE of the engagement
3) Constantly manage SCOPE, and issue a change order if deal is outside the SCOPE
4) Set client expectations up front, communicate regularly, manage expectations throughout

To put these in context, I will first respond to the questions from the practitioner (thanks for allowing me to post them, BTW): The Practitioner Wrote me:

I gather that you do not have pre-determined flat fees that are one-size-fits-all, even if the work being done does not differ for different clients. This might be where I have made some mistakes although I do often base my fees on what I perceive to be the "value of the deal".

Answer: Right! one size DOES NOT fit all. It is a big misconception that fixed-pricing is the same as MENU PRICING. While menu pricing is a form of fixed pricing (low end work is sometimes done on a menu basis). the pricing theory Exemplar uses is Value Pricing, which is a fixed price that is based on the value of the transaction to the CUSTOMER. (Yes - determining perceived value is an art, not a science, so learn to think value value value. Your clients will thank you for giving a hoot!)

Practitioner Continued:
How much time is going to be spent at the negotiation stage of doing one of these deals is very unpredictable. How do you deal with a contingency like that? I have tried setting fees in stages -- for example, $X for review of the agreement and consultation with the client. An additional $X for preparation of mark-up, "first round negotiations" and consultation with the client. And so on. I try to price these up front and then give the option of one all-in fee which is less than the client would ultimately pay if he/she ended up purchasing everything in the smorgasbord approach.

Answer: Great Question! Time is unpredictable. First, it is less unpredictable if you manage scope. Assuming you did and time is still unpredictable, SO WHAT??????? Are you running your business to make a lot of money or are you running your business to have a consistent effective hourly rate? The point is that we run our business to be profitable. We DO NOT COUNT TIME, let alone bill for it. Why? Because at the end of the day all that matters is that our business is increasingly profitable and that we continue to take steps to increase profitability. If we ran our business to make sure that every hour spent had the same profit margin (effective rate) then we would be LESS profitable. So, if it is between $10Mil in profit or $8Mil and perfectly consistent margins on every 6-minute increment, which would you choose? (Thanks for letting me pick on you. . . now to my next point)

STAGING: Great! Staging is a good thing. If you are just starting to implement a fixed pricing model, staging a deal is a good way to go. Your all-inclusive option at a discount is counter-intuitive!! You say that you offer a discount for the one-price option? Why? If I were a client and you asked me what I would value more, COMPLETE CERTAINTY, or fixed pricing in stages, I would say COMPLETE CERTAINTY without question. I would pay a premium for peace of mind, wouldn't you? (Don't get me wrong, I know why you do it.. . . . there are compelling psychological factors at play in fixed-pricing). Here, your interests are aligned. The client attributes more value to the all-inclusive fixed price and you undertake more risk include everything, so you ought to be charging more.

NOW: I would like to address some common mistakes professionals make when implementing a fixed-price model OR common (yet unfounded) fears!

1) Pricing based on the value of the deal
Yes, you read that correctly. Remember, Value pricing is all about and only about delivering value to the client. So, while the value of the deal may be a relevant factor in determining the value you can add, it does not mean that the client values your services in direct proportion. Depending on the client, their needs, risk profile, cash flows, and time sensitivity the client may value your services substantially more or less than you think. There is only one right way to approach value pricing: Price it based on perceived value to the client.

TIP: You are NOT a commodity! The whole point of Exemplar's innovative approach is to CREATE VALUE by leveraging our unique talents, skills, and diversity as a firm . . . ultimately offering a product/service to the customer that cannot be obtained at any cost somewhere else! So, always ask yourself "How can I create value?"

2) Menu Pricing
This will only work if you want to be a low-cost provider. If so, enjoy the lack of intellectual challenge, low margins, and the feeling of fungibility! While you are commoditizing yourself, you might as well welcome customers by saying "Welcome to McDonald's, can I help you?" After a year of hard work, maybe you'll get a McRaise!

