In Search of Perfect Client Service

Associate Pay Raises

I was just reading the Chicago Daily Law Bulletin.  Seems that Mayer Brown, DLA Piper and Latham are joining the growing tide of firms raising the starting salaries of their first year associates to $135,000.  Mark Jungers of Major Lindsey & Africa, a prominent recruiting firm, predicted that Kirkland, Sidley, Winston and McDermott will quickly follow suit.  I would be surprised if any of the top 10 or so Chicago firms hold the line.  The expectation is that there will be $10,000 bumps (in some cases "only" $5,000) to the salaries (or at least annual compensation) of all associates in the firm.

What do these salary increases mean for firms and their clients?  Simple math will tell you that these "bumps" are multi-million dollar hits to the firms bottom lines.  There are, at the end of the day, only two choices.  Do the partners make less (while the associates are making more), or do clients pay more for the same work?  It does not require an advanced degree to know that the partners will not make less.

It is at times like this that the pressure to increase total hours is at its most intense.  Some firms may be forthright and acknowledge that hourly requirements will go up.  Others will do what what I have heard referred to a "manage hours up."  Other firms will increase rates.  But however it is accomplished, firms will capture this revenue from their clients.  All for the same work.

Has the value to the client increased?  Of course not. 

There has been so much negative buzz lately about value received, hourly rates, paying for associate training, and so forth.  This salary increase will do nothing but increase the economic pressures that drive wedges between clients and some of their lawyers.  Perhaps this will be the event that marks the death knell of the hourly rate.

Its Not Price. Its Value.

Dan Hull has a good post on his What About Clients blog about price competition.  His approach is not to compete on price but instead to compete on service, not price.  His insight, which I cannot improve on in any way, is that "if clients come to you for price, they will leave you for price."

This thinking mirrors Tom Peters' view.  Tom has a great slide that he uses: "You can't compete with China on cost or Walmart on price."  So don't. Compete on value.

Outsourcing Litigation Oversight

In December, I ran a post about outsourcing the legal function or at least parts of it (here).  My thesis was (and remains) that certain inside functions could be handled better by outside counsel on a fixed fee that would be competitive with or less than the cost of the inside lawyer).   The Wired GC has written a very interesting critique of this idea.  The first noteworthy comment is about benefits from the process of considering whether work could be outsourced:

Nevertheless, this process can have the effect of forcing the GC to take a hard look at what work is being done. Some may be outsourced to law firms. Some may be redistributed internally to lawyers, given to non-legal staff, or restructured using appropriate technology. And–possibly best of all–some work may no longer be done at all.

Frankly, these collateral benefits were ones I had not even considered.

Wired GC goes on to find some potential problems with the example I used, including the again increasing salaries for new associates and the fact that most lawyers would not like to "oversee" litigation being handled on an hourly rate by others. 

It is, quite obviously, impossible in short posts such as those in our blogs to provide a detailed proposal and analysis of the benefits of any significant idea, particularly those such as this one which are so very fact-specific.  But let me say this.  My use of the term "oversee" (as in "overseeing litigation") was a poor choice of words used to summarize the many responsibilities an inside lawyer has with respect to a lawsuit.  Issues such as budgets, settlements, insurance coverage, keeping business units apprised, setting reserves and so forth all are significant factors.  But I continue to believe my hypothesis is true--not for all but for many.  The functions I described above could be performed as well or better by a senior litigator whose salary prices her out of the marketplace for many inside counsel positions.  Why would a firm perform such work on a fixed fee akin to her what it would cost to handle these functions in-house?  Many firms (and I know this from my own experience) would be thrilled to do so to get a foot in the door.

I am thrilled that the Wired GC found my post worthy of comment.  I hope he and other inside lawyers find the idea worthy of consideration.

New Book by Ron Baker: Pricing On Purpose

Thanks to Michelle Golden at Golden Practices for her discussion of Ron Baker's new book, Pricing on Purpose.  The book is available here.  Baker is a thought leader in the area of value pricing, and I have rarely seen Michelle as worked up about a topic as she is in her post of the book.   I've already ordered it.

