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October 28, 2006

Comments

Carolyn Elefant

I will try to take the time to read one of Ron's books. However, just because I ask skeptical questions about "value billing" does not mean that I support the billable hour. For solos, the billable hour is the death knell. It works for large firms because of the pyramid scheme, but if a solos are wedded to the billable hour, they effectively cap their earnings at the number of hours there are in a year. At the same time, I hear few tangible examples of how to figure out value, just many platitudes. Actually, Allison has done more than most to explain the concept in practical terms. Many times, it seems to me that people are picking numbers out of a hat and it's that randomness that I can't escape. Perhaps it comes from my energy regulatory background, where prices must either be set by cost and justified by substantial evidence, or are set by market (where most energy developers compete on price, though sometimes they charge premium for green power, which I guess is a form of value pricing).
I also try to see things from my own perspective as a consumer. When my husband and I had our kitchen redone, we'd get proposals from people that seemed "out of the air" - e.g., $50,000 estimate. I wanted to know what the estimate was based on - time spent, cost of materials. Yes, adding an addition to my house increased its value and made my life more comfortable, but I simply was not comfortable signing off on a random figure and I wonder about how clients feel about it.
Ron, I will read your books on this topic.

Allison Shields

Ron-

The focus of this particular post was on cost because the post grew out of Carolyn's questions. I have spoken/written before about the importance of determining and articulating value, and will continue to do so.

The original post does say that getting to know your business better helps you understand which factors bring value to your clients and which factors help you be more effective in delivering services to those clients.

As you say, in order to be able to offer value pricing, lawyers need to do their cost accounting up front - before they do the work. All I'm suggesting here is that lawyers get more familiar with their business, from both a cost and a value perspective, by paying attention to what's working and what's not working about how they deliver their services now so that they can be well informed about both cost and value when setting their fees.

If getting lawyers to do their cost accounting up front is the first step in getting them to move toward value pricing, then I have no problem with starting there.

I am not suggesting that attorneys are selling time; I'm merely suggesting that time is one of the resources that needs to be considered in determining whether and how they are going to provide a particular service to a particular client. And, as with any other business, if time is an inherent factor in the service being provided, that goes into a value calculation - some legal matters are much more time sensitive, and therefore, capable of being priced differently. Similarly, wanting a product in a 'rush' often affects pricing in other businesses - because the customer is willing to pay a premium for speed.

I think that project management and pricing can't necessarily be separated - and I work with my clients on both issues. Often, clients are willing to pay a premium because they value the manner in which services are provided and the way in which projects are managed. That doesn't mean that the lawyer is selling time - they're selling a service, and a method of delivering that service. If that's what's valued by the client, then it is part of pricing.

Ron Baker

Allison,

I'm glad we agree that value drives price. And I understand what you are saying in the rest of your comment.

Yes, of course businesses have to consider cost. The question is, WHEN do they consider it? With hourly billing, they only consider it when they are done, which is not a good time to learn you invested more in costs than your client was willing to pay.

With Value Pricing, you do the cost accounting BEFORE you do the work. This is known as price-led costing (or Target Costing, as Toyota calls it).

Toyota, for instance, doesn't have a standard cost accounting system. Now that blows most people away, and it should. How do they do it? They NEVER build a car until they know what the sales price is going to be. How do they determine the sales price? Value.

I illustrate this in almost all my books with the Mustang and Corvette example, and simply don't have enough space to retell it here.

Plus, all PSFs operate in a fixed cost environment (a typical law firm's fixed costs are a higher than an airlines!), and it doesn't take a rocket scientist to do cost accounting in a fixed cost environment. In fact, activity based costing is more accurate than traditional cost accounting.

But that only helps with costs, not value. And I think it's the wrong focus. Again, we won't become better pricers by being more accurate bean counters. It doesn't work that way.

Your comment about taking time into account is true, but so what? All businesses (indeed, all living things) are constrained by time. Again, so what? Bill Gates is subject to time constraints, the difference is he doesn't think he sells time.

This is the major problem I have with your advice to attorneys. Keeping them mired in costs, inputs, activities and efforts is not going to help them create and communicate (let alone capture) value.

Professionals need to start tracking value, and be able articulate the value they can provide for their clients. Since the value of what they provide will always well exceed their costs (otherwise, they need to find another line of work), the value is far more important to pay attention to than the costs.

All of the other salutary effects of Value Pricing is an additional advantage: better client service, no write-offs or write-downs, less admin work, no billing required (because you agreed up-front), better communication, etc.

Attorneys will take even longer to adapt if we keep them mired in the mentality that time is important. It's not. That's project management, not pricing.

Focusing on value is the only way to become a better pricer.

Regards,
Ron Baker, Founder
VeraSage Institute

Allison Shields

Ron-

I don't disagree that value is what drives price. That being said, attorneys, just like everyone else, have to consider cost in order to determine whether they are able to do the work at the price the client is willing to pay. Cost has to be a factor in their equation - not in determining the value to the client, but in determining whether a particular lawyer or firm can offer a client a particular service.

In my original post, I suggest that attorneys need to know a lot more about their business before they can determine how to price effectively. I don't mean to imply at all that cost is the ONLY factor that should be considered.

Part of my point was that in looking at alternative vs. hourly billing arrangements, many attorneys forget about the other 'costs' that are associated with their hourly billing arrangements - in the form of personnel, time it takes to follow up on collections, etc. I think if attorneys understood the costs involved in doing the business the way they're currently doing it, they might be more willing to take steps toward alternative billing arrangements. My point was not that they should continue to work on a cost basis, but that they should understand what their current systems are actually costing them, and how much of what they 'think' they're getting paid under an hourly system is actually getting eaten up administratively or by writing off or writing down their bills.

The fact is that attorneys often take a long time to adapt, and my post was merely a suggestion for taking a first step. In the real world, not many attorneys are going to just make the leap, as much as you, me, or anyone else might like them to. Some people need to be led by the hand a little more, and the first step is understanding why hourly billing doesn't work for lawyers any more than it works for their clients.

Even when attorneys aren't billing by the hour, they'll have to take time into account, just like any other person or business does, because time is a limited resource. I was merely pointing out that by understanding their business and their clients' needs better, they would not only be able to make more educated choices about billing methods, but would also free up more time to work on activities that generate revenue, rather than chasing down clients for money. They will also need to understand what makes a case more or less difficult to handle, and what factors affect the value to the client, in order to make educated business decisions about what kind of work they can and should be doing, and how to be not just efficient but effective.

Ron Baker

Allison,

I couldn't disagree more with your and Carolyn's comments, along with Ed Poll's.

Lawyers will not become better at pricing by becoming better cost accountants! If this were true, CPAs would be excellent pricers, and they are as bad as attorneys.

Costs don't drive price; rather value does. What attorneys need to track is not costs, but the value they create.

Most firms don't even do this, yet Accenture, McKinsey, and others, do. This is why they don't have to worry about hourly rates, write downs, write offs, etc. They talk value, not costs or hours, with their customers.

I've written 4 books on this topic. I wish Carolyn and all the others would take the time to read them. If you don't read my work, try Allan Weiss' books.

There's enough empricial evidence out there to refute all of this nonsense about the virtues of cost-plus pricing vs. value pricing. The debate is over. The evidence is out there for anyone willing to open their eyes and look around.

This is why the Fortune 500 all have professional pricers on their teams, and have turned pricing into a separate function. These people are not cost accountants; they track value. We can learn alot from them.

Let's evolve our thinking from one of costs, inputs, efforts and activities, to one of results, value and output.

Sincerley,
Ron Baker, Founder
VeraSage Institute

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