In the last blog post I focused on the first two C's. Now, it is time to give the last two some discussion. Just as a reminder, here are the 4 C's of Value Pricing:
Comprehend
Create
Communicate
Close
These last 2 C's are really funny. . . . everyone thinks they "get it" and most people don't have a clue. for instance, most attorneys I know insist hey have great communication skills and yet most seem to be socially inept at the same exact time! Simply amazing! Wall Street Journal please take notice, self-awareness in Lawyers is at all-time lows! Communication as a part of Value Pricing is critical. See Below:
ATTORNEY --------------- CLIENT
Value starts here ----------- and ends up here
COMMUNICATE:
The first two Cs are focused on the creation process that all starts with the service professional. Value Pricing is based on PERCEIVED VALUE . . . . in other words. . . your value does not really exist unless the client can see it! So many lawyers miss this point in their practices today. . . they get mired in the details of a legal matter while sitting behind their desk all day and go home so proud thinking they added so much value to the client (even though the client had no idea how hard they laboured to find that needle in the haystack) and the next thing you know the client is calling you complaining about that huge bill you sent them!
When you use a fixed price model, it forces you to COMMUNICATE the value of the services provided. Remember, if you priced based on value and fail to communicate the value to the client, you will certainly not be able to CLOSE the deal. What does this mean? Well, If you did a good job of Comprehending Value then Communicating value should be easy. You are simply taking what you comprehend and stating how what you Create meets the needs that you Comprehended! If it is a perfect marriage you will have a winner. This is different in every scenario, so what is most important here is to watch your client, their body language, questions, etc, and make sure that you got the value proposition right from the beginning. If not, try to understand why and create a proposal that meets their desired needs. Remember: Value is SUBJECTIVE. . . . you need to Communicate the value to create a greater appreciation for your wisdom.
CLOSE:
Sounds easy, right? OK. . . . well try to add as much value as you possibly can, price accordingly, and try to sell on a fixed price against all of those other lawyers who "underestimate" how long it will take to quote a lower price and get the business! Well, it is easy really. The first thing you need to understand is that you are not a commodity. . . . . well. . . you are if you think you are, and then you don't deserve to have more than anyone else. But if you have a special skill or talent or quality and you realize it, than you have a "special sauce!" At Exemplar, we leverage the unique skills and talents of our entire team to create a "you can't get than anywhere else" effect. This has everything to do with closing the deal. . . because it is your job as a professional to communicate how unique and differentiated your services are . . . so that a price comparison between you and your competition is apples and oranges.
Here are some common problems that people deal with and how to address them in closing the deal:
Price Resistance:
Remember -- People are not really price sensitive, they are value sensitive. If someone questions the price, you need to be smarter and realize it is really a value objection: Reinforce the value proposition, differentiate, and reassure!
Offer Solutions: Be creative. If your attempt to communicate value is not successful, you should be creative and see if you can solve their problem or accomplish their goal with "less lawyering" With a little creativity and listening skills, you will often find that clients did not want the kitchen sink!!! So stop throwing it at them!
TIP: KNOW THY VALUE!!! Never lower your price without taking away corresponding value. I could write a blog on this topic alone. It is behaviour modifying. . . if clients think they can squeeze hundred-dollar bills out of you by trying to negotiate, they will do it every singe time. Know thy value, price accordingly, and stand behind the value you add. At Exemplar, clients know we are not cheap. We tell them up front we are not the cheapest shop in town. I personally tell some clients that if they want to shop at Wal-Mart for their lawyer I can refer them to a few down the street. People get what they pay for and they know it. . . . clients who do not want to pay you highly will not value you highly (assuming you follow the 4Cs and did your part!).
Don't be afraid to walk away: Remember: Inventory at the supermarket does not lose self-esteem if it is sitting on the shelf for an extra hour. . . neither should you.
Losing Business To Wal-Mart: former Wal-Mart shoppers end up being our best clients. . . . they first go to lawyers (some at big-firms too!) who underestimate the deal by so much in order to get the business. . . . they think they win. . . the client gets SCREWED. . . and they come to Exemplar never to return to a billable hour firm again. Integrity is more important to clients than saving a dollar. Thanks big-law for sending business our way. The breaches of integrity in our profession can become a wonderful referral source!
Put this on your wall over your desk: It is the formula to success. . .
I feel much better having a free hour to develop better business than to work for a client who does not Value my expertise highly!
When I feel good about what I do, I produce better results for my client.
When I am Valued highly, I feel good about what I do.
When I get paid well, I feel Valued highly.
When I Comprehend, Create, and Communicate Value I get paid well by the RIGHT clients!
Are you getting my drift? If not than you deserve to be blown away by you competition. If so,
you are on your way to success in a Value Priced Model.
Tuesday, August 28, 2007
Thursday, August 16, 2007
The 4 C's of Value Pricing: Get it or forget it!
There are many things about Value Pricing that professionals continue to get wrong. In this blog, I wanted to share the methodology we use internally at Exemplar to train our professionals to execute on a Value Price model: The 4 C's of Value Pricing:
Comprehend
Create
Communicate
Close
For the purposes of this blog, I will focus on the first 2, since these could be the subject of a book and the last C is particular to closing the sale on Value Priced work, which will only happen if you do the first 3 properly. Let me start out by explaining that the Price of work in a Value Price model has NOTHING to do with your time. Say it with me now " The Price of work has NOTHING to do with time." Write it on the board 50 times and say it out loud at least 3 times a day. Value Pricing is about Adding Value to the client and Charging for the value you add. . . . It is ENTIRELY based on Value to the client. Yes, I'm going to have to ask you to repeat that to: It is ENTIRELY based on Value to the client. Now for a lesson:
(Short Story: I recently learned that if you get stuck in a cave for several days in perfect darkness, you would actually go blind. . . .YES. . . blind for good! Did you know that the fish that swim in cave waters are completely blind? Who knew! Why is this relevant? What the heck do you think will happen to your skills if you fail to use them, particularly the ones that are relevant to the 4 C's. So, for your own good, make sure you use your skills lest you lose them!
Comprehend Value:
Have you lost your ability to comprehend value as a result of decades of billing by the hour?
Perhaps the biggest challenge for professionals training in the billable hour model is to Comprehend Value to the client. Most professionals who try a fixed price model cannot help themselves but to try to estimate time in order to arrive at a price. This is almost a sure way to fail at pricing. The most profitable companies do no price products based on their costs, so why should you? They price their products based on the perceived value to the client! How do they determine value? First, they have to Comprehend Value to the client. In each field, there are certain things that clients value. In law, for instance, here are some of them:
-- Getting the job done quickly or at least on schedule
-- Great Service
-- High-Quality Work
-- A Relationship with their attorney
-- An attorney who understands their business
-- A professional who respects them
-- An attorney who returns phone calls
They go on and on. Many value drivers are specific to each engagement. For instance, some clients value being educated on each clause of their contracts, while others are so busy that they value a professional who can do a great job while requiring a little time as possible of the client's time. The key to comprehending value is to ask questions. You might say "I already ask many questions, so I must already get it". Listen up: If it were that simple smarty pants I would not have to be writing this to you. Clearly, it is about asking the RIGHT questions. Right now, you ask questions so that you can understand the substantive work that needs to be done. . . you are trying to understand your mandate. . . . not your VALUE to the client. You need to ask them what they are looking for in a professional relationship. What would the engagement look like to them in an "ideal" world and what would their customer experience be like. What "outcome" are they looking for and how much had-holding or education do they want. In order to value price you need to Comprehend Value by asking smart questions designed to uncover their desires, goals, deadlines, and business strategy. Without this information, you cannot effectively serve your clients no matter what billing model you use!
Create Value:
Have you lost your ability to be creative by being a drone in the billable hour system for years?
This one is simply my favorite one, because this is where Exemplar is so different from most professionals. Remember, we price based on Value and we charge for the Value we add. So, check this out. . . . where are the incentives for your firm and where are the incentives for Exemplar? What do you think is right?
PRICING MODEL
Billable Hours
INCENTIVE (You make more money when you. . . )
Bill More Hours, Drag it out, take your time, pad your bill, be inefficient)
PRICING MODEL
Value Pricing
INCENTIVE (You make more money when you. . . )
Are more effective, efficient, add more value, get the JOB DONE!
Are you getting my drift? In a billable hour model you do no spend any non-billable time thinking with the client about what the best strategy is to approach the case. In a Value Pricing model, we have every incentive to partner with our clients, put our business thinking caps on with them, and think up the most creative ways to approach the problem in order to solve it. It is a strategic process, and often a creative process, which is what is so rewarding about it. At Exemplar, we have an incentive to find new ways to solve old problems. Put incentives in the right place. . . no more hourly bull! No more bill padding and hamster wheeling. . . . put your timepiece down and do the Value Pricing dance! Look at the Incentive chart above again. . . what would you rather do the rest of your professional life?
This is only a short sample of what needs to happen on each of the first 2 C's. The other 2 are critical as well and are worthy of another discussion or blog post. The point here is that Value Pricing is not just a different pricing model. . . It is a different State of Mind and requires different Skills! So, you need to ask yourself if you are a fish in a cave or if you have the skills to pull it off. Be patient with yourself while you learn and develop. You will not become an expert in any of these in a day, but you will notice a significant difference in your lifestyle and in the happiness of your clients as you embark on the journey!
Comprehend
Create
Communicate
Close
For the purposes of this blog, I will focus on the first 2, since these could be the subject of a book and the last C is particular to closing the sale on Value Priced work, which will only happen if you do the first 3 properly. Let me start out by explaining that the Price of work in a Value Price model has NOTHING to do with your time. Say it with me now " The Price of work has NOTHING to do with time." Write it on the board 50 times and say it out loud at least 3 times a day. Value Pricing is about Adding Value to the client and Charging for the value you add. . . . It is ENTIRELY based on Value to the client. Yes, I'm going to have to ask you to repeat that to: It is ENTIRELY based on Value to the client. Now for a lesson:
(Short Story: I recently learned that if you get stuck in a cave for several days in perfect darkness, you would actually go blind. . . .YES. . . blind for good! Did you know that the fish that swim in cave waters are completely blind? Who knew! Why is this relevant? What the heck do you think will happen to your skills if you fail to use them, particularly the ones that are relevant to the 4 C's. So, for your own good, make sure you use your skills lest you lose them!
Comprehend Value:
Have you lost your ability to comprehend value as a result of decades of billing by the hour?
Perhaps the biggest challenge for professionals training in the billable hour model is to Comprehend Value to the client. Most professionals who try a fixed price model cannot help themselves but to try to estimate time in order to arrive at a price. This is almost a sure way to fail at pricing. The most profitable companies do no price products based on their costs, so why should you? They price their products based on the perceived value to the client! How do they determine value? First, they have to Comprehend Value to the client. In each field, there are certain things that clients value. In law, for instance, here are some of them:
-- Getting the job done quickly or at least on schedule
-- Great Service
-- High-Quality Work
-- A Relationship with their attorney
-- An attorney who understands their business
-- A professional who respects them
-- An attorney who returns phone calls
They go on and on. Many value drivers are specific to each engagement. For instance, some clients value being educated on each clause of their contracts, while others are so busy that they value a professional who can do a great job while requiring a little time as possible of the client's time. The key to comprehending value is to ask questions. You might say "I already ask many questions, so I must already get it". Listen up: If it were that simple smarty pants I would not have to be writing this to you. Clearly, it is about asking the RIGHT questions. Right now, you ask questions so that you can understand the substantive work that needs to be done. . . you are trying to understand your mandate. . . . not your VALUE to the client. You need to ask them what they are looking for in a professional relationship. What would the engagement look like to them in an "ideal" world and what would their customer experience be like. What "outcome" are they looking for and how much had-holding or education do they want. In order to value price you need to Comprehend Value by asking smart questions designed to uncover their desires, goals, deadlines, and business strategy. Without this information, you cannot effectively serve your clients no matter what billing model you use!
Create Value:
Have you lost your ability to be creative by being a drone in the billable hour system for years?
This one is simply my favorite one, because this is where Exemplar is so different from most professionals. Remember, we price based on Value and we charge for the Value we add. So, check this out. . . . where are the incentives for your firm and where are the incentives for Exemplar? What do you think is right?
