There’s nothing more practical than a good theory

Thank you to Stephanie West Allen over at Idealawg for sending me this blog post from the Blog Morepartnerincome on a pricing article by Ward Bower, a principal with Altman Weil, Inc.

There’s so much to refute from these two sources it’s hard to know where to start. Let me begin with this excerpt from another post from morepartnerincome on the necessity of contemporaneous timekeeping for attorneys:

You can’t accurately place a value on a task without recording the time it takes to do it. You can’t accurately place a value of an hour’s work without recording the time you spend working.

Really? This explicitly assumes that there is a relationship between time spent and value to the customer. This labor theory of value was refuted in 1871; it’s hard to believe that people continue to hold this belief.

The post goes on to explain how to enforce compliance to ensure attorneys keep track of their time. How inspiring for a knowledge worker to have to account for every six minutes of their working life and be reduced to an aggregate billable hours number at the end of year. And the profession wonders why it can’t inspire top talent?

But even more amazing is the Ward Bower article. Here’s how he begins:

Billing for legal services is an art, whereas pricing is more of a science.

Not really. It’s the opposite. Billing, which is almost always done in arrears, is actually a form of mail fraud. Multiplying an arbitrarily determined hourly rate, which Bower even provides a tidy little formula for computing, by logged hours on a timesheet hardly rises to the level of an art.

It’s purely a rote function that takes no creativity, imagination, innovation, or having an understanding of the actual value you are creating for the customer.

At least Bower does discuss the customer’s ability and willingness to pay, which is another way of saying the value of what they are receiving. But he does it all in the context of hourly rates, which assumes there is a link between time and value. This is such a colossal economic fallacy it’s hard to believe Altman Weil gets away with promulgating this nonsense year after year. Maybe they do it just to sell their Survey of Law Firm Economics?

Bower goes on to suggest that the firm must position its hourly rates in the external marketplace. Of course, this is a form of reverse competition. What’s the hourly rate of the most expensive firm in town? The least expensive? Most firms choose somewhere in the middle. This is letting your [dumbest?] competitors set your rate. This hardly qualifies as strategic pricing.

Yet that’s not even the main flaw. The main flaw is the underlying premise that hourly rates can communicate, create and capture value. This is never challenged, and is a result of flawed thinking. We at VeraSage hear ad nauseamm, “Enough with the theory of Value Pricing, show us how to compute value.” This is the equivalent of physics students telling the professor, “Enough about the theory of the atom, show us how to make a bomb.”

All learning starts with theory, and there’s nothing more practical than a good theory. For proof, just look how much destruction the time equals value theory has caused in the legal profession. Until firms—and the consultants to them—change their theory, they simply will not progress from where they are.

There’s no formula for value, despite Bower’s feeble attempt to provide a mechanism that allows a firm to be precisely wrong. Value requires that a firm be approximately right. The only way to understand value is to understand your customer, their value drivers, their business model, and how a particular service is going to benefit them, both economically and psychologically.

You can’t do this with a formula or a checklist. Understanding your costs and desired profit level will also not help, since value drives prices, not costs.

I won’t even bother to refute Bower’s section on Alternative Pricing. Suffice it to say he drags out the old canard of hourly rates, costs, and efficiency, all of which have been thoroughly refuted in the Firm of the Future’s practice equation at the top of this Web page.

It amazes me that Altman Weil and other prestigious consulting firms to the legal profession get away with not having a new idea since the Soviets launched Sputnik. But this is only because their clients believe in the same out-dated management ideas. More proof that consultants aren’t really change agents, nor are they innovative thinkers.

Bower’s article is a testament to the Firm of the Past, both his and his clients.

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