Four Realities of Value Based Pricing--The Second Reality

In November, I began a discussion of value-based pricing. I had clipped a piece that discussed the "four realities" of value pricing but had omitted to clip the name of the author.  I now know that it was Mike McLaughlin of Guerrilla Marketing for Consultants.  Now that I can attribute the material to Mike, I'd like to continue the discussion today focusing on his second reality:

Reality #2: Clients are reluctant to leave their comfort zone.

For decades clients have used the simplicity of the hourly rate to help make decisions on choosing consultants. The hourly or fixed rate gives clients an apples-to-apples comparison—at least on price—of their alternatives.

Sure, the firm with the lowest hourly rate isn’t always the winner, but clients like having a standard measuring stick. Consultants know that old habits die hard, and that the hourly rate or fixed-fee pricing won’t go away quietly.

Many clients need a powerful incentive to budge them from old habits. After all, if a client can hire a consultant on a fixed-fee basis to help reduce manufacturing costs, for example, what would motivate that client to pay a value-based fee, which is likely to be higher?

 

“You have to demonstrate a dramatic difference in measurable results as compared to the rest of the pack...”

The answer is reflected in just about everything you do, from marketing and selling to delivery. You need to rethink your marketing communication, sales approach, and your value proposition to effectively convert clients to a value-based billing approach.

You have to demonstrate a dramatic difference in measurable results as compared to the rest of the pack or your clients will head right back to their comfort zone—the hourly rate.

I have struggled with this concept.  I absolutely agree with the premise--old habits die hard.  But I am a litigator--how do we discuss "value" in the concept of litigating a case.  If the case could potentially cost a client $100,000 to defend, and there is a 10% chance of a $1 million dollar verdict, perhaps the value is $200,000.  But how does one distinguish--really distinguish--between a 10% and 20% chance of a certain result?  That difference--$100,000--might be real money to some.  As long as we are left with these kinds of vagaries, I have reservations about a company moving to "value" pricing for litigation.  Certainly budget considerations might drive the litigant to something other than hourly rate payments.

Cutting Inside Counsel: Perfect Opportunity For Fixed Fee Agreements

About I month ago, I wrote about "Outsourcing The Legal Function."  Today, I was reading this article at law.com about five questions law firms face for 2006.  The fifth question is whether client relationships are more critical than ever.  The author observes that "according to a recent law firm study by BTI, the vast majority of companies are shrinking their in-house counsel team, in part because they believe this will cut costs."  I attended the seminar where BTI first presented this data, which is very strong.  The reason, BTI believes, for this phenomenon is that reducing inhouse body count cuts inhouse costs, and that these numbers are more important for General Counsel than outside counsel spend. 

Whether the reasoning reflects the truth of the situation, it is inescapable the General Counsel should be thinking about outsourcing parts of the legal function.  Certainly the work can be handled by outside counsel.  For example, if a company has a lawyer overseeing litigation, any work she is doing likely could be done as an outside lawyer.  In terms of the value of the work, that value is fixed--what was the all-in cost for the inside lawyer?  Might the law firm be able to provide superior service?  Possibly, especially if the outside firm has the breadth of talent to manage (not necessarily handle) litigation with greater expertise brought to bear.  And quite possibly, someone more senior to the inside lawyer will make better judgments about tactical and strategic matters.  Experience does count for something after all.

With this said, I wonder why more General Counsel are not considering outsourcing as a solution.

Clients, Not Firms, Control The Future Of The Billable Hour

Another American Lawyer piece on the billable hours. Author Douglas McCollam does a terrific job analyzing the flaws in the system and some of the reasons it remains entrenched.  Here is an interesting insight:

The question remains then: If the billable hour is so unpopular, why hasn't it been replaced? For starters, it's a huge moneymaker for firms. To a large extent, reliance upon the billable hour is responsible for the pyramid structure of the modern law firm. With legions of associates toiling away on behalf of a narrow band of partners, the modern megafirm generates huge revenue. Take away the billable hour, however, and the foundation of the pyramid collapses. If the basic commodity sold becomes knowledge, not time, then the modern megafirm suddenly begins to look like an obsolete smokestack industry.

