26 March 2019

How to innovate legal pricing driven by value, not time

Published on 26 March 2019

John Chisholm has never been a fan of time-based billing. As a practising lawyer, and later as a managing partner and CEO, he found the process could be cumbersome. Not only did it add a layer of work on top of simply doing legal work, but it often had a detrimental effect on a law firm’s relationship with its clients when the client received a bill for legal services far in excess of what they expected.

For over a decade and now, as director of the Innovim Group, John has been helping lawyers find a better way to price their services.

Insights spoke to John about re-engineering how lawyers price their services, and what advice he has for firms interested in more strategic pricing models.

 

Those with the most to lose will be last to change

When John became a managing partner, he recognised the “perverse incentives” time-based billing encouraged.

“The longer it took for our lawyers to do something, the more we could get paid,” John said, noting this often led to bill shock. “It was never nice having those awkward conversations with clients after the work was done and the invoice sent trying to explain to the client why the fee was higher than anticipated.”

This was simply the reality of the business model of most firms at the time.

“I only had my ‘aha moment’ after I left mainstream law when I heard the late Paul O’Byrne, an accountant from Goffs Oak London,  present at an ALPMA Summit in Sydney in 2005 on Value Pricing for Professional Firms. I am ashamed to say I had never even heard of the concept prior to then but I was hooked from that moment on.”

Just to explain John defines value based pricing as a pricing model where the lawyer and the client have what John calls “a value conversation”, agree on a scope of work and a fee for the work with the client upfront before the work is done and document what is agreed in a costs agreement. Then the law firm gets on and does the work.

2019 actually marks the hundred-year anniversary of time-based billing in law firms.

“I do not underestimate both how hard it is for lawyers to change their business model and how loud are the death throes of the billable hour,” acknowledged John. “Those that have the most to lose will be the last to change. Meanwhile the innovators, the legalpreneurs, and the risk takers deserve all the credit they get for finding a better way of their practising their crafts with a much clearer and optimistic future.”

 

Unlearning the billable hour

By far the biggest challenge facing lawyers is unlearning how they value their services.

“For lawyers who, for the last generation or two, have known little more than ‘we sell time’ and have rarely priced anything upfront, we have to unlearn much of what we were conditioned to believe,” said John. “You can’t change your pricing model overnight. It will take months, if not years, to change. Learning to have a value conversation upfront with each of your clients is essential.”

All this is compounded by the fact that lawyers have had little training in pricing. This starts with truly understanding what your client values most.

“Every client will value things differently,” John noted. “Without this understanding, the chances of you being able to capture a fair proportion of the value you provide with strategic pricing are not high. If your client does not understand the value you are providing, whose fault is that? It is ours.”

 

Works best for experts

Several firms in Australia have transitioned away from time-based billing, including View Legal, Hive Legal, Law Squared, Lynn & Brown, Aptum and Moores.

“It is only once you stop recording time that you stop defaulting to time and become more creative and strategic in your pricing,” said John. “Clients take to upfront pricing like ducks to water. Why wouldn’t they? It gives them more certainty and predictability over their legal spend. Not every lawyer can adapt to it readily though. Strategic pricing imposes greater accountability on individual lawyers as they are no longer simply measured and rewarded by how long it takes them to do something but on value they provide to their clients. That is scary for many lawyers.”

John noted that firms like Moores, which introduced ‘Moores Agreed Pricing’, took some time to experiment with upfront pricing models before it became entrenched into the firm culture.

“Profitable professional firms like McKinsey have never billed by time. One of the most profitable law firms in the world, Wachell, Lipton, Rosen & Katz has never billed by time. Each firm has done it in their own way and in their own timelines.”

For value-based pricing to lift firm profitability, a firm must reassess how it does its legal work, and carefully consider its client base.

“After all, you cannot value price the wrong clients. Value-based pricing works much better for lawyers who are specialists and experts,” observed John. “For some firms, it will mean focussing more on what they do well. Done right over time, value-based pricing will increase a good firm’s profitability.”

 

Delivering value-based fees that clients are happy to pay

“Professionals will always have scope creep and seep no matter how they price,” said John. “Time billers have write-offs and time recording is never completely accurate, and will not capture the exact time spent on something.”

Once a lawyer has the value conversation with a client, it is important to agree on the scope of work before you discuss and agree on price. “This is where good, disciplined project management skills come to the fore. If something goes out of scope, then a lawyer and client can discuss re-scoping, and if necessary, re-pricing.”

Re-framing pricing in terms of value has numerous benefits.

“By far the greatest benefit is a much better relationship between lawyer and client.” John said. “Another benefit is much greater internal collaboration and team spirit. Time billing and time recording are HUGE collaboration killers. Professionals, much like our clients, prefer being valued on outcomes and results, rather than time spent on something.

“Over the last decade, I have discovered that when you agree on your price(s) upfront with a client, the client pays you faster and you have fewer or no cost disputes. For many smaller law firms this increased cashflow has been a huge benefit.”

In partnership with the Centre for Legal Innovation and the College of Law, Innovim is running some practical workshops exploring ways by which lawyers can innovate their legal pricing. Interested in attending this workshop? Find out more here.

 

You might also like to read

Getting the price right: How to charge for legal services

4 workflow hacks that will make your lawyer life easier