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Making the move to value-based pricing

Making the move to value-based pricing

The numerous benefits - and difficulties - of moving to a value-based pricing model have been discussed amongst legal circles for some time. However, many Australian firms remain reluctant to…

The numerous benefits - and difficulties - of moving to a value-based pricing model have been discussed amongst legal circles for some time.

However, many Australian firms remain reluctant to make what should be a relatively easy move.

According to consultant John Chisholm, a former chief executive of Middletons and managing partner of Maddocks, the transition to value-based pricing is much simpler than many lawyers would think.

At a recent LawAsia webinar entitled; "Why agreeing your fees upfront is easier than you think", Chisholm noted the fears underlying the reluctance of firms to move away from time-based billing.

"I think part of it is inertia [as well as] ignorance of how to price our services. I ran law firms but I was never taught how to price services. I didn't have to because we had rates and rates are not prices," he said.

"There's a fear factor - a fear of losing money, losing clients. There's a fear of breaking ranks with our peers. The fear of the unknown and particularly the fear of something we're not trained for."

According to Chisholm, lawyers lack the training and experience in pricing and as a result, feel uncomfortable talking to clients about anything other than time.

"It's not something we've always had to be good at. I think whether we bill by time or not, we have to improve our project management skills."

Advocating a move from time-based billing to value-based pricing - a model which calls for mutual agreement on the scope of work and the price upfront - Chisholm argued that firms need to stop selling clients something they don't buy.

"I think the most compelling reason and the prime reason why we should move away from time-based billing is, quite frankly, that your clients don't buy time from you. They never have and they never will," he said.

Instead, according to Chisholm, lawyers sell their intellectual capital - the value of which cannot be measured by time.

Providing the key steps to implementing value-based pricing successfully, Chisholm highlighted the importance of communicating with a client regarding the scope and price of work.

Chisholm believes that having a conversation with a client is the first key step in the successful implementation of value-based pricing.

"There's no point telling a client after there's been a change in the scope ... The better firms are able to predict and manage scope creep and are able to communicate with their clients before things get out of scope," he said.

"Examine and identify your clients and their needs, scope properly and of course project manage ... sit down and go through it with a client and discuss the benefits for clients in adopting the new approach. I've found that very successful."

Chisholm believes that to enhance the likelihood of the success of value-based pricing models, the profession as a whole must also look at its internal compensation system and culture.

"Even for some of those firms that have made the transition to agreeing their fees upfront with their clients have found some internal difficulties because our compensation measurement system is still based on time."

Briana Everett

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