I didn’t learn to swim by staying on the beach or by just dipping my toes in the water. My father taught me to swim in the waters of Point Lonsdale, Victoria when I was a young boy, and I played water polo for 25 years.
For 25 years as a partner, managing partner and CEO, I was part of the traditional law firm business model, which leveraged people x time x hourly rates. I believed our profession sold our time. And we sold it in six-minute increments.
After 25 years, I realised our clients actually don’t buy our time. What clients buy from lawyers are things like outcomes, results, peace of mind – they buy our intellectual capital.
If you don’t believe me, ring one of your clients and ask them what they’re buying from you. I can guarantee you they will not say time. So, if clients don’t buy our time, haven’t we got to stop selling them something they don’t buy?
Nearly 10 years ago, I discovered the concept of value-based pricing – that is, that value is subjective, that it is our clients’ perception of value – not ours – that matters, and that you agree the scope of your work and the price of your work with your clients up front. If the scope of the work changes, then the price might change accordingly.
Recently I was told by a partner that their firm was dipping their toes in the water and now practised ‘value billing’. They proudly proclaimed on their website that they offer fixed fees. When I enquired a little more about what exactly they do and how they arrive at their fixed fees, I was informed along the following lines.
“Firstly, we find out whether the client wants hourly billing or fixed fees. If they want hourly billing, we will tell them the hourly rates of everyone in the firm, who we anticipate is going to work on their matter and then provide them with an estimate of fees based on the time we think it will take us to complete the job.
“If they want a fixed fee, we will give them a fixed fee and we will base that fixed fee on both the seniority and mix of the lawyers we anticipate will work on the file and how much time we think they will each spend on the matter.
“Sometimes, because we don’t really know what is going to happen on a matter we can only give them a fixed fee for a limited amount of work we are going to do. If we finish up spending more time than we anticipated, then we reserve the right to change the fixed fee.”
I further enquired: “How is that considered a fixed fee if it can be changed?”
Answer: “Because we provide our clients with a fixed fee, not an estimate.”
I may be silly (and I have often been described as much worse) but I see no difference between this firm’s time-based billing and fixed-fee pricing.
Would a client really see any difference? To me, it very much sounds like 'the fixed fee you have when you are not having a fixed fee'. It’s just billable hours in drag. And therein lies the problem.
Many firms are struggling when they are asked for, or are providing, fixed fees. They are still basing their fixed fees on the time they anticipate spending on something and, unless you manufacture time, no one can accurately predict how much time they are going to spend in the future – certainly not to within six minutes or even an hour, or maybe even a day.
Such a fixed fee is solely based on the traditional law firm model still leveraging people x time x hourly rates. If the fixed fee does not change and the firm has spent more time on the matter than anticipated, then the firm thinks it is losing money or not making as much of a profit on the job as it thought.
On the other hand, if the fixed fee changes, the client feels duped because it was not a fixed fee after all.
The other problem is that fixed fees calculated this way have absolutely nothing to do with value. It is all about the law firm’s own internal activities and perceptions of worth and value – not their clients'.
All fixed fees are not value-based fees, and all value-based fees are not fixed fees.
True and sustainable value-based pricing is not simply a billing model change. It requires both a mindset and a business model change. We need to move completely away from the 'we sell time' paradigm. That is what makes it difficult for many lawyers.
The concept of value-based pricing is simple in itself, but it is the unlearning we have to do as a profession that is hard and – excuse the pun – that will take time.
Firms should be applauded for dipping their toes in the water and trialing and experimenting with fixed fees but, at some stage, they need to wade out deeper and learn to swim.
John Chisholm is the director of John Chisholm Consulting and a member of ALPMA.