PRICING MODEL
Billable Hours
INCENTIVE (You make more money when you. . . )
Bill More Hours, Drag it out, take your time, pad your bill, be inefficient)
PRICING MODEL
Value Pricing
INCENTIVE (You make more money when you. . . )
Are more effective, efficient, add more value, get the JOB DONE!
Are you getting my drift? In a billable hour model you do no spend any non-billable time thinking with the client about what the best strategy is to approach the case. In a Value Pricing model, we have every incentive to partner with our clients, put our business thinking caps on with them, and think up the most creative ways to approach the problem in order to solve it. It is a strategic process, and often a creative process, which is what is so rewarding about it. At Exemplar, we have an incentive to find new ways to solve old problems. Put incentives in the right place. . . no more hourly bull! No more bill padding and hamster wheeling. . . . put your timepiece down and do the Value Pricing dance! Look at the Incentive chart above again. . . what would you rather do the rest of your professional life?
This is only a short sample of what needs to happen on each of the first 2 C's. The other 2 are critical as well and are worthy of another discussion or blog post. The point here is that Value Pricing is not just a different pricing model. . . It is a different State of Mind and requires different Skills! So, you need to ask yourself if you are a fish in a cave or if you have the skills to pull it off. Be patient with yourself while you learn and develop. You will not become an expert in any of these in a day, but you will notice a significant difference in your lifestyle and in the happiness of your clients as you embark on the journey!
Monday, August 06, 2007
How Powerful The Mirror!
Don't you meet people all the time that make you think: "If only they knew what they looked like!" Don't you just wish you could just get them a mirror and put them out of their misery? I certainly do! I was reading David Maister's great book, True Professionalism, for the 3rd time and got neck pains from consistently nodding at how logical and, well, obvious it is that the measure of an organization is whether it has the courage to define and the defend its values! When I looked up from the book and peered out the window and the competing firm in the ivory tower across the way I had the opportunity to exercise the other neck muscles as I shook my head in disgust at what exists today in the legal industry: A crisis of values!
When I say values I do not mean some politically conservative statement or one of moral judgment. Rather, I mean a conspicuous absence of stated core values that are enforced and alive inside the firm! At Exemplar, we have eight core values: Excellence, Leadership, Integrity, Team, Trust, Respect, Communication, and Equanimity. What does that mean to us? It means that we talk about these values openly in the firm . . . not just once in awhile but all the time. We talk about them in staff meetings and come to a mutual understanding of what these values mean to us and to our organization. Perhaps most importantly, they are NOT for SALE! It is simply unacceptable to compromise any single one of them in our organization. This brings me to the point of this blog: Taking a look in the mirror. If you are a partner in BigLaw I suspect that the idea of all of the Partners looking in the mirror and seeing how people really see them (or what they think of them) makes you worry that they will all jump out the window of the 45th floor as if to re-enact 9/11. I'll bet you are right.
Most associates I know think the Partners in Power treat them like CRAP!
So, wake up and smell the flowers folks. . . it might be time to look in that mirror and see what the "people" around you really think about you. After all, the only person you are really fooling by sticking your head in the sand is you!
At Exemplar we've got mirrors in place from the start. We are instituting a system that allows everyone around you, both managers and subordinates, to rate you anonymously on the eight core values, the results of which are combined into a report that only you and an executive can see. At periodic quarterly reviews you will be able to see what you really look like to people. After all, consider the following on why perception really is reality!
Our VALUES are not an Objective Standard, They are subjective. The ONLY thing that matters is the mirror: Whether people really think you have them.
Take Leadership: You are not a leader if others do not follow. If people do no perceive you as a leader they are sure not to follow. Therefore, what people think about you in this regard is more important than anything.
Take Integrity: Have you ever heard a story about someone with the highest integrity. . . and nobody thought so? Neither have I!! Perhaps people's perception of your integrity is as critical as integrity itself!
How about Respect? There really is no such thing as a respectful person that causes everyone around them to feel like they are treated like crap!
Need I go on? Probably not! So, you ask, what do you do after someone sees what they look like? Just because they see "Ugly" does not mean they will change, right? RIGHT! That is the point. . . . Check this out.
The result of continuously giving people the "mirror" is that how (or if) they respond says a lot about their character. You see, the people who belong at Exemplar simply cannot stand to see the blemishes on their face. They came to Exemplar because they believe in the values and believe that they have every one of them. So, when they see something they can improve they are motivated to take action to make it better. The great thing about the mirror test for us is that it takes a hell of a lot less policing to identify the DUDS! It is this simple: The Duds will no change in spite of what they see! It makes our job easier. People who do not embrace the values are not disappointed when they look in the mirror and see "jerk" or "client hoarder" or "untrusting bastard!" . . . I can go on. . . you know many people who could be described this way!
So. all you really have to do is put people to the perception test and see if they give a damn! Do you have the courage to implement this in your organization? You have nothing to lose (well, unless your window is open. . . and even then the ones who jump probably did need a complete personality transplant!) Can you think of one good reason people should not be accountable to the values of the organization? I can't!
When I say values I do not mean some politically conservative statement or one of moral judgment. Rather, I mean a conspicuous absence of stated core values that are enforced and alive inside the firm! At Exemplar, we have eight core values: Excellence, Leadership, Integrity, Team, Trust, Respect, Communication, and Equanimity. What does that mean to us? It means that we talk about these values openly in the firm . . . not just once in awhile but all the time. We talk about them in staff meetings and come to a mutual understanding of what these values mean to us and to our organization. Perhaps most importantly, they are NOT for SALE! It is simply unacceptable to compromise any single one of them in our organization. This brings me to the point of this blog: Taking a look in the mirror. If you are a partner in BigLaw I suspect that the idea of all of the Partners looking in the mirror and seeing how people really see them (or what they think of them) makes you worry that they will all jump out the window of the 45th floor as if to re-enact 9/11. I'll bet you are right.
Most associates I know think the Partners in Power treat them like CRAP!
So, wake up and smell the flowers folks. . . it might be time to look in that mirror and see what the "people" around you really think about you. After all, the only person you are really fooling by sticking your head in the sand is you!
At Exemplar we've got mirrors in place from the start. We are instituting a system that allows everyone around you, both managers and subordinates, to rate you anonymously on the eight core values, the results of which are combined into a report that only you and an executive can see. At periodic quarterly reviews you will be able to see what you really look like to people. After all, consider the following on why perception really is reality!
Our VALUES are not an Objective Standard, They are subjective. The ONLY thing that matters is the mirror: Whether people really think you have them.
Take Leadership: You are not a leader if others do not follow. If people do no perceive you as a leader they are sure not to follow. Therefore, what people think about you in this regard is more important than anything.
Take Integrity: Have you ever heard a story about someone with the highest integrity. . . and nobody thought so? Neither have I!! Perhaps people's perception of your integrity is as critical as integrity itself!
How about Respect? There really is no such thing as a respectful person that causes everyone around them to feel like they are treated like crap!
Need I go on? Probably not! So, you ask, what do you do after someone sees what they look like? Just because they see "Ugly" does not mean they will change, right? RIGHT! That is the point. . . . Check this out.
The result of continuously giving people the "mirror" is that how (or if) they respond says a lot about their character. You see, the people who belong at Exemplar simply cannot stand to see the blemishes on their face. They came to Exemplar because they believe in the values and believe that they have every one of them. So, when they see something they can improve they are motivated to take action to make it better. The great thing about the mirror test for us is that it takes a hell of a lot less policing to identify the DUDS! It is this simple: The Duds will no change in spite of what they see! It makes our job easier. People who do not embrace the values are not disappointed when they look in the mirror and see "jerk" or "client hoarder" or "untrusting bastard!" . . . I can go on. . . you know many people who could be described this way!
So. all you really have to do is put people to the perception test and see if they give a damn! Do you have the courage to implement this in your organization? You have nothing to lose (well, unless your window is open. . . and even then the ones who jump probably did need a complete personality transplant!) Can you think of one good reason people should not be accountable to the values of the organization? I can't!
Wednesday, July 25, 2007
Law Firms Are Over-Managed and Under-Lead. . and Full of People Who Cannot Manage Either!
David Maister and other prominent writers on professional services have all concluded that Law firms are over-managed and under-lead. . .
The fact that law firms simply suck in the leadership category is not worthy of discussion since that sad fact plainly speaks for itself. It is even more sad that, as David Maister so correctly points out, management has beat leadership and true people management is virtually non-existent in law firms today.
My experience is that law firms are full of people who cannot manage and people who refuse to be managed. I find this dichotomy to be quite interesting because you would think that it would take particularly skilled managers to manage a workforce of people who, by their nature "resists" being managed. Instead, firms have given up on trying to manage their people so there is very "management" going on at all.
When I ask Associates where they get feedback from they tell me they get a spreadsheet from "above" that lands on their desk every month with their billable hours on it (so they can worry endlessly about whether they are meeting their quotas).
When I ask what the reporting structure is at their firm most have no idea. When I ask when they last got a "review" with their manager they said "What? A Review?" Some said it happened once two years ago and never since. Most would never describe the person reviewing them as a manager at all. The title itself is simply nonexistent in law firms today. Think about it: The Managing Partner of a law firm does no really "manage" people either. Do you really think that the Partners at the big firm voted in Mr. Popular so that he could give them performance evaluations? Put simply, the Partners do no give ANYONE permission to manage them! They have autonomy! The only thing that Managing Partners really manage are big egos and fires in the firm.
So the problem with law firm structure (a dilution by consensus model) is that is lacks accountability and checks and balances altogether! Partners are not accountable to anyone. . . they are accountable to the collective only, none of which have any individual consent to be managing another. There is no Board of Directors holding the executives (Partners) accountable for being good. It is a corrupt system. . . the Partners are the Directors, the Shareholders, and everyone is the CEO of their own empire. There are no checks and balances at all.
It is no wonder why large firms are unable to build a consistent culture when they are stuck with the sub-cultures created by each Partner who leads a department.
It is no wonder why Partners can get away with treating Associates and Partners alike like crap and get away with it.
It is no wonder why the largest rainmakers are the ones who are allowed to sit on the compensation committees. One day they will accommodate themselves out of existence!
It is no wonder why people -- future leaders -- are not identified and developed within the firm.
It is no wonder why lawyers get away with hoarding their books of business -- the very people who are in a position to fix the problem of client hoarding are benefiting from their self-accommodation!
It is no wonder that attrition rates and burnout are at historical highs.
It is no wonder that a young attorney like myself finds no inspiration in the traditional model. . . one that has abandoned its young . . . one that, by its structure alone, speaks volumes about how they do not value who we are, how we develop as professionals, or whether we have a thriving organization to lead in decades to come.
It IS a wonder, however, why the most inquisitive of professionals do no themselves step off the treadmill once in awhile to take a look in the mirror. To see what you do from afar. To watch how the business model adversely effects your life and the lives of those around you. To escape for a moment the fact that you have spent more than two billing increments reading this blog and realize that you and everyone around you lives their lives this way. . . on a treadmill that simply will not stop . . . tick, tock, drop.
With all of the impact a new business model can have on the lives of professionals in this industry who are crying out for a better life. . . . It is NO WONDER why I would dedicate my professional life to abandoning the billable hour in favor of a model that makes sense and create a corporate structure with accountability, management, leadership, vision, and hope. . . . . . so that thousands fewer of us lawyers have to wake up every day on a treadmill, return home after our children sleep, and see every non-billed moment of our life as an opportunity cost. Finally, they can actually be happy! It would be my greatest pleasure to bring this sense of satisfaction to our people!
The fact that law firms simply suck in the leadership category is not worthy of discussion since that sad fact plainly speaks for itself. It is even more sad that, as David Maister so correctly points out, management has beat leadership and true people management is virtually non-existent in law firms today.
My experience is that law firms are full of people who cannot manage and people who refuse to be managed. I find this dichotomy to be quite interesting because you would think that it would take particularly skilled managers to manage a workforce of people who, by their nature "resists" being managed. Instead, firms have given up on trying to manage their people so there is very "management" going on at all.
When I ask Associates where they get feedback from they tell me they get a spreadsheet from "above" that lands on their desk every month with their billable hours on it (so they can worry endlessly about whether they are meeting their quotas).