3) There is no way to fixed-price a litigation!
Really? What do you think this profession did for the 1,950 years before we starting billing by the hour? (Hourly billing started in the 50s). Do you think we all threw our hands up in the air and decided to just settle everything? The funny thing about this is that everyone who says it cannot be done have never even tried. Most do not want to spend non-billable time even thinking about how it could work! Those who have lost their shirt have done so not because of a problem with the model, but because they had NO CONCEPT of what it means to manage SCOPE or price on the VALUE to the client. If you don't want to do it right, don't do it at all! If you don't want to learn it, don't try it! Go read Ron Baker's book on Value Pricing for Professionals. "Take one of these and call me in the morning" and then you will begin to scratch the surface of what value pricing really is. (FUN FACT: Ron's book is awesome. How much more in production cost do you think it cost his to make that soft-covered book compared to others on Amazon? How much more TIME do you think it took the printer to print the darned thing? YEAH! NOT MUCH! That son of a gun VALUE PRICED the book!!! It is $149. I still bought it because I valued it. It was great and I did not regret it for a minute Are you beginning to get it? I think Ron and I will set up a bunch of vending machines in the dessert selling bottled water at $50/bottle.

4) Pricing based on an estimate of time multiplied by your hourly rate. I must say, this is just about the worse form of fixed pricing out there and is really only done by professionals who are too clueless to figure out how to do it right. It is no wonder why most people that do this get burned. Here are the most obvious reasons:

-- Clients are not stupid. They never wanted to buy your time to begin with. Do you think that if you put it in a can with a bow on it (and overprice it to be safe) that clients will want to buy it? If your clients are that dumb then they are dangerous. If you are crazy enough to think that's what they want then you deserve to lose your shirt! (Shirt-loss seems to be a theme in this blog)
-- The whole point of fixed pricing is to be able to add value with non-time-dependent value adds, such as additional skills/services, creative thinking, strategy, stress balls, etc!. Basing your price on time deprives you of the opportunity to get paid for adding value.
-- Now you are shifting the risk to yourself (of the project taking more time) and not reaping any reward. You already cap your profit margins by charging by the hour and now you are putting that at risk by "estimating" wrong. What are you thinking? Rather: Are you thinking??

Oooops, I just got a call from my publisher who told me that if I write any more it will be as long as a book. This only scratches the surface, but should provide some good guideposts for fixed pricing. Remember to practice your ABCs until next time:

1) Price based on VALUE TO THE CLIENT
2) Clearly Define the SCOPE of the engagement
3) Constantly manage SCOPE, and issue a change order if deal is outside the SCOPE
4) Set client expectations up front, communicate regularly, manage expectations throughout

Time-Based Accounting is Behavior Modifying to the Deteriment of Profits

Time and time again Human Resource executives reinforce the concept that what you measure and reward is what you get for behavior. Nobody I know disputes that this is true. If you accept it as true, then you create a linear relationship where common behaviors can be explained by looking to a firm's measurement and reward system. It seems like companies today have become obsessed with collecting and analyzing data . . . . simply because they can. So much so that most companies would rather reward the wrong behaviors because they can easily measure them, rather than reward the right behaviors that are more difficult to quantify with numbers. As a result, time-based accounting creates a distorted sense of reality that changes the behavior of professionals to the detriment of profits. Let me explain:

Factual Foundation:
Billable hour requirements are at all-time highs in our profession
Attorneys are therefore working harder and harder just to meet these billable requirements
Billable Hours are the most important factor in one's compensation (Aside from origination, which is only relevant at the Partnership level)

If I were to ask you what the firm above values what would you say?
ANSWER: Billed Time

OK -- So how does this impact attorney behavior?
Attorneys therefore, in order to see their families every once in awhile, are trained to put in as many "billable" hours as possible and do not value "non-billable" time. Put another way, since it takes roughly 70hrs a week of work in order to meet the 2000 hour billing requirement for the firm, attorneys have no financial motivation to act in the best interest of the client or in the interest of the firm -- Let me explain:

