The Bottom Line: Beyond the Billable Hour

I'm happy to be the cover story in this issue of the State Bar of California's Law Practice Management and Technology Section. You can even earn an hour of MCLE reading my article (I flunked).VeraSage is quoted throughout the issue, including Mark Chinn and Jay Shepherd, and Exemplar Law gets a mention, too.It's also encouraging to see so many "director of pricing" folks who are quoted throughout the articles.But reading through the articles has been less than encouraging. Here are some brief comments on each article.Will Hoffman: I'll let our lawyers comment on the "comprehensive petition pending" to the California Supreme Court. But the fact that the Bar should acknowledge and encourage Alternative Fee Arrangements (AFAs) is, I suppose, progress, even though it lags way behind the free market.Ed Poll: "All pricing is arbitrary." What? This would come as a shock to the thousands who work as professional pricers. Why are they needed then? We'll just let computers do it all.Poll is still stuck, like most of the other authors, in an Industrial Era mindset of efficiency and cost cutting. There's no mention of why or how knowledge work and knowledge firms work differently then Henry Ford's factories.This worldview invalidates nearly everything he writes about value and pricing.Dr. Silvia Hodges: Silvia interviewed Mark Chinn for her article, along with Pat Lamb, and she mentions Exemplar Law. She quotes the ACC's definition of value, which is unnecessarily complex. The ACC has yet to understand that all value is subjective, and they continue their quest to provide a checklist to quantify and qualify value.She writes:

The purpose of AFAs is not to reshape a firm's business model—although this is exactly what it might do in some firms—but to meet clients' needs.

But Value Pricing is a business model change; it's much more than just meeting the needs of clients. It's also about meeting the needs of the professionals who work in those firms, as well keeping the profession relevant.One of the reasons why so many of these articles are muddled is because they seem to get the idea of value being externally determined, but they miss the concept when the work comes back into their firms. They insist on applying Industrial Era, Six Sigma, and cost accounting principles to that same work. This is a prescription for failure, since it's a contradiction to the theory of a Professional Knowledge Firm.She also cites Pat Lamb, and if he's right that most firms' work is not customized, then their value is on the low-end of the Value Curve. But even here, a firm can utilize Value Pricing—see Southwest's pricing on any flight offering a wide range of offerings.But I believe Lamb to be wrong. The work that adds the most value is, by definition, customized and represents the applied judgment of experienced lawyers. To apply cost accounting principles to such work is to misunderstand—at the most fundamental level—the patterns and cadences of knowledge work.Henry Turner, Jr.: Henry is with Valorem Law Group, and writes:

A proper value fee will not involve adding up the number of hours you think a matter will take and then quoting a fixed fee based on those hours. That is simply a "wolf in sheep's clothing." If you commit to pricing on a value basis, you can no longer think about pricing in terms of hours.

True. Why, then, does Valorem continue to maintain timesheets? He who says A must say B, and if hours are meaningless externally to the customer, they are also meaningless to the internal workings of a knowledge firm.He uses the Apple store and iPhone as an example, but here's the point that he and the rest of these authors are missing: the Apple store employee is not told to spend less time with you to lower costs and make more profit.Rather, she's taught to spend as much time with you as necessary, and Apple considers this cost an investment in the lifetime value of the customer.Tracking time, and cost accounting, destroys this attitude, which is Paul Kennedy's point in this brilliant essay. Read this essay and you won't have to pick up a book on Lean Six Sigma.Donna Seyle: Jim Hassett is quoted as saying he'd switch to hourly billing for his business in a heartbeat?Wow, this is truly ignorant, as hourly billing is suboptimal for capturing value. The entire pricing revolution was started to move away from cost-plus pricing, not to hold it closer.It also makes me wonder why he is spending so much time writing on Value Pricing and encouraging firms to make the change? The cognitive dissonance is indefinable.Donna suffers from the same efficiency and cost containment mindset as the others in this issue. She also writes that a lawyer's knowledge has "intrinsic value." But nothing in this world—except for human life—has intrinsic value. Value is subjective.Reading these articles illustrates the importance of linguistics. These authors will never truly understand the subjective theory of value if they continue to hold on to their existing vocabulary of commodization, cost control, efficiency, lean six-sigma, etc.What do you think?