When I ask what the reporting structure is at their firm most have no idea. When I ask when they last got a "review" with their manager they said "What? A Review?" Some said it happened once two years ago and never since. Most would never describe the person reviewing them as a manager at all. The title itself is simply nonexistent in law firms today. Think about it: The Managing Partner of a law firm does no really "manage" people either. Do you really think that the Partners at the big firm voted in Mr. Popular so that he could give them performance evaluations? Put simply, the Partners do no give ANYONE permission to manage them! They have autonomy! The only thing that Managing Partners really manage are big egos and fires in the firm.
So the problem with law firm structure (a dilution by consensus model) is that is lacks accountability and checks and balances altogether! Partners are not accountable to anyone. . . they are accountable to the collective only, none of which have any individual consent to be managing another. There is no Board of Directors holding the executives (Partners) accountable for being good. It is a corrupt system. . . the Partners are the Directors, the Shareholders, and everyone is the CEO of their own empire. There are no checks and balances at all.
It is no wonder why large firms are unable to build a consistent culture when they are stuck with the sub-cultures created by each Partner who leads a department.
It is no wonder why Partners can get away with treating Associates and Partners alike like crap and get away with it.
It is no wonder why the largest rainmakers are the ones who are allowed to sit on the compensation committees. One day they will accommodate themselves out of existence!
It is no wonder why people -- future leaders -- are not identified and developed within the firm.
It is no wonder why lawyers get away with hoarding their books of business -- the very people who are in a position to fix the problem of client hoarding are benefiting from their self-accommodation!
It is no wonder that attrition rates and burnout are at historical highs.
It is no wonder that a young attorney like myself finds no inspiration in the traditional model. . . one that has abandoned its young . . . one that, by its structure alone, speaks volumes about how they do not value who we are, how we develop as professionals, or whether we have a thriving organization to lead in decades to come.
It IS a wonder, however, why the most inquisitive of professionals do no themselves step off the treadmill once in awhile to take a look in the mirror. To see what you do from afar. To watch how the business model adversely effects your life and the lives of those around you. To escape for a moment the fact that you have spent more than two billing increments reading this blog and realize that you and everyone around you lives their lives this way. . . on a treadmill that simply will not stop . . . tick, tock, drop.
With all of the impact a new business model can have on the lives of professionals in this industry who are crying out for a better life. . . . It is NO WONDER why I would dedicate my professional life to abandoning the billable hour in favor of a model that makes sense and create a corporate structure with accountability, management, leadership, vision, and hope. . . . . . so that thousands fewer of us lawyers have to wake up every day on a treadmill, return home after our children sleep, and see every non-billed moment of our life as an opportunity cost. Finally, they can actually be happy! It would be my greatest pleasure to bring this sense of satisfaction to our people!
Monday, July 16, 2007
Distinguishing Price-Lead Costing from Cost-Plus Pricing
We are finally making some progress on the details of executing on a value-priced model. A reader and fellow attorney commented on a prior post with confusion on the differences between Cost Plus Pricing and Price-Lead Costing, writing:
"I am confused. Throughout your blog you mention that attorneys need to know their costs in order to have an adequate basis on whether to take on a job/client or not. Simple enough, get the accountants/bookeepers rolling and you have your cost basis per day/week/year.The confusion sets in when you say that you must get away from a cost + profit margin model and go to the more ephemeral value billing proposition. I get your value based theory, but I get lost on the details of arriving at "value" without factoring costs per day/week/year, etc. If what you are saying is like Lucky Brand - it costs them $5 per pair of jeans to make, but we as the client value them at $100.00 per pair of jean, then they have provided a value we are willing to pay for (don't get me going on Diesel or Sevens). Regardless, there is the value and then the price you are willing to pay for "fashion". Is this what you are talking about? In your paradigm, is cost important to know the minimum amount you would take from a client and still earn a profit?
On the one hand you state - know your costs. On the other you state that costs + margin should be avoided. Isn't it always cost plus margin. If you know your cost and propose a value billing system to your client, wouldn't it be cost + plus margin with a different definition of margin? "
This reader asks great questions and everyone needs to understand the differences and the subtleties here. First, let's do away with the notion that "billable" hours has anything at all to do with costing. . . IT DOES NOT!!! It costs you the same in salary, benefits, and overhead to pay your secretary whether she's writing a client letter or doing her nails! The attorney is absolutely right that I am saying you must "know your cost," but there are some key operational differences in the two business models:
I think the hang up is that the reader is trying to conceptualize costing the same way he does operating in his current billable hour environment In a cost-plus model, you mark up by a desired profit margin all of your resources so all that you have to account for is time multiplied by a rate. Can I challenge you to change your paradigm for a moment? Think of your business this way: (I simplify)
You have 10 attorneys at a fully loaded cost of $200k/yr each (average)
You have 5 paralegals fully loaded at $80k each
You have 5 Secretaries fully loaded at $60k each.
At a very simple level, your operational costs are $2.7Mil/yr whether you are all playing poker in he conference room or doing hard work. You know and I know that the cost by function can be broken down into monthly costs per resource, and that you have practiced long enough to get a sense of how many full-time equivalents at each level should be required to complete a trial or a legal project with NO CREATIVITY. Remember SCOPE???? This is really important because you have to first sit down with the client and SCOPE the job and let them define the desired boundaries. . . remember with a SCOPE defined you no longer have to "guess" what the boundaries will be because you will have defined it). Now, you are able to arrive at a rough cost.
NOW that we have "roughly" achieved a minimum cost (meaning that we need to add and charge for at least this value to make a profit), let's take a look at the differences between a Cost-Plus Model and a Value Priced model in operation by giving examples of each: first, note the language difference in Cost Plus Pricing (the word cost comes before pricing) and Price-Lead Costing (Price comes before true costing:
Cost-Plus Pricing law firm: Managing attorney evaluates the estimated "cost" of resources fully loaded to be $150,000 based on the Scope that customer provided in the fixed price agreement. As a firm, you decide that a desirable profit (mark-up) is 100 percent, so you give the customer a fixed price of $300,000 for the work. (Note: Take your Lucky Jeans example above . . . I just paid $100 each for the damn things even though I know it costs them $5 bucks to make. . . trust me, when I was shopping I was not thinking about how "lucky" I just make the Lucky Jeans executives, I was thinking about whether my butt looked good in the jeans (ask anyone in my firm!!!). I wish YOU were pricing those things because I could have paid much less than I valued them. Like the law example, you would have decided that 100 percent profit is good enough and in true cost-plus pricing fashion I would have myself a nice looking back end for only $10. I thank you deeply for the good deal! What is your problem? Look outside of your ivory tower. . . . see tall buildings. . . . your firm (and any other law firm) does not own a single one? Why the hell do you think that is? Do you think it could have anything to do with the hamster-wheel pricing model and minimizes profit in the name of risk-aversion? Well, the reason you think this form of pricing makes less sense in the law is because now you have shifted the risk of over-using resources to the firm without any premium in spite of the fact that customers will pay a premium to have peace of mind and certainty. . . . all things that you have not charged for.
Exemplar's Model: Take the same facts as above: We ROUGHLY estimated minimum resource requirements for the desired SCOPE at $150,000. Now, that number stays internal and is put away in a safe for the moment. Now, we use good questioning and understanding of what the customer VALUES to see what all of the non-time related value adds are in the job, what the customer's objectives are, and how we can be CREATIVE to accomplish the customer goals in less time (thus lower cost). We estimate the VALUE of this great creativity and work product to the client based on what THEY want. Remember I said we provide what customers VALUE, not that we provide a list of legal work we can do. Customers VALUE a lot of things. . . . hell, we'll send a town car to pick you up and serve you Godiva chocolates at every meeting if that is what you value. . . we are the Ritz! I will wear a pink underwear if a client values it as much as I do my Lucky Jeans and it only cost me $5 to buy it. Really, we give them a proposal offering a few different options of how we can achieve their objective and price based on the value to the client. Let's say we offer 3 options:
1- Bronze - (economy class)
2- Silver (Coach/Business class)
3- Gold (Premier Class)
If the VALUE of any package falls below our RESERVE price (the internal Least-Cost Estimate) then we will not include it in our proposal. You see, We are not really costing first, we are pricing first and ONLY comparing the Value Price against the Accept/Reject price of $150K.
Now, our work is not done: Project management and creativity is KEY to making a significant profit. Let's say you have a litigation and say our least-cost-estimate is $150k and our client valued it at and paid $450K. Now, I know that they want to resolve the matter as quickly as possible and they have certain bargaining points and are willing to give up others to get a resolution.. . . .we are now able to use effective and creative strategies to get exactly what the client wants WITHOUT spending all those resources. As a client, your interests are now aligned with mine. . . YOU WANT IT DONE!!!! So, If we resolve the case in 3 months at a resource cost of $80K, we made a significant profit and achieved a superior outcome to any law firm in the city. After all, when big firms bill by the hour why on holy earth would they not bill hours adding up to $450k if the client could afford it? Then, they have a big bill, a long trial with no peace of mind or resolution, pissed-off shareholders, and an executive team that is endlessly focused on your clock and not your superior strategy and business savvy.
So, in a Value Pricing model, pricing is made without regard to cost with the only exception that we quote only prices above a rough least-cost-estimate. Then, true costing is an exercise of effectiveness, efficiency, and creativity of our project managers.
I really hope this helped you reconcile my statements about knowing your cost yet not using a cost-plus model. At the end of your comment you wrote:"A little guidance would be helpful as getting away from the billable hour would be a life goal and free up a lot of extra time to spend with people who will appreciate your time more."I am everyday connected with the people who read my blog and whose lives could change if they were able to escape from the billable hour. I see attorneys burning out, losing loved-ones (divorce) and leaving the profession as a result of the never-ending billable hour wheel. My heart is with everyone of you who lives this way and I am living my professional life to help you to discover how you can change yours. . . so that you can see your family. . . see your children smile before they go to bed, to do the things you dreamed to do in your life . . . and to find new meaning in the work you do every day. . . so that you wake up one day and realize that it is not much work at all. It is a passion. A true profession!
"I am confused. Throughout your blog you mention that attorneys need to know their costs in order to have an adequate basis on whether to take on a job/client or not. Simple enough, get the accountants/bookeepers rolling and you have your cost basis per day/week/year.The confusion sets in when you say that you must get away from a cost + profit margin model and go to the more ephemeral value billing proposition. I get your value based theory, but I get lost on the details of arriving at "value" without factoring costs per day/week/year, etc. If what you are saying is like Lucky Brand - it costs them $5 per pair of jeans to make, but we as the client value them at $100.00 per pair of jean, then they have provided a value we are willing to pay for (don't get me going on Diesel or Sevens). Regardless, there is the value and then the price you are willing to pay for "fashion". Is this what you are talking about? In your paradigm, is cost important to know the minimum amount you would take from a client and still earn a profit?
On the one hand you state - know your costs. On the other you state that costs + margin should be avoided. Isn't it always cost plus margin. If you know your cost and propose a value billing system to your client, wouldn't it be cost + plus margin with a different definition of margin? "
This reader asks great questions and everyone needs to understand the differences and the subtleties here. First, let's do away with the notion that "billable" hours has anything at all to do with costing. . . IT DOES NOT!!! It costs you the same in salary, benefits, and overhead to pay your secretary whether she's writing a client letter or doing her nails! The attorney is absolutely right that I am saying you must "know your cost," but there are some key operational differences in the two business models:
I think the hang up is that the reader is trying to conceptualize costing the same way he does operating in his current billable hour environment In a cost-plus model, you mark up by a desired profit margin all of your resources so all that you have to account for is time multiplied by a rate. Can I challenge you to change your paradigm for a moment? Think of your business this way: (I simplify)
You have 10 attorneys at a fully loaded cost of $200k/yr each (average)
You have 5 paralegals fully loaded at $80k each
You have 5 Secretaries fully loaded at $60k each.
At a very simple level, your operational costs are $2.7Mil/yr whether you are all playing poker in he conference room or doing hard work. You know and I know that the cost by function can be broken down into monthly costs per resource, and that you have practiced long enough to get a sense of how many full-time equivalents at each level should be required to complete a trial or a legal project with NO CREATIVITY. Remember SCOPE???? This is really important because you have to first sit down with the client and SCOPE the job and let them define the desired boundaries. . . remember with a SCOPE defined you no longer have to "guess" what the boundaries will be because you will have defined it). Now, you are able to arrive at a rough cost.
