Are Lawyers Tone Deaf?

CLIENTS ARE almost entirely united in seeing an end to the billable hour, with a majority of lawyers willing to agree, an anonymous survey has revealed.

So writes the Lawyers Weekly from Australia in a November 30, 2006 article entitled "Clients slam billable hour, again."

The article cites a survey from a recent conference showing 95 percent of clients believe a majority of law firm clients want a change from the billable hour system, while 71 percent of lawyers concurred. Only 3 percent believed the billable hour was extremely effective, but 40 percent said it was some-what effective.

As if more empirical evidence was needed that the billable hour is universally disliked. We already knew that; what's more interesting is what are these Australian law firms going to do about it? It's like Mark Twain said about the weather, everybody talks about it, but nobody does anything about it.

On November 23, 2006, Lawyers Weekly ran an article entitled "Please choose your payment method," which began by stating:

If they can't get a quote from a service provider, most consumers will move on to someone else. But law firms have so far largely managed to avoid this accepted fact of commercial life.

The reasons are complex. There are now isolated examples of law firms offering alternative ways of pricing their services, and more are likely to follow driven by a combination of market dynamics, client demands, and competition, not to mention national profession laws requiring upfront costs agreements.

No, the reasons are not complex. The fallacies are complex. The subjective theory of value teaches us that value is in the hearts, minds, and souls of customers. It's an elegant theory, it's also quite simple. Yet there is an enormous difference in being simple and simplistic. Being simple often is the outward sign of depth of thought.

Ronald Reagan had a simple idea about the Cold War: America wins, the Russians lose. Most economic theories are relatively simple; it is the fallacies that get complicated. It is an unnecessary complication to believe that complex effects must have complex causes.

The fact that the earth tilts on its axis is fairly straightforward, but this certainly causes complex reactions in plants, animals, people, ocean currents, and so forth. To say that value is subjective is also fairly straightforward; it's when we deny this basic theory that we run into vast complications.

The billable hour contradicts the subjective theory of value, so if you start with the wrong theory, it doesn't really matter how accurate everything else is, you end up with precisely the wrong result. How many instances of this do we have to hear from customers—not to mention lawyers themselves—before we understand this basic point? Einstein once said, "Perfection of means and confusion of ends seems to characterize our age." Nowhere is this more true than in how professional knowledge firms price.

If the billable hour correlated with value, why is everyone so frustrated with its continued use? The article quotes general counsel:

One general counsel we spoke to said 'the first firm that gets fixed fees right is going to clean up,' he says. There are other general counsel saying: 'I'm comfortable with hourly rates, because I can compare the rates [easily] from different firms, from one to another'. There are different views on the specifics.

In the final analysis, the customers are not the ones who change pricing strategies. I have intensely studied the history of industry pricing changes, and nearly every one was driven by the sellers, not the buyers. Why?

Because it's the sellers that have the most incentive to capitalize on the gains from pricing commensurate with value. Sellers sell thousands (or millions) of times, whereas buyers only purchase relatively infrequently. It's simply not worth their time to try to change how the businesses they patronize price their products and services. But when a competitor comes along with a superior pricing/value model, they switch.

The article also quotes Colin Jasper of Beaton Consulting:

According to Jasper, "contemporary pricing theory" says a combination of three different methods of setting prices should be used: the value the client places on the deal (known as the marketing emphasis), competition (the sales emphasis), and the cost of providing that service (accounting emphasis).

With advice like this, we don't need consultants. I know of no "contemporary pricing theory" that states these three methods, not to mention the utter lunacy of trying to use a combination of all three (I'll give him the benefit of the doubt and assume he didn't mean at the same time). In realty, the only pricing strategies are Skim, Neutral and Penetration. Once again, consultants love to obfuscate the obvious with dubious language.

What possible good is it to price based on cost if that cost exceeds value? And why would any business want to let it's dumbest competitors set its price? And which competitors? Is Porsche concerned with what Chevy charges? Is Ritz-Carlton concerned with Hampton Inn's rates?

Strategy determines price, not the other way around. It may come as a shock to some consultants, but firms pick their competitors through the strategy they adopt. To say that the competition sets price is utterly meaningless until you define the competition. And even then, you have room to charge a premium if you offer a superior alternative. See iPod and Disney for just two examples.

There is one bright spot from this article:

The chief executive partner of Minters' Adelaide office, Nigel McBride, told Lawyers Weekly the service they offer is not just commodity-based, but includes sophisticated legal services in medical and workers' compensation claims management.

"The whole system before we came along was based on inputs," he says. "How much time did you put in, how many pages did you write, how many pages did you read, how many files did you open. We just scrubbed that completely; our lawyers don't even put down their time."

McBride says essentially their system has removed the "ridiculous" amount of time some lawyers spend on "shuffling paper, filling in time recording and counting pages to bill".

"That all goes and that makes [the lawyers] incredibly efficient because they can focus on being lawyers on that part of the case management that requires their strategic input."

But then McBride slips right back into the fallacies, with this unbelievable contention:

However, he says there will always be certain areas that cannot be offered on a fixed-price basis. "I don't think we'll see hourly billing replaced in a number of areas. If you are doing high-level tax advice, [for example], you can't commoditise that." But he maintains "so much of the legal market" could be offered on a fixed-fee basis.

Why do these lawyers assume that only "commoditized" work can be fixed price? Because they know how long it takes to do it, on average. We are right back into labor inputs equal value, a fallacy dating back to Mr. Karl Marx (and long before).

What they don't know is the value they have created, because they've never given it much thought. As Oscar Wilde said about cynics, they know the cost of everything and the value of nothing.

If lawyers had any pricing acumen at all, they would realize it's exactly the work higher up on the value curve that should be value priced, since that is where they would be able to capture more of the value they are creating. With hourly billing, they are overcharging on some jobs, while undercharging on many others.

VeraSage Senior Fellow Paul O'Byrne has been doing a lot of work in Australia lately with law firms, and obviously has been stoking the flames of reform. The billable hour is on the defensive. There exists an incredible window of opportunity for the first firms who move to a real Value Price model.

Do these lawyers have the courage? Do they have the vision? The leadership? The faith in their firms and the value they provide? A faith in the future?

Or will they remain tone deaf to the cries of their customers, who are anxiously waiting for the opportunity to defect to a firm offering a superior value proposition?

Stay tuned...