The quest to meet billing requirements is inherently a short-sighted. For instance, there are severe pressures on attorneys to pad bills and over-lawyer legal matters with no regard for the risk-return relationship on which businesspeople make decisions. These concerns are not only ethical ones, but also foster a relationship of distrust between the client and the attorney. In addition, the efforts to raise short-term revenue are clearly at the expense of clients (who know they are being taken for a long walk) and end up leaving or simply never become loyal to the firm. So, say for example that an attorney (who really needs to put in some hours to make quota) gives into temptation and decides to put in 20% more hours on a case than is necessary. Do you think that the 20% extra revenue this year is greater than the Net Present Value of future cash flows NOT EARNED by virtue of one attorney's self-interested behavior? Of course not! The problems are these:

1) At a firm-wide level these practices are short-sighted and arguably driven by greed of the Partners. The problem is that the reward system creates individual pressures that may not be driven by greed alone, but simply a desire to get off the treadmill of time before 10pm so they can go kiss their wife and children goodnight once every few days. Either way, the result compromises the integrity of our profession, the service to our clients, and sends the wrong signal to our people about what is truly important in life.

2) If you agree that these pressures can have a severe impact on the client relationship and compromise the long-term cash flows of the firm (remember, getting a new client costs 5 times more than keeping a current client!), then do you realize what you are doing? You are giving each and every individual in the firm the power to compromise the long-term viability of your organization by creating financial incentives for over-billing and over-lawyering, temptations for billing fraud, padding, and absolutely NO INCENTIVE to provide excellence in client service. Your people, some responding to the reasonable pressures of family life and some responding to the desire to earn more by these compensation systems, are doing EXACTLY what you are telling them you value. BILLING TIME!!! Congratulations! You just treated your people like a stopwatch! No wonder attrition rates are at all-time highs. Firms have no concept of how to value people, and so what they end up with are cogs in a wheel.

What we have done at Exemplar is realize that time-based billing is not only a poor way to value people, it is inhumane. As a result, we work hard to identify that leading indicators of value in our organization and reward each individual on the basis of one's strengths and contribution. Value-Pricing is not just a better billing model, it is a better way to show your people that you truly care about who they are and what they have to offer. It makes all the difference in the world when you wake up every day looking forward to going to work. It makes all the difference in the world when I see our people leveraging their strengths at every turn knowing that we both know and value what each of them have to offer. More than anything, seeing people thrive is the most rewarding experience . . . it is why we persevere . . . and why I am so proud of what Exemplar stands for!

SCOPE: It's Not Just A Mouthwash! It's What You Do When You Used Fixed Pricing!

One of the most common misconceptions people have about using a fixed-price model is that setting a fixed-price is all that you need to do. It is no wonder attorneys worry about how it can be done. In order to be profitable on a fixed-price model, attorneys need to change the way they do business almost entirely. They need to:

1) Define a price
2) Clearly Define and Communicate the Scope of the work
3) Learn to be a project manager by
a) Managing the scope
b) Delegating as appropriate, which requires trust that someone
other than yourself can do some of the work competently
c) Mentoring; and
d) Communicating regularly with the client on progress and strategy;

This blog focuses on Scope because it seems to be the part that attorneys have the hardest time wrapping their brain around. Scoping a project is about working with the client to first understand what they value, how much certainty they want and how much work that certainty includes. Then you can define a scope that is consistent with the clients needs and desires. As a general proposition, professionals are all in a position to give the customer what they want at a fixed price and operate a profitable business. Let me propose one way to look at it that works for us. In scope we consider 3 different types of work:

1) Certainly - Work that will certainly need to be done
2) Likely - Work that may need to be done or is likely
3) Huh? - You don't have a crystal ball after all. Sometimes you simply have no idea if it will need to be done when you scope it out.