NOW that we have "roughly" achieved a minimum cost (meaning that we need to add and charge for at least this value to make a profit), let's take a look at the differences between a Cost-Plus Model and a Value Priced model in operation by giving examples of each: first, note the language difference in Cost Plus Pricing (the word cost comes before pricing) and Price-Lead Costing (Price comes before true costing:
Cost-Plus Pricing law firm: Managing attorney evaluates the estimated "cost" of resources fully loaded to be $150,000 based on the Scope that customer provided in the fixed price agreement. As a firm, you decide that a desirable profit (mark-up) is 100 percent, so you give the customer a fixed price of $300,000 for the work. (Note: Take your Lucky Jeans example above . . . I just paid $100 each for the damn things even though I know it costs them $5 bucks to make. . . trust me, when I was shopping I was not thinking about how "lucky" I just make the Lucky Jeans executives, I was thinking about whether my butt looked good in the jeans (ask anyone in my firm!!!). I wish YOU were pricing those things because I could have paid much less than I valued them. Like the law example, you would have decided that 100 percent profit is good enough and in true cost-plus pricing fashion I would have myself a nice looking back end for only $10. I thank you deeply for the good deal! What is your problem? Look outside of your ivory tower. . . . see tall buildings. . . . your firm (and any other law firm) does not own a single one? Why the hell do you think that is? Do you think it could have anything to do with the hamster-wheel pricing model and minimizes profit in the name of risk-aversion? Well, the reason you think this form of pricing makes less sense in the law is because now you have shifted the risk of over-using resources to the firm without any premium in spite of the fact that customers will pay a premium to have peace of mind and certainty. . . . all things that you have not charged for.
Exemplar's Model: Take the same facts as above: We ROUGHLY estimated minimum resource requirements for the desired SCOPE at $150,000. Now, that number stays internal and is put away in a safe for the moment. Now, we use good questioning and understanding of what the customer VALUES to see what all of the non-time related value adds are in the job, what the customer's objectives are, and how we can be CREATIVE to accomplish the customer goals in less time (thus lower cost). We estimate the VALUE of this great creativity and work product to the client based on what THEY want. Remember I said we provide what customers VALUE, not that we provide a list of legal work we can do. Customers VALUE a lot of things. . . . hell, we'll send a town car to pick you up and serve you Godiva chocolates at every meeting if that is what you value. . . we are the Ritz! I will wear a pink underwear if a client values it as much as I do my Lucky Jeans and it only cost me $5 to buy it. Really, we give them a proposal offering a few different options of how we can achieve their objective and price based on the value to the client. Let's say we offer 3 options:
1- Bronze - (economy class)
2- Silver (Coach/Business class)
3- Gold (Premier Class)
If the VALUE of any package falls below our RESERVE price (the internal Least-Cost Estimate) then we will not include it in our proposal. You see, We are not really costing first, we are pricing first and ONLY comparing the Value Price against the Accept/Reject price of $150K.
Now, our work is not done: Project management and creativity is KEY to making a significant profit. Let's say you have a litigation and say our least-cost-estimate is $150k and our client valued it at and paid $450K. Now, I know that they want to resolve the matter as quickly as possible and they have certain bargaining points and are willing to give up others to get a resolution.. . . .we are now able to use effective and creative strategies to get exactly what the client wants WITHOUT spending all those resources. As a client, your interests are now aligned with mine. . . YOU WANT IT DONE!!!! So, If we resolve the case in 3 months at a resource cost of $80K, we made a significant profit and achieved a superior outcome to any law firm in the city. After all, when big firms bill by the hour why on holy earth would they not bill hours adding up to $450k if the client could afford it? Then, they have a big bill, a long trial with no peace of mind or resolution, pissed-off shareholders, and an executive team that is endlessly focused on your clock and not your superior strategy and business savvy.
So, in a Value Pricing model, pricing is made without regard to cost with the only exception that we quote only prices above a rough least-cost-estimate. Then, true costing is an exercise of effectiveness, efficiency, and creativity of our project managers.
I really hope this helped you reconcile my statements about knowing your cost yet not using a cost-plus model. At the end of your comment you wrote:"A little guidance would be helpful as getting away from the billable hour would be a life goal and free up a lot of extra time to spend with people who will appreciate your time more."I am everyday connected with the people who read my blog and whose lives could change if they were able to escape from the billable hour. I see attorneys burning out, losing loved-ones (divorce) and leaving the profession as a result of the never-ending billable hour wheel. My heart is with everyone of you who lives this way and I am living my professional life to help you to discover how you can change yours. . . so that you can see your family. . . see your children smile before they go to bed, to do the things you dreamed to do in your life . . . and to find new meaning in the work you do every day. . . so that you wake up one day and realize that it is not much work at all. It is a passion. A true profession!
Monday, July 09, 2007
What You Compensate is What You Get! Top Line Versus Bottom Line Growth and Why You Should Care.
I am having more fun blogging than ever before. . . finally, readers are asking the intelligent questions that will get us closer to making value pricing a reality. The last comment focuses on compensation systems:
"You mentioned that "we bonus our project managers for managing profitability". What measurement metrics do you use to do that? I had kicked around the idea of bonuses based on revenue per manager or % of deliverables completed on time... which would incentivize them to increase productivity but not necessarily profitability (they might use a quicker more senior resource to get the job done). How do you get to client profitability to incentivize lowest cost delivery?"
Let me first put my comments in context: The incentives that I discuss are ones that will work in a fixed price model but not in a billable hour world. The problem with billable hour firms is that the compensation systems are inherently short-sighted. They are based on lagging indicators of performance and are entirely focused on rewarding and promoting top-line growth (sales commission/origination credit), often at the expense of profitability. Since most law firms are still run by lawyers (and the ones running the show got to be the circus clowns by being the top top-line revenue producers in the firm), They simply do not understand their business well enough to know how to compensate for profitability (not to mention that the greedy bastards on the compensation committee, all who are top-producers and many who make the rules in their favor, have no incentive at all to explore the issue of profitability) I don't know about you, but I would rather have a $50Mil business that is 30 percent profitable than a $52Mil business that is 20 percent profitable.
Now onto some real answers. There were 2 questions presented here:
1) What measurement metrics do you use to bonus project managers for managing profitability
We take a top down approach to this. Remember, every organization has a 100 percent pie to divide up among its people. This game of compensation is really just about wealth redistribution in your organization. First, you should GRADE all of you clients, and instead of giving your people origination credits at the point of sale, wait a year and give the originator a bonus based on the "grade" of the client. After some time, you will realize that some rainmakers are generating top-line revenue growth by bringing in crappy clients. . . some who don't pay and others who are so happy that they will go tell all their cheap friends about you! Reward the RIGHT people for bringing in the RIGHT clients. You should always be grading your clients based on their profitability to the firm.
As for your project managers, the key is to think more broadly than professionals typically do. . . if your business is like ours in that we have long-term clients and not one-time deals, you want to compensate based on total profitability for the client account, NOT on a per-project basis. There are numerous valid business considerations for investing in loss-leaders or going above and beyond to wow a client. Project managers need the room to exercise discretion and then need to held accountable for making good decisions. I get hand-written letters from clients telling us how pleased they were with our service. I'll bonus any project manager who can produce a handwritten client letter! Why? If they took the time to write me a note they will certainly tell 10 of their business colleagues about us. . . and voila. . you have a sales force. Profitable? Certainly? Warm and fuzzy? OK, maybe that too.
Profitability has 2 components: Good Pricing, and Good Costing. Since a fixed price model is about letting the price determine the cost, project managers AND the sales team who made the value proposition are responsible for profitability together. Since in our business the pricing is not set by the project manager alone, but by a committee, there is a standardization of sorts for pricing in our organization. Therefore, what you will notice is that overall defects in profitability should be the responsibility of the pricing committee and project manager specific profitability problems can be taken into consideration in the total compensation scheme at year-end for each PM.
Here is my point: Project manager performance needs to be considered as a whole after multiple projects are completed because some projects will be winners and some may be losers. If you bonus a PM after a big winner and she bombs the next one, you did not reward performance you just rewarded luck at the expense of your year-end winner! Result: A wealth distribution system failure. If you know your business, I'll bet you can rank your top performers and your worse ones. Remember, the comp game is about wealth distribution. Take average salaries. Take your PMs. Rank your top PMs, Rank your Lowest PMs. (You will know who they are too). Take your pie and create a wealth distribution scale in excel that distributes the pie. . . more to the best, less to the worse. Simple, right? (if you have specific questions about profitability metrics, write me and email because it is the topic of a book rather than a blog)
2) How do you get to client profitability to incentivize lowest cost delivery?"
Great question. Notice the subtle distinction between client profitability and least-cost-delivery? What drives your business is client profitability. Ironically, PM's need to learn least-cost-delivery first and certainly need to know that least-cost delivery is NOT least-time-delivery! Why? Because PMs are often likely to think they should do something themselves instead of delegating because:
1) They are control freaks
2) They think they can do it better than you so they don't delegate, or
3) They just do it because they can get it done faster
Each one of these are TERRIBLE for profitability in your business. Control freaks simply don't think about profitability because they are so concerned with controlling everything that they care more about themselves than they do the business! "I can do it better than you" people have a problem because they think the game is about doing low-value (low challenge) work better than you and not about delegating so that they can improve on the high-value work the client really cares about. Time sensitive PMs who do things because they can do it faster than you are also missing the boat. I just want to look at the PM's in category 2 and 3 and just say "no shit! If I did something 10,000 times I would be able to do it better and faster than you too. Is that what you want to do with your life? Is that what kind of life our people should have? Because you can't learn how to delegate your work to someone who values a challenge you have essentially sentenced our younger work force to becoming expert document-reviewers!!!!!!! If they were to send you a hand-written card, what would it say? I'm almost certain it would read "HELP, I'm mired in discovery hell and have been down here for months. How about using some of my Harvard education and delegating some challenging work!?!?" Least-time delivery? Certainly not, but I am smart enough to know that you retain smart people by offering them as much challenge and responsibility as they can handle. . . . and that doing so is a big key to profitability in our organization.
Sunday, July 01, 2007
Intelligent Questions Deserve Intelligent Answers
Finally, a professional who commented on my last post asked some intelligent questions worthy of attention and discussion. For the purposes of this post, I will include his questions and comments in quotes and then answer them. Although there are far too many good questions here to answer them all in detail, I will choose a couple and we can move onto the rest in a future post. The professional asked:
"Do you use timesheets internally?I am having trouble letting go of timesheets for internal firm management and am not sure if I should even be trying to. Externally we fixed-price our services, but if I really think about it we arrive at our pricing by asking ourselves 1) what is a client willing to pay and 2)will it be profitable enough for it to make sense for us to service it. It is that second part that requires the measurement of time. Although the time we spend on a project does not dictate the value we create, it does dictate how profitable the firm can be."
Great question! The answer is NO WAY! Time sheets are like toilet paper in a normal business. Forget about professional service firms for a moment and think about the companies that are far more profitable and own billions of dollars in assets. Ask yourself this: Does their profitability depend on the COST of making and delivering their product? Hell yes it does!! News flash: Not a single one of those companies use timesheets and they make so much money it is silly. They all know who their top performers are, their best project managers, and their worse ones. What do you really think you are counting in 6-minute increments? It is like you are counting my pores to prove I have skin!
Here is what I am getting at: Your 2 step process is correct, so I want to give you credit for that, but the conclusions you are drawing from part 2 that are way off and counter to how the real world operates. Question 1 is properly 1) How much is this worth (and how can we design the services to be worth the most) to the client, and 2) What is the RESERVE price. You are correct that in a fixed-price world profits depend on lowest cost delivery. Where you made an error was taking the leap from understanding costing impacts profits to "we have to measure time in advance in order to understand how profitable we can be." Time is only one small part of costing and as our services begin to involve far more than just time, such as service costs, etc, to please the client, or a car service to pick up clients who do not want to drive into the city, you can see that the fascination with counting time is misleading at best.
First, pricing based on value requires that #2 have no impact on price. What you are trying to get at with understanding costing (NOT JUST TIME) to get to an ACCEPT/REJECT Price. This means you will go back to you intellectual "engineers" and see how efficiently they can use firm resources to accomplished the outcome outlined in the SCOPE section of your fixed-price agreement. Only good project managers will know how to do this well. The point is not to maximize profit with this exercise or even to estimate how long you "think" it will take, the point is to identify the lowest-cost-delivery" that would result in an acceptable profit. By doing this, you will know the lowest price that you will accept to do the work. If the value is 3x that price, you have a winner, if it is below the reserve price, you should REJECT the client.
