What About Clients?™

Dan, Dan, Dan . . .

lawyers lack pricing power and therefore have nothing to say about how legal services are priced. long run, that is determined by the market.

hourly/monthly, billing is the rule because it is the cheapest way for corporate america to buy legal services.

Drucker explains this very well in just a few sentences in his essay, The Five Deadly Business Sins, which is mostly about pricing. Please read ASAP

Drucker writes, in discussing "cost-driven" pricing,

"This is true but irrelevant: customers do not see it as their job to ensure manufacturers a profit. The only sound way to price is to start out with what the market is willing to pay--and thus, it must be assumed, what the competition will charge--and design [your costs] to that price specification."

Going to "fixed pricing" means that ELP will fail, if such results in a lower price to customers, unless ELP can cut costs...but it cannot do that. A back to back degree (AB + JD) from Harvard or Yale including opportunity cost is now north of $500,000. People who pay for that kind of an education will not work for lower $$$. Thus ELP cannot cut costs; if it tries to do such, it will never, long run, have the talent to survive.

If you doubt me, read Gates on what keeps him awake at night--his competition with Goldman Sachs for the best talent.

Moe X 3:

As much as I like and respect you, I've got to disagree about 100%. I get your points. But humans can influence economic laws; people with good ideas create and manipulate markets all the time. Been going on for centuries. I really respect Drucker--and have read most of what he has written. But no one with an idea and any balls listens to academics or consultants; they are not risk-takers and they are rarely right for very long.

While I have no stake in ELP's success--I still like hourly billing for my firm and our clients--re: costs I gather that ELP has the kind of talent you cite and/or can get it quickly, and I think they could make this work with the right people continuing to be involved. Most of the lawyers I am close to can work in any law firm they like--big to smaller boutique. In fact, more than a few of them (and the ones with the golden resumes to which you refer) would seriously entertain the idea of taking a pay cut to be involved in an ELP-type experiment. I envy and admire ELP--no matter what happens. I'm not alone. Dan P.S. I still owe you a post on Jack Stack.

Dan,

no human an influence any economic law.

what you are talking about is something entirely different and they is a new product, service, or a real break thru, a new business model. These changes in the market place are not changes in economic laws.

Those who don't listen to the likes of Peter Drucker are very sadly mistaken.

Moreover, you mis-speak when you talk about lawyers taking "risks." Even contingent fee lawyers do not take risk the way an entrepeneur does. Many studies have shown that cases are carefully screened to avoid risk and that the fees earned are roughly equal to hourly rates plus the deferral on opportunity cost (i.e., imputed interest).

The exception were the tobacco cases and you can see how socialist republicans reacted to such entrepreneurial activity by lawyers.

Because the code prohibits a lawyer from charging an unreasonable fee, lawyers cannot take "risks." like other businesses. They can not risk $500 in capital, hoping for a $500,000,000 dollar return. That was at the heart of MDP--lawyers wanted to take risk and invest time in startups, hoping to earn fabulous returns and everyone immediately started saying doing such created conflicts of interest

Dan and Moe, if you really want to take this conversation to the next level you absolutely must visit www.verasage.com and you must read Ronald J. Baker's work (a reformed accountant, an economist and a huge Drucker fan).

No one has studied the birth of the billable hour and the horrendous conseqences of it more than Ron. In fact, Ron's work is a significant influence behind Chris starting ELP.

Moe, I agree with you that ELP will not succeed if it attempts to be the low priced provider in their market.

Additionally, though you seem to be a proponent of the theories behind value pricing, I must disagree on two points:

You say "hourly/monthly, billing is the rule because it is the cheapest way for corporate america to BUY" I disagree with this on two things...first, it is NOT necessarily the cheapest, and second (and most importantly) it is the RULE because it is the laziest way for professionals to PRICE. There is no forethought required about the value, or lack thereof, provided to the customer. The provider just stomps his or her foot and says "this is the price because that is how long it took me." There is, in fact, no relationship between the length of time something takes and the value of the result in the client's eyes.

Also, allow me to point out that you referred to

Value pricing done right usually means both higher or lower prices than the hourly method. It also means controlling your capacity and "reserving" room for the clients who value you the most (at the appropriate price, of course).

The mistakes most lawyers, accountants, consultants, etc make when they embark on fixed prices are these:

1) they "set" their price at what the average hourly price used to be (hello! Still no relationship to value, although I will agree there is some relationship to the market when your competitors are pricing by the hour still)

2) they charge every customer the same price for the same work and don't offer extra value (they don't properly constrain capacity at lower pricing levels meaning too many time-sucking "low price" customers not valuing the work leaving no room for the high value--usually the most enjoyable--work)

3) they continue to track their time and set "goals" that undermine the firm's service objectives (putting billable hours ahead of doing the right thing for the right customer for the right reasons)

And Dan, you know I MUST strongly disagree with your statement: "But no one with an idea and any balls listens to academics or consultants; they are not risk-takers and they are rarely right for very long."

Though I do agree that a majority of modern day consultants do not take significant personal, operational, or pricing risks, and most are talking heads, yet throughout history there have been several respectable consultants AND academics who have dedicated themselves, at tremendous risk, to imparting information and demonstrating new concepts while being considered lunatics or heretics for going against the grain (Galileo comes to mind).

"hourly/monthly, billing is the rule because it is the cheapest way for corporate america to buy legal services."

I disagree on a macro level; this is simply the model that has been followed for many years, more because of inertia than because of the merits of the system.