A key part of fixed pricing is understanding what kind of peace of mind the client wants. Exemplar sends proposals for work that includes all 3 of the categories above when necessary. We often price work that is certain to be done and clients appreciate the fixed price. We very often include work the is also likely required because clients value the peace of mind of knowing that it will be taken care of at a price certain. Sometimes, we even price projects that include work that falls into the category of "Huh?" This is for clients who want top notch, concierge service with no surprises at all. This selection begins to act like legal insurance at the outer edges. This blog is too short to explain the pricing methods used for the different types of projects and scopes, but I will certainly respond to the basic question of "How can you include 1,2 and 3 and be profitable if you do not know blah blah blah blah?" (Yes, I am making fun of you for asking. . . . unless you were born yesterday then you realize that you are surrounded by high rise buildings that are all owned by the most profitable companies in this country that do exactly that. . . . they sell insurance. . . . and yet you still feel compelled to wonder????) At a macro level, you only have to know liability ranges and probabilities. Keep in mind the following: You do not have to sell a Mercedes for the price of a Buick. How to price projects on a value pricing basis is also beyond the "SCOPE" of this post, but will be coming soon. Just keep in mind that statistical analysis is not necessary for most types of fixed pricing. If you are considering trying out a fixed-price model, start by setting a scope with the client that only includes work that is !) Certain, or 2) VERY likely to need to be done. This will reduce your "perceived" risk while giving the customer the peace of mind that they want and deserve. If you have questions about this please feel free to comment and I will respond.

NOW: Finally you are free from the billable hour on at least one project. Take this project as a golden opportunity to learn project management skills. This is what will improve your profitability or (as you probably think about it . . ) your "effective rate." What does that mean? It means asking yourself who needs to do what, how work can be done more efficiently and effectively. You may well find that good project management gives you the opportunity to get the work done more profitably (at the same end cost to the client), AND increase the perceived value of your services to the client at the VERY SAME TIME! We have certainly done so!

You Have to Know How A JibJab Works Before You Can Fix A Broken JibJab!

Happy New Year to everyone. I open the year with a blog that has you asking "What the hell is a JibJab?" A JibJab is a tool that I am using in this blog to illustrate my point. . . the point that you cannot fix a problem with a JibJab unless you know how a JibJab works. I am making this point in an effort to explain the dearth of intelligent conversation that most attorneys are able to have about the merits of fixed-pricing over the billable hour model. There is no question that every lawyer has an opinion on the topic, but no real headway can be made in a debate where one side is simply in the dark as to how their own business operates. You see, their JibJab is the billable hour model. The billable hour is the heart of their business but so many lawyers do not understand how it impacts their business. They do not keep metrics on customer satisfaction rates, uncollectables, new vs. current customers as a percentage of total revenue, etc, etc. Those larger firms that do keep this data put non-lawyer administrators in charge of managing it and reporting it, rather than using it as a tool to better understand their business.

Let's assume for the sake of this blog that I were taking questions on the merits of fixed-pricing from the brightest minds at the big firms and that they some were educated on how their JibJab worked. My proposition is that these partners would find it perfectly logical and irrefutable that fixed-pricing is a more sound economic model and ultimately more profitable in the long-run for law firms, not to mention that the pricing model solves many problems that firms have been struggling with for decades, such as diversity, work-life balance, and many more. In fact, my fellow Fellows at the VeraSage Institute have done just that . . . they have consulted to some of the largest firms in the world and, while firms are able to see multiple ways that it can improve their business, they are unable to take it from an intellectual exercise to execution. Where I am going with this? The point is this: Progress in our industry breaks not at the point of logic or even proof that fixed pricing is better, progress breaks at the point of execution. I therefore propose that we talk more about the tough issue of execution in order to make progress and perpetuate the change back (Billable Hours started in 1950s) to a fixed-price model. There is enough empirical evidence out there to show that billing by the hour is a dying practice. For those who embrace the future, let's work together in 2007 to create a better vision for the future of the profession.

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.