It is a business-model and mindset change, as distinct from a billing model change...
Lawyers and their clients have been talking about ending the billable hour’s stranglehold on client fees for a long time (see, for example, Scott Turow’s article, “The Billable Hour Must Die,” published in August 2007), but the needle moves slowly, and charging clients in tenth-of-an-hour increments remains a dominant standard in the profession. The good news is that alternative billing arrangements are being used by more and more firms. The less good news? Changing the ways lawyers charge for their services and, equally important, the ways that clients pay for them, requires more than flipping a switch and sending out a different type of bill.
I had a chance to talk about what firms and lawyers need to do in order to get away from the billable hour with Australian John Chisolm, a former practicing lawyer and law firm CEO who works with firms around the globe to help them evolve from traditional billing – by the hour – to what has become known without irony as non-traditional: pricing services based on their value.
Here is the first part of our discussion, in which we define the concepts and talk about the broader set of changes that firms must make if they want to begin pricing their legal services around value:
LANCE GODARD: John, can you make it clear what we are – and are not – talking about when we say “value billing.” Do clients typically define these ideas differently than lawyers and firms?
JOHN CHISHOLM: For a start, Lance, let me correct you and say that it is NOT “value billing” – it is “value PRICING.” Pricing happens before you do any work, billing happens after the work is completed.
For me, value pricing means having a conversation with your client around what they see as important and valuable to them, what they are trying to achieve and then agreeing on scope and price with your client before you do the work. The price is always based on the value to your client, but we need to understand that the value of what you provide is determined by your client’s perception of value, not yours – all we can do as lawyers is try and influence our clients’ perception of value. It is about focusing on outcomes and results, not on hours billed.
...the value of what you provide is determined by your client’s perception of value, not yours
In short, it means seeing things much more from your clients’ perspective rather than your own. In my experience, I used to think technical excellence was important and of value. But that was often far, far different from what my clients perceived as valuable. That is why I cannot emphasize enough the necessity of what we call a “value conversation” with clients. Value is subjective and different clients see value differently, so it is critical to have the conversation with each client.
GODARD: What in your experience is the biggest hurdle for firms hoping to move forward and change the way they charge clients?
CHISHOLM: I don’t see a move to value-based pricing as a billing model change. It is not even a pricing model change. It is really a business model change and that is a huge hurdle for "old-law" firms to overcome. If it was simply a billing model change, it would be relatively easy, but when you tell a law firm partner that, in reality, their client cares little about how much time it took them to complete a task, they lose it. The “we sell time” mindset – drummed into generations of lawyers – cannot be undone overnight. It may take decades, because it is not the learning of a new way to do things that is difficult, it is the unlearning of the old ways.
The “we sell time” mindset – drummed into generations of lawyers – cannot be undone overnight.
To date, most of the firms that have made the transformation to value pricing have been smaller to midsized firms: it is easier to change the minds of 100 lawyers than it is to change those of 1,000 or 2,000.The other adopters to date of value pricing have been start-ups and disruptors in the legal marketplace who not only have different offerings and different business models but different pricing models as well.
It is a business-model and mindset change, as distinct from a billing model change. Clients come to lawyers to make a profit from using our services, and if we can focus on increasing our clients' profit first and foremost, ours will follow. It’s not easy, but not as hard as many make out and the benefits are significant. Show me something with significant benefits that was easy.
GODARD: Do you meet many firms that think they’re ready for change, but run into problems when they begin asking partners to do things differently? How can a firm evaluate its own readiness?
CHISHOLM: When I first learned about and studied value pricing over a decade ago I thought it was the savior of the legal profession and that if an average hack lawyer like me from Australia could get it, imagine what smart innovative deep-pocket law firms could do with such a concept. Ten years ago I, along with some colleagues from the VeraSage Institute (an international think tank for professionals co-founded by the world’s leader in value pricing for professionals, Ron Baker) began giving talks to law firms all over the world. And guess what? Apart from some courageous and innovative risk-taking lawyers, most lawyers said, “interesting, thanks but no thanks.” Of course, there were a number of reasons for that response (in addition to lawyers innately being change- and risk-averse) but above all it was because most lawyers have done and continue to do very well financially with the billable-hour model, thank you very much. As Ron Baker would say, “It is hard to change millionaires.”
I used to think I could change the profession (if not the world); now I realize that I can only influence motivated professionals to make a difference (my why). If the lawyer is not genuinely motivated to change or at least genuinely curious about different business models, I cannot help them. I – along with other professionals who have made the change – will tell you it is a far, far better way of practicing their craft, but individual lawyers have to experience that for themselves. It is not for everyone.
At the moment worldwide in the legal profession I would say we have just passed the innovators stage and are hitting the early adopters but there is still some way to go to get the early majority on board. The late majority will follow the leaders and/or when clients insist.
GODARD: Are there best practices a firm can adopt that will ease the transition from hourly billing to value pricing, or is each situation unique to the firm?
CHISHOLM: I cannot give you a template of best practices: just as value is subjective to each client, each law firm is different and how and when and why they might adapt value-based pricing is subjective. There is of course some general framework - and compared to, say, a decade ago there is so much more material available to guide and assist firms these days. Further, this is no longer just some idealistic theory. The empirical evidence from the increasing number of firms that have changed is very helpful to those firms genuinely thinking of making the move.
...do not try to eat the elephant with one bite
My general advice for most firms is to take small steps – do not try to eat the elephant with one bite – but taking many, many small steps in the right direction is essential. You will make mistakes – you’re making mistakes now – but if you learn from those mistakes and push on, it is worth it for owners of firms, their staff and their clients.
Read, read, read all you can about value-based pricing. Talk to those firms that have transformed their practices.
Follow me for Part 2 of my interview with John Chisholm, value pricing consultant.
[Lance Godard has spent three decades within the legal profession, in-house and as a consultant, helping lawyers and practice groups grow their book of business. Connect with him on LinkedIn and follow his new work on JD Supra.]