On a side note, here is another problem with time: Most professionals don't understand their business well enough to use time estimates to understand cost. They are used to multiplying by Billable rates, not actual cost per day for the use of a resource. They also do not understand project management enough to realize how to use low-cost resources (NOTE: this is different from low-billable resources) to accomplish an end. Costing as an exercise should be fully-loaded and include more than time in order to be accurate.
"There is a reason that the Big 4 (very scalable, profitable and successful businesses) still use timesheets even when using value pricing. "
First, lawyers who say this do so to rationalize continuing a billing practice that started as an accident and everyone hates. The Big 4 is not value pricing for one, and yes there is a reason (which is neither good nor compelling as a reason for you): That is the way they have always done it!!
As the firm grows my personal involvement and knowledge of project profitability becomes further removed. Without timesheets how do you determine:1) Which jobs are least profitable and need to be re-priced or eliminated?2) Which resources are the most efficient and therefore should received bigger raises?3) How many engagements (and therefore how much revenue) an efficiently functioning delivery team can service at full capacity?"
GREAT QUESTIONS!!!! I could write a book about these! I will try not to, but here you go:
Let me first begin by challenging you here. You preface questions 1-3 with the statement "without timesheets how do you". My problem with that is this: You are assuming there is a relationship between timesheets and the answers to your questions. Prove it, you ask? Again, look at every single profitable company in this economy. . . they have fixed price products and services, no timesheets, and yet they know their price points, costs, which resources are most efficient, who performs best and they understand capacity limitations, etc. I really should write a separate blog about each of these topics, but put simply, the entire world economy works like this and proves that it works. Now, let's explore this in a professional services firm context: However, I will not, in answering your question, acknowledge that there is a relationship between ditching the timesheet as you know it and the questions you ask.
1) Part 1: Profitable JOBS is not you goal as a business. Profitable Clients is your goal: Distinguish between profitable jobs and profitable client. Timesheets distort reality and make for bad decisions. So what if a job is not profitable? What if you have a very profitable client and you decide to do it as a loss-leader? A look at the data might tell you that you need to raise your price, but simple business logic tells you that you did the right thing to "throw em a bone". So, don't lost the forest in the trees: Most lawyers are so afraid to be less profitable in 6-minute increments that they win the battle and lose the war: Higher profitability on a project, but less on average per client
Part 2: There is no such thing as re-pricing a job. It is either within the SCOPE or outside the SCOPE and requires a change order!
Here is the symptom that prompts the question and my diagnosis:
SYMPTOM-- Job 1 is taking too much time and we are losing money on this one
Problem 1
DIAGNOSIS 1
a) Poorly Defined Scope -- Whose fault is this? YOURS! If you Scoped the job properly, you would not have this problem. You should certainly not blame the client and raise the price. You should not fire them either. Remember, you are VALUE pricing. Just because you added $50k in value for $20k in price, remember that they still feel the value you add. WOW them at a loss and capture that value on the next job. Use it as an opportunity to show them what you can do.
b) Clear Scope, work is creeping outside of scope (Scope Creep)
Sometimes the people delivering the service are so far removed from the partners who sold the work and scoped it out that companies experience Scope Creep. Good communication and teamwork goes a long way here. Make sure the team understands boundaries and communicates to the relationship partner that they need to have another conversation with the client about a Change Order.
c) Clear Scope, Project Manager sucks
Again, some project managers will just suck. It is not the client's fault, right? It may cause you to think you underpriced a job but remember: If you actually price on value you simply CANNOT underprice a job. . . you may have taken in when you should not have, but sometimes people will project manage the job so terribly that you lose your shirt. Make sure you get them off the deal. . . . fast! Do not increase the price to the client, LOWER THEIR SALARY INSTEAD!!! Value price your people. You will get to pay your best more in the end!
d) Clear Scope, Error in Accept/Reject Process
Sometimes you scope the job right and every once in awhile realize that you should have rejected the client. If you want to make a lot of money you cannot be afraid to eat one every once in awhile! There is such a thing as a Risk/Reward Relationship in business!!!
e) Client is high maintenance and consuming more resources than expected:
2 choices. . . . 1) What would Donald Trump say ("yer fired!") OR 2) double the price
on the next job. Those clients know they are a pain in the butt and will pay for
someone to put up with them.
Your second Question:
2) Which resources are the most efficient and therefore should received bigger raises?
This has nothing to do with timesheets at all. I know who our most efficient workers and least efficient workers are. Most managers know this without any time accounting at all. How: You give them a bunch of work and see how much they put out and at what rate and quality. I never needed a timesheets Here is what we do: We bonus our project managers for managing profitably. It is their job to delegate internally to get the job done at lowest-cost delivery. Watch this: If someone is not pulling their weight what do you think will happen? Our project managers will not use them for a project because it will impact their bonus. OK . . . so how do you know your weakest players are who are not productive? They are the ones sitting around because none of our project managers want to give them work? What about our best ones? They are busy as hell and in high demand. NO TIMESHEETS REQUIRED! It is a beautiful thing! The best and worse ones self-identify through this system.
TIP: Identify a healthy profit and split the difference that your project managers can achieve above that amount. (remember: do this at a client level, not per-job. There are very compelling business motivations for doing a job or two at a loss. Walgreens happily sells potato chips and batteries at a loss knowing that you will come in and spend $10 more on other things.
Your last question I will leave to a future blog so I don't end up writing a book here.
The point here is this: Timesheets are toilet paper to a normal business. Time-accounting is NOT costing. It is a component of cost, and is becoming less and less as technology, benefits, and other value-added services enter the equation. Accounting for one's time to understand cost, at best, need not be done by minute or hour but instead at a very high level. You might ask your people what percentage of their time went to each of the top 5 accounts they worked on this month and you would get the information you need in order to add time in the rest of your costing calculation.
"Do you use timesheets internally?I am having trouble letting go of timesheets for internal firm management and am not sure if I should even be trying to. Externally we fixed-price our services, but if I really think about it we arrive at our pricing by asking ourselves 1) what is a client willing to pay and 2)will it be profitable enough for it to make sense for us to service it. It is that second part that requires the measurement of time. Although the time we spend on a project does not dictate the value we create, it does dictate how profitable the firm can be."
Great question! The answer is NO WAY! Time sheets are like toilet paper in a normal business. Forget about professional service firms for a moment and think about the companies that are far more profitable and own billions of dollars in assets. Ask yourself this: Does their profitability depend on the COST of making and delivering their product? Hell yes it does!! News flash: Not a single one of those companies use timesheets and they make so much money it is silly. They all know who their top performers are, their best project managers, and their worse ones. What do you really think you are counting in 6-minute increments? It is like you are counting my pores to prove I have skin!
Here is what I am getting at: Your 2 step process is correct, so I want to give you credit for that, but the conclusions you are drawing from part 2 that are way off and counter to how the real world operates. Question 1 is properly 1) How much is this worth (and how can we design the services to be worth the most) to the client, and 2) What is the RESERVE price. You are correct that in a fixed-price world profits depend on lowest cost delivery. Where you made an error was taking the leap from understanding costing impacts profits to "we have to measure time in advance in order to understand how profitable we can be." Time is only one small part of costing and as our services begin to involve far more than just time, such as service costs, etc, to please the client, or a car service to pick up clients who do not want to drive into the city, you can see that the fascination with counting time is misleading at best.
First, pricing based on value requires that #2 have no impact on price. What you are trying to get at with understanding costing (NOT JUST TIME) to get to an ACCEPT/REJECT Price. This means you will go back to you intellectual "engineers" and see how efficiently they can use firm resources to accomplished the outcome outlined in the SCOPE section of your fixed-price agreement. Only good project managers will know how to do this well. The point is not to maximize profit with this exercise or even to estimate how long you "think" it will take, the point is to identify the lowest-cost-delivery" that would result in an acceptable profit. By doing this, you will know the lowest price that you will accept to do the work. If the value is 3x that price, you have a winner, if it is below the reserve price, you should REJECT the client.
On a side note, here is another problem with time: Most professionals don't understand their business well enough to use time estimates to understand cost. They are used to multiplying by Billable rates, not actual cost per day for the use of a resource. They also do not understand project management enough to realize how to use low-cost resources (NOTE: this is different from low-billable resources) to accomplish an end. Costing as an exercise should be fully-loaded and include more than time in order to be accurate.
"There is a reason that the Big 4 (very scalable, profitable and successful businesses) still use timesheets even when using value pricing. "
First, lawyers who say this do so to rationalize continuing a billing practice that started as an accident and everyone hates. The Big 4 is not value pricing for one, and yes there is a reason (which is neither good nor compelling as a reason for you): That is the way they have always done it!!
As the firm grows my personal involvement and knowledge of project profitability becomes further removed. Without timesheets how do you determine:1) Which jobs are least profitable and need to be re-priced or eliminated?2) Which resources are the most efficient and therefore should received bigger raises?3) How many engagements (and therefore how much revenue) an efficiently functioning delivery team can service at full capacity?"
GREAT QUESTIONS!!!! I could write a book about these! I will try not to, but here you go:
Let me first begin by challenging you here. You preface questions 1-3 with the statement "without timesheets how do you". My problem with that is this: You are assuming there is a relationship between timesheets and the answers to your questions. Prove it, you ask? Again, look at every single profitable company in this economy. . . they have fixed price products and services, no timesheets, and yet they know their price points, costs, which resources are most efficient, who performs best and they understand capacity limitations, etc. I really should write a separate blog about each of these topics, but put simply, the entire world economy works like this and proves that it works. Now, let's explore this in a professional services firm context: However, I will not, in answering your question, acknowledge that there is a relationship between ditching the timesheet as you know it and the questions you ask.
1) Part 1: Profitable JOBS is not you goal as a business. Profitable Clients is your goal: Distinguish between profitable jobs and profitable client. Timesheets distort reality and make for bad decisions. So what if a job is not profitable? What if you have a very profitable client and you decide to do it as a loss-leader? A look at the data might tell you that you need to raise your price, but simple business logic tells you that you did the right thing to "throw em a bone". So, don't lost the forest in the trees: Most lawyers are so afraid to be less profitable in 6-minute increments that they win the battle and lose the war: Higher profitability on a project, but less on average per client
Part 2: There is no such thing as re-pricing a job. It is either within the SCOPE or outside the SCOPE and requires a change order!
Here is the symptom that prompts the question and my diagnosis:
SYMPTOM-- Job 1 is taking too much time and we are losing money on this one
Problem 1
DIAGNOSIS 1
a) Poorly Defined Scope -- Whose fault is this? YOURS! If you Scoped the job properly, you would not have this problem. You should certainly not blame the client and raise the price. You should not fire them either. Remember, you are VALUE pricing. Just because you added $50k in value for $20k in price, remember that they still feel the value you add. WOW them at a loss and capture that value on the next job. Use it as an opportunity to show them what you can do.
b) Clear Scope, work is creeping outside of scope (Scope Creep)
Sometimes the people delivering the service are so far removed from the partners who sold the work and scoped it out that companies experience Scope Creep. Good communication and teamwork goes a long way here. Make sure the team understands boundaries and communicates to the relationship partner that they need to have another conversation with the client about a Change Order.
c) Clear Scope, Project Manager sucks
Again, some project managers will just suck. It is not the client's fault, right? It may cause you to think you underpriced a job but remember: If you actually price on value you simply CANNOT underprice a job. . . you may have taken in when you should not have, but sometimes people will project manage the job so terribly that you lose your shirt. Make sure you get them off the deal. . . . fast! Do not increase the price to the client, LOWER THEIR SALARY INSTEAD!!! Value price your people. You will get to pay your best more in the end!
d) Clear Scope, Error in Accept/Reject Process
Sometimes you scope the job right and every once in awhile realize that you should have rejected the client. If you want to make a lot of money you cannot be afraid to eat one every once in awhile! There is such a thing as a Risk/Reward Relationship in business!!!
e) Client is high maintenance and consuming more resources than expected:
2 choices. . . . 1) What would Donald Trump say ("yer fired!") OR 2) double the price
on the next job. Those clients know they are a pain in the butt and will pay for
someone to put up with them.
Your second Question:
2) Which resources are the most efficient and therefore should received bigger raises?
