BDO Stoy Hayward in the UK recently issued a report I read several weeks ago, which has been annoying me ever since. It’s titled: Stop the clock?: A research report on fees and value in legal services.
There are some interesting nuggets in this report. There’s also an enormous amount of nonsense, which would take literally a book to refute. I’ll just give you a list of what I found interesting from the report, as well as what I agree with, and finally what I vehemently disagree with.
[Note: This post should be read after reading my post How Much Are You Leaving on the Table Because of Mediocre Pricing, since the main message of this post is law firms are responsible for changing their pricing strategies, not in-house counsel or their customers].
Interesting items from the report, along with my commentary in brackets:
- 82% of in-house counsel believe hourly billing provides no incentive for firms to be efficient.
- Hourly billing accounted for two-thirds of the total annual legal spend of our survey respondents.
- Nearly half of the respondents were dissatisfied with hourly bills and were clear about the reasons why.
- One in ten in-house counsel said hourly billing had no strengths at all, and most were ready to be impressed by an alternative [Law firms: Hint, hint].
- Some organizations are bringing their procurement departments to the negotiating table, believing this will help them to get better value for money [Advertising agencies are already facing this issue, and it’s not pleasant. If you are dealing with professional buyers, then you certainly need professional pricers].
- Fixed fees achieved the highest satisfaction levels, with capped fees close behind. Both levels are higher than the satisfaction rating for hourly billing, but neither statistic is a resounding endorsement. [We needed a study to learn this?].
- Fixed fees was ranked as the best substitute by only one-fifth of respondents. [So what? Customers need to be educated and inculcated to new methods of pricing, and the onus is on the sellers, not the buyers].
- 68% of in-house counsel said they would be willing to pay higher fees for valuable work if they were charged less for lower-value work. Only 4% disagreed strongly with that idea. [We’ve said this for years, using Bill Cobb’s Beloved Value Curve as an illustration: some work is of relatively lower value than others, but the hourly rate treats all work the same. It’s insane, and creates this cross-subsidy system whereby lower value work is overpriced and high value work is underpriced. This is all the result of law firms not understanding value to the customer].
- If law firms are willing to try a value-based approach, many in-house counsel would be receptive. Indeed, 65% said they would like to discuss the possibility of value-based billing with the law firms they use. [Amazing].
- When the relationship with a law firm has broken down, billing is only one of the reasons, [one in-house counsel believes]. “Really it will have been because we were not impressed by the service we received or we were not well understood by the people we worked with. If their bills were cheaper, would I still go back to them? No.” [Research for decades has shown that nearly two-thirds of customers leave professional firms due to perceived indifference. It’s the little things that matter most, and service is primary. Note the answer to her own question! How many times must we repeat it: customers are not price-conscious, they are value-conscious].
Here are items from the report I agree with, along with my commentary in brackets:
- But what about value? If there is a negotiation about value, it often takes place once the final bill has been received, when in-house counsel asks the firm in question to retrospectively justify its charges. Some in-house counsel are happy to work on this basis, others are less so. Either way, our research shows that in-house counsel are keen to engage law firms in a wider debate about the issue of billing. [It’s not a debate, it’s a strategy to capture the value a seller creates for the buyer. Since value cannot be communicated as efficaciously retroactively, it must be discussed before the service is started. Otherwise, how could a value price be set? This is such a basic economic law—and every other industry follows it—it’s truly amazing this is still being discussed with this level of intensity. I come back to a lack of intellectual curiosity among law firm leaders for this sorry state of affairs].
- Two imperatives frame this debate. Firstly, in-house counsel want to talk to law firms about how they can improve the hourly billing model, and whether alternatives might work better. In particular, the charging process should be more transparent and there should be greater certainty about the way in which the total fee is calculated. [The hourly billing model cannot be improved—it is what it is. It’s been around now for over 50 years, quite long enough to figure out whether or not it can be tweaked. It needs to be buried, along with the labor theory of value mindset that is inexorably linked to it. Of course pricing should be transparent, which it is if it is based on value and provided to the customer BEFORE work begins. What’s more transparent than that?].
- Secondly, in-house counsel want to discuss value in the wider sense. If fees are to relate more closely to value, what might that involve? And if in-house counsel want a more value-driven relationship with the firms they use, what might that look like? [It would look like all the other relationships buyers have with sellers around the world. They know the price up-front, and they get to decide, based on a value-to-price relationship, whether or not the value is worth the price. If firm leaders opened their eyes and looked around the business world, they would see what this looks like].
- One respondent complained about a firm that charged for travel time when its office was just a fifteen-minute walk away. A value-focused relationship is one, in his view, where he could phone up a lawyer to discuss an issue quickly and not be charged for it. [This is why we advocate utilizing an “Unlimited Access” clause in all Fixed Price Agreements, whereby the firm’s price includes unlimited telephone calls and meetings. This inevitably leads to Change Orders and is one of the most effective—and inexpensive—methods for cross-selling additional services].
- Mr. Holford [in-house counsel] hopes the system will lead to a “no surprises” culture, where the company can better estimate its legal costs and the claims themselves. That’s an outcome many of the in-house counsel in our research would like to achieve. [“No Surprises” is a cardinal axiom of a Value Pricing culture. Fixed prices offer this as no other pricing strategy can or does].