On a micro level, this might be true: a single case, or single inquiry, might very well be handled most cost-effectively on an hourly basis. But for extended engagements or relationships, this becomes increasingly inefficient, punishes the client and rewards lawyer inefficiency.

Consider for a moment two businesses I'm familiar with: construction and chemicals. In the construction business, if you have a minor problem with your house, you hire a contractor and pay by the hour. Job is done, bill is paid, all is good. But if you're building a major addition, you don't pay by the hour. Instead, you get a fixed bid, which is based on the contractor's expertise in assessing the scope of the job, the costs involved, and his desired margin. If he doesn't have the expertise to evaluate the job properly, he shouldn't bid.

In the chemical business, the more you buy, the better price you get per unit. Lots of other businesses are like that.

Why don't these models make their way into the legal arena? I've heard the cries of lawyers who claim that there is no way of predicting what your opponent will do in a suit, and I've made those same cries myself. However, this is part of the risk of taking the job; if lawyers had a financial stake (i.e., penalty) for jacking around on a case and being jerks, I suspect we'd see much more civility.

Also, if I retain a firm on a case that spins out of control, and more and more resources get thrown at it, I should expect a break on rates. Is that unreasonable? I give my customers better pricing to keep their business, if they bring business to me - my lawyers should do the same thing.

Again, I understand the economic model that outside counsel have adopted. That does not mean, however, that I have to accept that model as desirable as I choose to run my business. I've been in many law firms where the per-attorney overhead is far north of $200k per head, and where new associates get salaries that rival my own. If I have to accept the penalties for bad business decisions made by outside counsel in the form of higher rates, why doesn't outside counsel have to accept the penalties for bad business decisions I might have made, and which require legal counsel, by truly becoming my partner, instead of a drain on my budget?

The efficacy of the system also breaks down the more

Michelle--Points taken, and well said. It was only a general rule (of course it could never apply to you!) and besides primarily calculated to Make Moe Mad. So it was a double failure. Mea culpa. Dan

DH,

James asks, "Why doesn't outside counsel have to accept the penalties for bad business decisions I might have made, and which require legal counsel, by truly becoming my partner, instead of a drain on my budget?"

James, because its just business.

Do businesses cut their customers a break who have made a mistake or do you look at such as a point where you have leverage and can make a profit?

DH,

I hit the send button early. I am going to send you a long note on markets and legal fees and value pricing, but I wanted to finish my reply to James.

James wants to know, "why doesn't outside counsel have to accept the penalties for bad business decisions I might have made, and which require legal counsel, by truly becoming my partner, instead of a drain on my budget?"

The simple answer is that how could one build a successful financial life giving away legal services to a series of businesses who have made bad business decisions. Since most of the time the reason why a lawyer is hired is because of bad business decisions by the client, where would be the profit in being a lawyer?

It doesn't read eithe Bank or Sisters of Mercy above my door.

In real life, it actually works the opposite way. I give away lots of legal time up front, as the pot boils and a client slips into the indictment, in denial of the scope and extent of the problem.

Only after the federal government has set the hook and leverage swings is a decent fee generated.

Sometimes one is skilled enough to avoid the indictment but the civil cases also parallel and must be properly defended, to maximum profit.

There is also a strong public policy that James overlooks. Frankly, I believe it unethical for a lawyer to shield a client from the true legal costs of its conduct--its a form of champerty or maintenance.

It is against public policy to sell insurance against wilful conduct or punitive damages, but in effect James wants such.

I believe it is similarly against public policy for a lawyer to cut fees if by doing such one implicitly aid or abet, counsel or encourage wrongful wilful corporate conduct. Seen through this lens the uncertainty of legal fees and blown budgets is a good thing--over time it assures corporate behavior within the rules.

Theory is a powerful tool. If we are going to use it, we have to understand the tool we are using.

In Moe's post where he quotes Drucker on the issue of cost-driven pricing, he uses the quote
"The only sound way to price is to start out with what the market is willing to pay--and thus, it must be assumed, what the competition will charge--and design [your costs] to that price specification."

The logical gap in Moe's reasoning in using Drucker to support a conclusion that a fixed price model will not work is that he uses Drucker's "assumption" that the competition is the benchmark of what the market will bear. Drucker, in his essay, actually supports the ELP model when he says that the "only sound way to price" is price-driven costing (with price being market driven). For all of the pricing theorists our there, we know this refers to value-based pricing, in which case Drucker, no surprise, is a staunch advocate of value-based pricing. Drucker's assumption that the competition's pricing is a benchmark of what the market will bear is was made because, taken in context, his essay refers to industries that operate under a price-based costing model. The Legal Industry is backwards from the model to which Drucker refers and operates under a cost-based pricing (cost-plus) model, which essentially means that the competition's pricing bears no relationship to what the market will bear. Drucker's statement, properly interpreted, actually foretells the end of the billable hour model when he said "customers do not see it as their job to ensure manufacturers a profit," which is the essence of a cost-plus pricing model (BH Model). The only reason for it's continued existence is, until now, the lack of an alternative in the marketplace.

BTW: I meet top-notch attorneys every day who would take a significant pay cut for a better work-life balance, professional satisfaction, happiness, respect, etc. I refer you to the ABA Commission on the Billable Hour Report where 70% of attorneys polled said they would take a significant pay cut in exchange for a better work-life balance.

Dan,

Before I respond to Chris, I would like him to answer a simple question. Several times he writes about what competing legal firms would charge not being the benchmark of what the market will bear.

Is Chris saying the market will bear more--pay more because lawyers have gone to fixed pricing? Is he saying clients will pay less? Or, is he saying that the model will be neutral on revenue, but lawyers will work less?