This has nothing to do with timesheets at all. I know who our most efficient workers and least efficient workers are. Most managers know this without any time accounting at all. How: You give them a bunch of work and see how much they put out and at what rate and quality. I never needed a timesheets Here is what we do: We bonus our project managers for managing profitably. It is their job to delegate internally to get the job done at lowest-cost delivery. Watch this: If someone is not pulling their weight what do you think will happen? Our project managers will not use them for a project because it will impact their bonus. OK . . . so how do you know your weakest players are who are not productive? They are the ones sitting around because none of our project managers want to give them work? What about our best ones? They are busy as hell and in high demand. NO TIMESHEETS REQUIRED! It is a beautiful thing! The best and worse ones self-identify through this system.
TIP: Identify a healthy profit and split the difference that your project managers can achieve above that amount. (remember: do this at a client level, not per-job. There are very compelling business motivations for doing a job or two at a loss. Walgreens happily sells potato chips and batteries at a loss knowing that you will come in and spend $10 more on other things.
Your last question I will leave to a future blog so I don't end up writing a book here.
The point here is this: Timesheets are toilet paper to a normal business. Time-accounting is NOT costing. It is a component of cost, and is becoming less and less as technology, benefits, and other value-added services enter the equation. Accounting for one's time to understand cost, at best, need not be done by minute or hour but instead at a very high level. You might ask your people what percentage of their time went to each of the top 5 accounts they worked on this month and you would get the information you need in order to add time in the rest of your costing calculation.
Thursday, June 21, 2007
Top 10 Reasons Why Professionals Don't "Get it" When it Comes to Pricing and Service!
Many professionals just can't seem to get it right. They are so caught up in thinking about how smart they are that they are completely blind to the fact that they are driving clients nuts. They are simply so out of touch with what clients want and yet so convinced that they know what they want all at once that I had to write a blog about it. Although I thank them all for sending business our way by completely missing the boat, it is a part of our mission to "give back" to the community and help professionals to serve clients the way THEY WANT to be served. Here are the Top 10 Reasons Professionals don't get fixed-pricing or the meaning of service!
1) Not Responsive
Yes - You have heard this a million times. The most common cause on non-meritorious malpractice claims in the nation is the failure to return phone calls. What is your problem???? It is not that you are too lazy, your problem is likely to be one of these two things:
1) You are smart as hell and socially inept, so you are a genius who dreads client contact and will never service clients well until you "get it!" OR
2) Your screening process sucks. You serve clients you don't enjoy working with so you subconsciously put off communicating with them and they get pissed off.
You see, this point is NOT about returning phone calls, it is about taking a look at yourself, your process, and you psychology and asking yourself what is going on.
2) No Respect
Yes - it's true. . . most clients do no feel like you respect them. You, their trusted advisor, who they are counting on, do not "explain" things to them, involve them in decision making, or empower them to decide on the strategic direction of their case. You even talk down to them sometimes. You probably don't even realize you do it. Next time you talk to a client, ask yourself if you are "treating them like a partner?" Maybe when you look in the mirror tomorrow you will see yourself differently. Treat clients with respect and they will certainly see you differently.
3) failure to understand scope?
Attorneys just don't get scope altogether. They think that lawyering is just some amorphous process that keeps going until they say it is done and so they lawyer the hell out of it. They bill people to death, and justify their action on the grounds that it would be malpractice not to bill you into bankruptcy because they have a "duty to advocate." Think: They bill by the hour!!! They get rich practicing cover-your-ass law at your expense because you give them a financial incentive to drag things out and lawyers do not hold themselves (or let you hold them) accountable to a SCOPE! Why? They cannot bill to educate and empower their clients and help them to understand what is going on so they don't. If your dog had a 1,000 foot leash what would he do with it? See spot run!!!!!!
4) Can't Comprehend Value
This is funny. . . lawyers just don't know how to look at anything other than their time to understand value. We teach fixed pricing techniques and time and time again lawyers go back to asking "well. . . how do you know how long . . . blah blah blah blah" as if the client gives two hoots how long it takes. Remember, they want it done faster!! Why do lawyers care how long it takes? Because they just don't get that their effective hourly rate has NOTHING to do with profitability, but since they have been clueless about how profitability is achieved in a "normal" business for so many decades, they have lost all ability to comprehend value except in terms of time. It is a darned shame, but let's talk about how to solve this problem.
5) Cost-Plus fixed Pricing WILL NOT WORK!!!!
Lawyers seem to think that a fixed-pricing strategy is about menu pricing. They have it all wrong. If they did their homework, they would understand that there are many ways to accomplish fixed-pricing and menu pricing will NOT WORK. We price on value to the client. A firm will not be highly profitable if it attempts to menu price because it is essentially a cost-plus pricing model where they shifted the risk of error (in time) to the service firm without compensation for the risk.
6) It's all about the quality .. . . NOT!!!!!!!!!!
If you did not get the memo, GET THIS ONE: All research studies show that clients do not hire you for your "quality" so put your pride back in it's big box and listen: Clients expect quality from any professional! Clients want a quality professional who CARES about them. So, while you are on your bathroom break after 12 straight hours in your sweat shop, ask yourself how you think your clients would respond if I called them up and asked them if they felt you really cared about them! If you are honest with yourself, you might be surprised what you find. Don't make me pick up the phone and try.
7) Lack Business Sense
Most business attorneys simply lack business sense altogether. They operate to "reduce risk at all cost" because somehow they feel like they were put on this planet to do this job. . . . It is like they actually believe brownie points come from the identification of problems rather than SOLVING THEM!!!!! Why do you think Law is one of 2 professions of 104 professions where pessimists perform the best? Pessimists have a knack for identifying all the problems with everything . . . they don't solve a damn one of them, and they drive everyone around them nuts . . . . they simply cannot help themselves! It has almost become an extra-curricular activity watching these bozos blow up a business deal and pound their chests like gorillas thinking they did something "valuable!"
8) Old White Men! :-)
Unlike "normal" businesses, our industry is run by a bunch of old risk-adverse white guys. So, while the rest of the world is innovating (mostly lead by young people who can live to benefit from the revolutions they are creating), the old whities at the top of the legal pyramid scheme are too busy lining their retirement plans at the expense of young associates who sold their lives for the "dream" of parnership they don't understand, let alone have a chance at making. WAKE UP! If the "Partners" did not tell you what the succession plan is at their firm yet, it's because they don't have one. It's OK, we are accepting resumes! Don't think they will start to care anytime soon! Why do clients care about this? Who wants to play with a dinosaur?
9) Phone Call and Photo Copies!
If you bill for either you are either dangerously stupid or simply don't care about your clients!!!! I deal with CEOs of companies and they don't bill me to talk to me! If you fall into the category of dangerously stupid, read on:
-- Let me enlighten you: CLIENTS HATE IT! STOP BILLING TO TALK TO PEOPLE! Every shred of information in the market shows that clients are absolutely enraged by this process. Now, you are on notice, so if you continue this practice you have effectively graduated from "dangerously stupid" to "I simply don't give a damn about what my clients want" Seriously, I have no idea how you rationalize it except that you are so "entitled" as to require people pay to have a conversation with you that you simply cannot let go of it OR God forbid you could not bill a client for your next toner cartridge!!!! for God's sake, clients understand that you have to operate a profitable business, but could you please do it in a way that does not drive them absolutely nuts????
10) Managing Resources
Lawyers simply don't get how to manage resources to do a fixed-price job profitably. Project management is not an art that lawyers tend to understand. We find that we need to teach attorneys the principles of project management. for instance, law firms suffer from systemic under-delegation. Part of this is ego, because lawyers tend to believe that they can do things better than someone else. It is also about control and profitability. Since they bill by the hour, they actually make more money by doing things that really can and should be done by someone else! Client's are more savvy than ever, and lawyers will not get away with this practice for very long!
OK. Please find attached bottle of e-lotion for your wounded back-end. The problems in our industry are real and need to be addressed by bringing them out in the open and discussing them to solve problems that change lives and the customer experience. It is within our power to make change, but first attorneys have to face the music. Exemplar is leading the movement. Will you rise to the challenge and be a part of the discussion?
1) Not Responsive
Yes - You have heard this a million times. The most common cause on non-meritorious malpractice claims in the nation is the failure to return phone calls. What is your problem???? It is not that you are too lazy, your problem is likely to be one of these two things:
1) You are smart as hell and socially inept, so you are a genius who dreads client contact and will never service clients well until you "get it!" OR
2) Your screening process sucks. You serve clients you don't enjoy working with so you subconsciously put off communicating with them and they get pissed off.
You see, this point is NOT about returning phone calls, it is about taking a look at yourself, your process, and you psychology and asking yourself what is going on.
2) No Respect
Yes - it's true. . . most clients do no feel like you respect them. You, their trusted advisor, who they are counting on, do not "explain" things to them, involve them in decision making, or empower them to decide on the strategic direction of their case. You even talk down to them sometimes. You probably don't even realize you do it. Next time you talk to a client, ask yourself if you are "treating them like a partner?" Maybe when you look in the mirror tomorrow you will see yourself differently. Treat clients with respect and they will certainly see you differently.
3) failure to understand scope?
Attorneys just don't get scope altogether. They think that lawyering is just some amorphous process that keeps going until they say it is done and so they lawyer the hell out of it. They bill people to death, and justify their action on the grounds that it would be malpractice not to bill you into bankruptcy because they have a "duty to advocate." Think: They bill by the hour!!! They get rich practicing cover-your-ass law at your expense because you give them a financial incentive to drag things out and lawyers do not hold themselves (or let you hold them) accountable to a SCOPE! Why? They cannot bill to educate and empower their clients and help them to understand what is going on so they don't. If your dog had a 1,000 foot leash what would he do with it? See spot run!!!!!!
4) Can't Comprehend Value
This is funny. . . lawyers just don't know how to look at anything other than their time to understand value. We teach fixed pricing techniques and time and time again lawyers go back to asking "well. . . how do you know how long . . . blah blah blah blah" as if the client gives two hoots how long it takes. Remember, they want it done faster!! Why do lawyers care how long it takes? Because they just don't get that their effective hourly rate has NOTHING to do with profitability, but since they have been clueless about how profitability is achieved in a "normal" business for so many decades, they have lost all ability to comprehend value except in terms of time. It is a darned shame, but let's talk about how to solve this problem.
5) Cost-Plus fixed Pricing WILL NOT WORK!!!!
Lawyers seem to think that a fixed-pricing strategy is about menu pricing. They have it all wrong. If they did their homework, they would understand that there are many ways to accomplish fixed-pricing and menu pricing will NOT WORK. We price on value to the client. A firm will not be highly profitable if it attempts to menu price because it is essentially a cost-plus pricing model where they shifted the risk of error (in time) to the service firm without compensation for the risk.
6) It's all about the quality .. . . NOT!!!!!!!!!!
If you did not get the memo, GET THIS ONE: All research studies show that clients do not hire you for your "quality" so put your pride back in it's big box and listen: Clients expect quality from any professional! Clients want a quality professional who CARES about them. So, while you are on your bathroom break after 12 straight hours in your sweat shop, ask yourself how you think your clients would respond if I called them up and asked them if they felt you really cared about them! If you are honest with yourself, you might be surprised what you find. Don't make me pick up the phone and try.
7) Lack Business Sense
Most business attorneys simply lack business sense altogether. They operate to "reduce risk at all cost" because somehow they feel like they were put on this planet to do this job. . . . It is like they actually believe brownie points come from the identification of problems rather than SOLVING THEM!!!!! Why do you think Law is one of 2 professions of 104 professions where pessimists perform the best? Pessimists have a knack for identifying all the problems with everything . . . they don't solve a damn one of them, and they drive everyone around them nuts . . . . they simply cannot help themselves! It has almost become an extra-curricular activity watching these bozos blow up a business deal and pound their chests like gorillas thinking they did something "valuable!"
8) Old White Men! :-)
Unlike "normal" businesses, our industry is run by a bunch of old risk-adverse white guys. So, while the rest of the world is innovating (mostly lead by young people who can live to benefit from the revolutions they are creating), the old whities at the top of the legal pyramid scheme are too busy lining their retirement plans at the expense of young associates who sold their lives for the "dream" of parnership they don't understand, let alone have a chance at making. WAKE UP! If the "Partners" did not tell you what the succession plan is at their firm yet, it's because they don't have one. It's OK, we are accepting resumes! Don't think they will start to care anytime soon! Why do clients care about this? Who wants to play with a dinosaur?