- There will always be some firms working on an hourly basis, says Mr Given [in-house counsel], but over time “the business model will change and firms will focus more on adding value”. If billing does move onto that more subjective basis, how will in-house counsel decide what they ought to pay? “It’s also the other way around,” he says. “It’s for law firms to work out what their USP [Unique Selling Position] is and to put a value on it. I’m not going to say it will be easy, but it will be increasingly hard to ignore as an issue—it’s not going to go away.” [Amen. Again, it’s up to law firms to change, not in-house counsel!].
Finally, there are statements and conclusions in this report that are utter nonsense. All of them have been refuted in the books written by Richard Reed for the ABA dating back to the early 1990s, as well as my books, among others. The fact that we still have to reiterate these basic laws of economics illustrates how much work we have left.
Here are some of the more annoying passages from the report, again with my commentary in brackets:
- There is a role for hourly rates, fixed and capped fees, value based billing and other structures. The challenge is learning when to use these various methods, developing accepted standards around their usage and capturing the value which legal services bring to organizations. We hope this report will facilitate positive on-going conversations between private practice and in-house counsel which helps to influence and inform the debate on this topic. [It’s hard to believe they conclude that there’s still a role for hourly billing, after their own report shows 94% of in-house counsel complain there’s no certainty over the final cost, or link to value. All of the challenges they mention are the responsibility of law firms, so there should be no “debate” with buyers about this].
- Tradition is taken seriously in the legal profession and tradition dictates that most law firms charge their clients on an hourly fee basis. It is a simple way of working out fees, and in the highly complex world of the law, simplicity should not be undervalued. [Tradition is the democracy of the dead. If a theory is not working, shouldn’t it be replaced with a better one? Clinging to hourly billing because it’s been around for over half of a century is the triumph of hope over experience].
- However, in a climate of rapidly increasing fee rates, hourly billing can also lead to a lack of trust through a fear of overcharging and a growing concern that legal charges do not reflect the true value of the services provided. [No kidding. This lack of trust is severe, a consequence of an incorrect pricing theory. Restoring trust is reason alone for burying the billable hour. Not to mention that hourly billing is unethical].
- Those who have used alternative methods—such as fixed or capped fees—say that while these are preferable, they do not believe that any one of them on their own can, or should, replace hourly billing. Instead, the most popular model involved a menu-style approach, where in-house counsel could influence more control over costs by agreeing to use a billing method that reflects the assignment. [Well, quite frankly, it doesn’t matter what in-house counsel believe. I agree they should be offered various levels of services and price, much like airlines offer anywhere from no-frills coach to first-class tickets. But that does mean that passengers get to have a say in whether or not airlines use Yield Management pricing. This is where law firms lack creativity and vision. Offering a menu of different levels of service and pricing is a rational strategy, but it simply has to be done by law firms, not customers].
- One route many in-house counsel adopt is to challenge the bill when it arrives—as one participant in our research put it, “to negotiate value after the event”. Some in-house counsel are happy to have this kind of discussion with their legal advisers. Mark Harvey, in-house counsel at Help the Aged, says he typically works this way, receiving an hours-based bill from a firm and then asking what they actually propose to charge. “We’ll agree something at the end,” he says. Does that make for an awkward relationship? Apparently not. “It’s not haggling, it’s negotiating.” Mr Harvey says he is generally happy with the value he receives, and focuses on quality of service more than anything else. [Pricing is not negotiating, and once cannot communicate and convince customers of value retroactively. This is insane. Value must be discussed up-front, period, so the customer can compare value to price before they purchase, not after. A service needed is always worth more than a service delivered, for the same reason an apple today is a different product than an apple tomorrow. Why would lawyers want to price in arrears?].
- Les Todd, in-house counsel at Newcastle Building Society, would rather establish a clearer link between fees and value from the start. “I do not like receiving quotes which turn out to be totally unrealistic,” says Mr Todd. “In certain circumstances the quote may be exceeded, but I do not accept this as a fait accompli, and generally find that constructive discussions need to take place to ascertain whether the increase is justified.” [Precisely why we advocate utilizing Change Orders where price and scope are authorized up-front, along with Fixed Price Agreements].
- Any negotiation over value, whether entered into when the bill arrives or when the work is assigned, begs the question: what is value? The majority of survey respondents and interview participants want a better link between fees and value, but their understanding of what value means in this context varies. [That’s because value is subjective, and depends on context. A bottle of water is worth far more to a man about to die in the desert than it is to a man washing his dog, or to a man with water flooding his basement. If we want prices to be better linked to value, I can tell you one way not to do it, for sure: discuss hours. If law firms don’t discuss value, procurement or in-house counsel will force them to discuss costs, inputs and hours. The choice is yours].
Much more could be said about this report, but this post is already too long.
Suffice it to say, let me be clear: Sellers are responsible for innovating new pricing paradigms, just as lawyers did when they started using hourly rates (customers never asked for it, it was thrust upon them).
Law firm leaders need to lead the change, and visionaries such as Chris Marston of Exemplar Law Partners and Jay Shepherd of Shepherd Law Group are blazing the trail other firms will inevitably follow.
One last comment: Physician, heal thyself. BDO Stoy Hayward is an accounting firm mired in the mentality that it sells time. It would be nice to see them bury the billable hour along with their law firm brethren. I won’t hold my breath.