What if the basic commodity sold was results?  Makes me wonder how many CEOs would tolerate the system tolerated by their GCs?  If Jack Welch or others of his stature were ever charged with creating an efficient, effective legal marketplace, what would the over/under be on the future of the billable hour?  My bet would be on less than a New York minute.  CEOs like results.  Apparently the GCs are willing to focus on process.

The bottom line is that clients will continue to be offered what they buy.  All the carping in the world isn’t going to cause the fundamental, systemic change needed to banish an economic model that is not in the best interest of the consuming clients.  If clients pay for “legions of associates toiling away,” that is what they will get.  If they pay for hours of research on an issue that is at best a sideshow, that is what they will get.  If they choose to pay for results, that is what they will get.  The market moves to the money.  Always has.  Always will.

The Annual Rite Of Passage: Raising Rates

Check out this post on Law.com. Brenda Sandburg of The American Lawyer reports that amongst the Amlaw 200:

• Billing rates will continue to go up. Fifty-three percent of respondents expect to increase billing rates by 5 percent or less; 46 percent anticipate raising them by more than 5 percent.

• Profits will keep rising, too. Sixty-eight percent of respondents expect profits per partner to grow more than 5 percent; 27 percent think profits per partner growth will be 5 percent or lower.

Its amazing—99% of law firms “expect” to raise rates, nearly half by more than 5%.  Did they ask their clients?  Are their clients raising their prices?  How many of their client legal departments are facing cut-backs or cost constraints?

At the same time, profits per partner are going up.  More than 2/3 think the PPP will go up more than 5%.  I wonder how their clients feel about that.

I will say that this might be misleading, akin to a peacock showing off its tail feathers.  Impressive, but not relevant.  How many of these firms will be offering discounts that more than offset the increase?  How many “negotiate” the bill on top of the discounts?

As I have said before, the system is phony.  Maybe this is the year some clients will wake up and smell the coffee.

 

This Is Really Pathetic

https://thebillablehour.com/clocks.php

https://thebillablehour.com/watches.php

Some people find these timepieces funny (checkhere). It strikes me as sad. 

Four Realities Of Value-Based Pricing--The First Reality

I clipped something to post about and when I went back I realized I had forgotten where I found the material.  If you recognize it, please let me know so I can edit this post to provide proper attribution.  I thought about not posting because of this problem, but the ideas are too valuable not to share and discuss.  As you can see, the author identifies four realities of value-based pricing.  I will reprint them with some commentary in four separate posts.

EDITED AS OF JANUARY 6, 2006.
I received a comment from Andrea Harris at Guerilla Consulting who kindly advised me that the material I had clipped but forgotten where I found it came from Mike McLaughlin, co-author of Guerrilla Marketing for Consultants.  Mike, my apologies.

 

Four Realities of Value-Based Pricing

The logic of value-based pricing for consulting work is sound. Why shouldn’t consultants be paid based on the results of projects, rather than the number of hours they log on them? And to take the logic another step, if a consultant’s work generates big savings for a client, shouldn’t the consultant share in that windfall?

I think value-based pricing will take hold in the consulting business, so facing the realities of this approach now will prepare you for the changes ahead.

Reality #1: Clients care about the performance of their businesses—not yours.

“Clients are interested in their results, not your profit margin or how much time you put into a proposal or a project.”

Most clients are looking for tangible results, at the best price, when they hire a consultant. Of course, clients will pay a premium if they believe they can achieve faster, better, or more permanent results with a higher-priced consulting firm.

But never lose sight of the fact that clients are interested in their results, not your profit margin or how much time you put into a proposal or a project.

Some clients will express enthusiasm for and negotiate a value-based fee with a consultant, only to get cold feet at the last minute and ask for a time and materials or fixed-fee proposal. Clients sometimes perceive less risk and lower cost with the hourly rate option, even when that does not reflect reality.

Keep your pricing options flexible even if a client shows a strong interest in value-based pricing. You’ll avoid scrambling at the last minute to create a price for services.

My take:  I agree with this to a point.  A savvy client will want you to earn a profit too since happy vendors or service providers can really help a business advance and grow.  The relationship should be one of shared risk, but also shared benefits.  One way streets are headed in the wrong direction.