9) Phone Call and Photo Copies!
If you bill for either you are either dangerously stupid or simply don't care about your clients!!!! I deal with CEOs of companies and they don't bill me to talk to me! If you fall into the category of dangerously stupid, read on:
-- Let me enlighten you: CLIENTS HATE IT! STOP BILLING TO TALK TO PEOPLE! Every shred of information in the market shows that clients are absolutely enraged by this process. Now, you are on notice, so if you continue this practice you have effectively graduated from "dangerously stupid" to "I simply don't give a damn about what my clients want" Seriously, I have no idea how you rationalize it except that you are so "entitled" as to require people pay to have a conversation with you that you simply cannot let go of it OR God forbid you could not bill a client for your next toner cartridge!!!! for God's sake, clients understand that you have to operate a profitable business, but could you please do it in a way that does not drive them absolutely nuts????
10) Managing Resources
Lawyers simply don't get how to manage resources to do a fixed-price job profitably. Project management is not an art that lawyers tend to understand. We find that we need to teach attorneys the principles of project management. for instance, law firms suffer from systemic under-delegation. Part of this is ego, because lawyers tend to believe that they can do things better than someone else. It is also about control and profitability. Since they bill by the hour, they actually make more money by doing things that really can and should be done by someone else! Client's are more savvy than ever, and lawyers will not get away with this practice for very long!
OK. Please find attached bottle of e-lotion for your wounded back-end. The problems in our industry are real and need to be addressed by bringing them out in the open and discussing them to solve problems that change lives and the customer experience. It is within our power to make change, but first attorneys have to face the music. Exemplar is leading the movement. Will you rise to the challenge and be a part of the discussion?
Monday, June 11, 2007
Outside-In Pricing -- Because Good Clients Don't Want To Insult You
One of the best parts of pricing on value is the ability to use difference pricing strategies with different clients. One of the most interesting to us and yet the one that scares the heck out of professionals is outside-in pricing. What is that? Outside in pricing is about looking outside of the four walls of your office building to determine what your work is worth to the client. Did you ever think to ask your client what it is worth? Why not? (Because you are scared to death what they might say . . . that they might tell you they think you are worth half of what your firm needs you to charge to make everyone rich.) Well, that is what we do sometimes. . . . and it works great most of the time.
Think about it this way: There is psychology on your end -- the fear that they may not value you as much as your ego desires. Just the same, there is psychology on their end -- The fear of looking cheap or insulting you with a low price. Actually, it is a great way to see if 1) You have done a good job communicating the value proposition, and 2) whether or not they really value you anyhow. Wouldn't you rather know BEFORE you took them on as a client?
Here is another benefit: Just think of how much easier your life would be if you never needed to fill out a time sheet again. . . . you and your client just agree to a price and off you go! No counting, no billing, no collections, No Hourly Bull! Why did you choose to be a professional? When you graduated law school was your stated goal to have the highest effective hourly rate in the profession? Was it your goal to bill more hours than your colleagues? For most people I know, it was to be happy, balanced and make good money. What is good money? I guarantee that you do not think of "good money" in hourly rate terms. You think about what you take home and you look in the mirror and think about whether you enjoyed work this month, whether you saw your wife and children enough. . . and you balance it all and ask yourself "was it worth it all?" At the end of the day, no matter how you bill, you are asking yourself these questions and not "how much do I charge per hour and how much did I bill?" If you did, you either need a life or a brain transplant.
Outside-In Pricing teaches you to communicate value, understand how customers value what you do, and free you from counting your life in 6-minute increments .Repeat after me: "Increments are Excrement! Increments are Excrement" . . . . . yeah. . . you're getting the hang of it now!
Think about it this way: There is psychology on your end -- the fear that they may not value you as much as your ego desires. Just the same, there is psychology on their end -- The fear of looking cheap or insulting you with a low price. Actually, it is a great way to see if 1) You have done a good job communicating the value proposition, and 2) whether or not they really value you anyhow. Wouldn't you rather know BEFORE you took them on as a client?
Here is another benefit: Just think of how much easier your life would be if you never needed to fill out a time sheet again. . . . you and your client just agree to a price and off you go! No counting, no billing, no collections, No Hourly Bull! Why did you choose to be a professional? When you graduated law school was your stated goal to have the highest effective hourly rate in the profession? Was it your goal to bill more hours than your colleagues? For most people I know, it was to be happy, balanced and make good money. What is good money? I guarantee that you do not think of "good money" in hourly rate terms. You think about what you take home and you look in the mirror and think about whether you enjoyed work this month, whether you saw your wife and children enough. . . and you balance it all and ask yourself "was it worth it all?" At the end of the day, no matter how you bill, you are asking yourself these questions and not "how much do I charge per hour and how much did I bill?" If you did, you either need a life or a brain transplant.
Outside-In Pricing teaches you to communicate value, understand how customers value what you do, and free you from counting your life in 6-minute increments .Repeat after me: "Increments are Excrement! Increments are Excrement" . . . . . yeah. . . you're getting the hang of it now!
Tuesday, May 29, 2007
Note To The CFO: Lighten Up A Bit, Will You? - Part II
As someone who has served as a CFO and holds two degrees in finance you would think that I am a person that lives by the numbers. What I have come to realize in my professional experience as a Chief Financial Officer is the true limitations of numbers in providing guidance for running a company. We have all heard that numbers can tell you whatever you want to see in them. I remember reading in Ron Baker's Book "The Firm of the Future" that "according to numbers, everyone in this country has one testicle" (half of us are women). With technology and data capacity so great, it seems like we collect data just because we can and not because someone sat down and did the math and determined that the cost of keeping such vast amounts of data and creating hundreds of jobs to interpret it actually produces a positive return on investment. Take law firms, for instance. They measure their entire operation in 6-minute resolution, forcing their entire workforce to adhere to a regime that by all accounts "changes the way you live your life." The partners who operate the firm actually believe they need to count this way to be profitable in spite of the fact that the most profitable companies and industries in the world operate just fine without knowing where every minute went. In the meantime, countless hours are spent just counting time instead of actually doing something productive with your life.The biggest question that skeptical and fearful attorneys ask me is "how do you know you are profitable if you do not count every 6-minutes." After a moment of internal giggling (because I have worked the real world and understand quite well that no other business runs this way) I answer "Lighten Up A Bit, Will You? You don't need to know whether every single project you did made you a profit. What you need to know is that your business is operating profitably." The savvy questioner understands what I just said while the not-so-savvy one just sits there with a blank look on his face as if to say "Huh?". For those of you finance people out there, it is called portfolio theory. An investor has a portfolio of stocks (just like a law firm does clients) and the job of the portfolio manager is not to make sure every stock goes up, it is her job to make sure that the portfolio is profitable as a whole. This entails managing the portfolio as a "big picture," eliminating non-performers and increasing the investment in the winners (in law firms, this is called forced churn) Clearly, every organization has metrics that help guide you in making informed decisions for the organization, but Exemplar recognizes that myopia will not make the firm more profitable; that making thousands of highly educated people count their lives in 6-minute increments and sending them home to their loved ones trained to think of personal time as an "opportunity cost" is not just cruel but inhumane. At Exemplar, we are happy to come to work every day because of the opportunity to use every bit of our intellectual capital on activities that help our clients achieve success in the marketplace. We recognize that there is a high correlation between happy people and customer satisfaction (See Southwest Airlines), and thus profitability. My message to those who live by the clock is to "Lighten up a bit. Let your hair down. Manage your portfolio and stop driving your people crazy. They will love you for it and your clients will notice the difference. Ours certainly have!"
Tuesday, May 15, 2007
Embracing The Values: The Balance Between Growth and Excellence
In this post I would like to share some of my personal thoughts and challenges that weigh on my mind as I am building Exemplar. This is an act of crossing one of my hands in yours by sharing the balacing act that we face as leaders trying to build an organization of Excellence in the legal and business community. It is about values.
I have always believed that the "right people" are key to building an organization that cannot be beat. My belief was confirmed last year when I met Jack Welch and heard him say that the HR function was most important function in the organization next to the Chief financial Officer. Jack Welch went on to explain how he only hired the right people 50 percent of the time at the start of his career and it took him 30 years to get to an 80 percent accuracy rate. What he was really telling us was that 5 out of every 5 people were the WRONG people and what all of us business people know so well at a gut level that it is just as important to know how to dispose of the WRONG people as it is to bring in the RIGHT people! "Hire slow, fire fast" is the common wisdom . . . which runs against every instinct I have as a young leader because I believe in people so very much that look for reasons that they can succeed with more support. Yet, the leaders and mentors that I look up to all reinforce how important it is to have the right people on the bus, and, more importantly, get the wrong ones off. . . . fast!
I have grown more as a professional in the past 2 years of the life of Exemplar than ever in my professional life. I have learned about what people stand for, the stands they make or are too cowardly to take. . . the things that move them and the things that they won't move on at all. And for all of these lessons I have never felt more passionate about anything than building an organization around core values and principles that I cannot, must not, compromise on. . . at first for myself, and now for the people who have joined our team depending on me to make sure that we stay true to the values that attracted them to join the quest for Excellence from the beginning. I have learned that we are not hiring for skill, but instead for character. We are not hiring for the things that school can teach you but the gifts your parents should have given you as a child. Skill may get them a phone call, but character and values get you in the door. Over the past couple of years I have been faced with the opportunity to triple or quadruple revenues at the expense of our core principles, to obtain near-immediate success for only the soul of the firm, or grow our attorney base by leaps and bounds were it not for our values. As a young and impatient leader, I want so much to grow at the speed that clients demand it or with the pace that attorneys are knocking at the door to join. Were it not for everything that we stand for as an organization, only "Excellence," we could double tomorrow.
In my short life I have seen the power of positive people empower and inspire our people to greatness and I have seen the tyranny of distrust and negativity tear down the walls the people put their hearts on the line to build, and at some point I decided that the cost of the wrong people is TOO HIGH. The kind of change we want to inspire in our profession is the kind that necessitates only the strongest leadership, un-tempted by greed or by false possibility and with an unending conviction to succeed. Leadership starts at the top and as a leader I must accept that the Exemplar standards which I wake up every day and strive to live up to fall first on my shoulders above anyone else. . . they help me to be a better person and to be a living example to our people. And so in the infinite wisdom of Jack Welch I have learned to hire slow in spite of the wealth of interest in our model and to hire for character. . . the things that great leaders are made of. I can teach skill, but I cannot teach integrity. I can train a corporate lawyer but I cannot teach trust. I can show you how to build a company but cannot teach you to respect the janitor. These are things your parents should have taught you long ago. And so I continue down the road with my monogram on one sleeve and my heart on the other. . . values intact and the vision alive and well. I am rich in my heart knowing that we are taking the right steps to build a great organization.
I had drinks with a gentleman who was of high rank in the US Military who recently told me "you've got to bleed to lead," which I cross referenced with a quote that leaders "bleed willingly and joyfully" to endure the lessons that are too difficult for the rest, and pass on the bits of wisdom that make this life worthwhile and make a real difference in the lives of others. To what end, you ask? When I started Exemplar someone asked me why I would take on such an enormous challenge as a young professional. . . why endeavor to inspire transformational change? Almost out of instinct I responded: "Because I can, I must."
I have always believed that the "right people" are key to building an organization that cannot be beat. My belief was confirmed last year when I met Jack Welch and heard him say that the HR function was most important function in the organization next to the Chief financial Officer. Jack Welch went on to explain how he only hired the right people 50 percent of the time at the start of his career and it took him 30 years to get to an 80 percent accuracy rate. What he was really telling us was that 5 out of every 5 people were the WRONG people and what all of us business people know so well at a gut level that it is just as important to know how to dispose of the WRONG people as it is to bring in the RIGHT people! "Hire slow, fire fast" is the common wisdom . . . which runs against every instinct I have as a young leader because I believe in people so very much that look for reasons that they can succeed with more support. Yet, the leaders and mentors that I look up to all reinforce how important it is to have the right people on the bus, and, more importantly, get the wrong ones off. . . . fast!
I have grown more as a professional in the past 2 years of the life of Exemplar than ever in my professional life. I have learned about what people stand for, the stands they make or are too cowardly to take. . . the things that move them and the things that they won't move on at all. And for all of these lessons I have never felt more passionate about anything than building an organization around core values and principles that I cannot, must not, compromise on. . . at first for myself, and now for the people who have joined our team depending on me to make sure that we stay true to the values that attracted them to join the quest for Excellence from the beginning. I have learned that we are not hiring for skill, but instead for character. We are not hiring for the things that school can teach you but the gifts your parents should have given you as a child. Skill may get them a phone call, but character and values get you in the door. Over the past couple of years I have been faced with the opportunity to triple or quadruple revenues at the expense of our core principles, to obtain near-immediate success for only the soul of the firm, or grow our attorney base by leaps and bounds were it not for our values. As a young and impatient leader, I want so much to grow at the speed that clients demand it or with the pace that attorneys are knocking at the door to join. Were it not for everything that we stand for as an organization, only "Excellence," we could double tomorrow.
In my short life I have seen the power of positive people empower and inspire our people to greatness and I have seen the tyranny of distrust and negativity tear down the walls the people put their hearts on the line to build, and at some point I decided that the cost of the wrong people is TOO HIGH. The kind of change we want to inspire in our profession is the kind that necessitates only the strongest leadership, un-tempted by greed or by false possibility and with an unending conviction to succeed. Leadership starts at the top and as a leader I must accept that the Exemplar standards which I wake up every day and strive to live up to fall first on my shoulders above anyone else. . . they help me to be a better person and to be a living example to our people. And so in the infinite wisdom of Jack Welch I have learned to hire slow in spite of the wealth of interest in our model and to hire for character. . . the things that great leaders are made of. I can teach skill, but I cannot teach integrity. I can train a corporate lawyer but I cannot teach trust. I can show you how to build a company but cannot teach you to respect the janitor. These are things your parents should have taught you long ago. And so I continue down the road with my monogram on one sleeve and my heart on the other. . . values intact and the vision alive and well. I am rich in my heart knowing that we are taking the right steps to build a great organization.
I had drinks with a gentleman who was of high rank in the US Military who recently told me "you've got to bleed to lead," which I cross referenced with a quote that leaders "bleed willingly and joyfully" to endure the lessons that are too difficult for the rest, and pass on the bits of wisdom that make this life worthwhile and make a real difference in the lives of others. To what end, you ask? When I started Exemplar someone asked me why I would take on such an enormous challenge as a young professional. . . why endeavor to inspire transformational change? Almost out of instinct I responded: "Because I can, I must."
Sunday, May 06, 2007
Pricing Misconception #2: The Difference Between Cost-Based Pricing and Price-Lead Costing
In this post I would like to talk about another big misconception that many attorneys have about using a fixed-priced model. The largest one has to do with understanding how, exactly, we arrive at a price. Many attorneys think that the trick to setting a price has to do with estimating how long it will take to do a job. That is entirely incorrect. There are numerous reasons why this practice will not work:
1) It assumes you know
2) In a multi-person organization it does no consider the differences in costs associated with using different human and other resources
3) It assumes that you cannot get it done faster or achieve the outcome more creatively
4) It is inherently task oriented because you are attempting to estimate the time to complete tasks -- this is backwards because the client is not coming to you to buy "tasks," the client is buying an outcome. You cannot estimate the time of an outcome. . . so STOP TRYING!!
5) Once you estimate time in order to price, you are less likely to be resourceful and think about how you can accomplish the outcome in less time
6) All of this brain twisting is inward-facing. . . it is all about you. . . if you don't charge by the hour then you have to retrain-your-brain to understand that clients really don't care what you do with every hour of your day. They want results.
I could go on forever, but to put it simply these are examples of Cost-Based Pricing. It is a LOSING proposition to price based on cost. The client does NOT CARE how much it costs you to do work. They care how much they VALUE the work you do. I know your ego is already big, so stop thinking about yourself and start thinking about VALUE TO THE CLIENT!
Studies of the most profitable companies in America show that they price based on the value of the good or service to the client, NOT based on cost plus a margin. Anyone who thinks it cannot be done has simply no done their homework. . . . most attorneys do not know how to comprehend value because they spend their entire careers looking inward at how much "time" they take and what "tasks" they do to justify their rates. Value pricing looks only at the client. unlike the most profitable companies who operate on a Value Pricing model (this does not mean cheap, it is the name of the pricing theory), attorneys have the luxury of meeting one-on-one with each customer and ask questions to determine how much it is worth to each of them. With this, attorneys (and accountants) can do a much better job of determining a price based on value than other businesses.
How are we profitable by pricing based on value?
1) We work with the client to define the SCOPE of the work, defined in outcomes NOT in tasks
2) We use project management skills to have the appropriate human resources doing work at the right level
So, If you lose money on a Value-Price model, you are most likely doing so because:
1) You defined the scope too broadly, or your proposal is task-heavy
2) You did not manage the SCOPE and are now doing work that the client did not originally want without getting paid for it!
3) Poor Project Management Skills: This is a huge problem. Now, instead of thinking of yourself as the person who does all of the work, you need to think about how to get it does cost-effectively. Profitability is improved in our model through balancing cost-efficiency with winning results every time.
There are several books written only on the topic of project management so I will not attempt to summarize them in a blog. The point is that there is a lot more to being profitable in a fixed price model than meets the eye. If you are curious how to pull it off, you really need to do your homework. Understand Project Management, delegation, Scoping for outcome, managing scope, and understanding and communicating value. If you understand these you will be well on your way to success in a value-priced model. Give it a try: It will change your life and your clients will thank you!
Questions: Post a comment and we'll discuss!
1) It assumes you know
2) In a multi-person organization it does no consider the differences in costs associated with using different human and other resources
3) It assumes that you cannot get it done faster or achieve the outcome more creatively
4) It is inherently task oriented because you are attempting to estimate the time to complete tasks -- this is backwards because the client is not coming to you to buy "tasks," the client is buying an outcome. You cannot estimate the time of an outcome. . . so STOP TRYING!!
5) Once you estimate time in order to price, you are less likely to be resourceful and think about how you can accomplish the outcome in less time
6) All of this brain twisting is inward-facing. . . it is all about you. . . if you don't charge by the hour then you have to retrain-your-brain to understand that clients really don't care what you do with every hour of your day. They want results.
I could go on forever, but to put it simply these are examples of Cost-Based Pricing. It is a LOSING proposition to price based on cost. The client does NOT CARE how much it costs you to do work. They care how much they VALUE the work you do. I know your ego is already big, so stop thinking about yourself and start thinking about VALUE TO THE CLIENT!
Studies of the most profitable companies in America show that they price based on the value of the good or service to the client, NOT based on cost plus a margin. Anyone who thinks it cannot be done has simply no done their homework. . . . most attorneys do not know how to comprehend value because they spend their entire careers looking inward at how much "time" they take and what "tasks" they do to justify their rates. Value pricing looks only at the client. unlike the most profitable companies who operate on a Value Pricing model (this does not mean cheap, it is the name of the pricing theory), attorneys have the luxury of meeting one-on-one with each customer and ask questions to determine how much it is worth to each of them. With this, attorneys (and accountants) can do a much better job of determining a price based on value than other businesses.
How are we profitable by pricing based on value?
1) We work with the client to define the SCOPE of the work, defined in outcomes NOT in tasks
2) We use project management skills to have the appropriate human resources doing work at the right level
So, If you lose money on a Value-Price model, you are most likely doing so because:
1) You defined the scope too broadly, or your proposal is task-heavy
2) You did not manage the SCOPE and are now doing work that the client did not originally want without getting paid for it!
3) Poor Project Management Skills: This is a huge problem. Now, instead of thinking of yourself as the person who does all of the work, you need to think about how to get it does cost-effectively. Profitability is improved in our model through balancing cost-efficiency with winning results every time.
There are several books written only on the topic of project management so I will not attempt to summarize them in a blog. The point is that there is a lot more to being profitable in a fixed price model than meets the eye. If you are curious how to pull it off, you really need to do your homework. Understand Project Management, delegation, Scoping for outcome, managing scope, and understanding and communicating value. If you understand these you will be well on your way to success in a value-priced model. Give it a try: It will change your life and your clients will thank you!
Questions: Post a comment and we'll discuss!
Monday, April 30, 2007
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
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!!
Sunday, April 22, 2007
How Much "Time" Does It Take To Set A Price? Who the Heck Cares!!
I apologize for the dealy in writing as there has been a family emergency that required my attention.
Heather, who commented on my last post, wanted some ideas to bring back to a disgruntled lawyer who read my blog. The lawyer rationalized his dismissal of the value pricing approach by complaining that it fails to consider how much "time" it takes to arrive at a price. Silly man. I shall explain why in a moment. Here is part of her comment and my response will follow:
"One lawyer came back to me angered about your post. The example, he said, didn't take into any consideration the amount of time it would take to figure out a flat fee for the various and varied work our corporate lawyers do. With that in mind, he was very dismissive of the value-billing approach. How would you suggest I respond to this lawyer in furthering the argument for value-billing?"
Tell him to do his homework on value pricing theory. Clearly, time rules his world and that is all he can think about. You know. . . it actually reminds me of myself in a very limited circumstance. Every once in awhile I go to bed so late that I would only have 5 1/2hrs of sleep . . . Then, I would stay up all night worrying about how little "time" I have to sleep. What a waste of time, right? Clearly, the dog is chasing his tail in this instance. OK -- I have heckled the poor guy enough, now I will expose the point here:
He is clearly making the mistake of confusing Cost-Based Pricing from Value Pricing, which is Price-Lead Costing. Let me explain the difference and how it has shaped his perceptions.
Cost-Based Pricing models are models where there is a fixed margin from the start and the price depends on the cost. The LEAST Profitable companies in the world use this model for their pricing. The billable hour is a form of cost-based pricing. Clearly, they know how much each hour of time costs and they add the desired margin on top and "viola!" you have a price per hour. It is possible, albeit a deadly error, to attempt to execute on a fixed price model with this theory. . . . . which must be what the attorney in your office is thinking. . . . clearly, he thinks we are sitting around "guessing" how much "Time" it will take to do a job when we price. In fact we do not. It is not relevant to value. We value price, and such a model is based on price-lead costing as I will explain below. Your attorney is correct that if a fixed-price model were a cost-based pricing model then it would take a hell of a lot of time to price a job.
Price-Lead Costing is when you let the price determine the cost. This model is used by the MOST Profitable companies in the world. Value Pricing operates on this model. Any lawyer needs to do an intake, so you are inevitably going to have to spend a certain amount of time developing the relationship and understanding the need. Since we price legal work based on the perceived value of the work to the client, we know how to ask the right questions that get to the value proposition during the intake so that we do no spend any more "Time" arriving at a price at all. Once we discuss the pricing internally we determine together, knowing our efficiency and using our creativity, whether we can achieve the desired "outcome" for the client profitably. The margin need not be the same on every project, and we often discover ways to get the desired outcome in less "time" in the middle of the job. If the price is such that we will be able to achieve a "win" for the client at the same time as meeting a desired profit for the firm, then Houston . . . We Have A Winner! :-) We go back to the client and present a proposal (often giving options of many different ways to achieve the outcome and we are off to the races!
So, it does not take us any more time to arrive at a price. That being said, imagine this for a moment. Since we don't use time-based billing, we do not waste our "time" calculating every 6-minute increment of our life. (Imagine the value of all of that productive time that we have and you don't! Even better, print my picture from our website, tape it to your computer, and think of me every time you are marking up your time-sheet. I am smirking at you like Mona Lisa. Yes, that is me thinking you are silly for wasting all that time. NOW, Imagine how much money it costs you and your firm in uncollectables, accounts receivable, administrative staff who collect, account for your time, and send the bills out.. . . . not to mention their benefits and that they take up a lot of expensive space in your fancy office. Are you getting my drift? (Stinks, doesn't it?) We don't have those costs. NOW: Print my picture again and stick it to THEIR computer too. Prozac sales will double almost immediately (I just bought options on the stock!. . Yahoo).
You see, we can actually be less expensive than our billable hour counterparts AND more profitable all at once!!!! We actually have a life too. Who knew! :-) So, please tell him to stop counting in 6-minute increments. Increments are excrement! Cut the crap and start using a model that makes economic sense!
Heather, 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!
Wednesday, April 11, 2007
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.
Thursday, April 05, 2007
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:
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).
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
"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!
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