My late father taught me to swim in the sea off Point Lonsdale when I was a very young boy. I was a surf lifesaver and played competitive water polo for over 25 years. I now live in Point Lonsdale where I get the opportunity to swim every morning.
For over 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 6 minute increments.
Only one problem with selling time is that after 25 years I realised our clients actually don’t buy our time. So, if clients don’t buy our time, haven’t we got to stop selling something clients don’t buy? What clients do buy from lawyers - in fact any professional - are things like outcomes, results and peace of mind. They buy our intellectual capital not our time - and if you don’t believe me, ring one of your clients now and ask them what they buy from you. I can guarantee they will not say time.
Over 15 years ago now, I came across 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(s) of your work with your clients up front. And if the scope changes, the price may change. That is, after all how the vast majority of the business world price.
Some time ago I was told by a law firm partner that their firm was dipping their toes in the water and now practiced “value billing” (sic) and that 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.( my emphasis) ”
“So how” I asked “is that fixed fee really a fixed fee if it can be changed?” The answer: “Because we provide our clients with a fixed fee, not an estimate.”
I may not be terribly smart but I see no difference between this firm’s time-based billing and its fixed fee pricing. Do you? Would a client really see any difference? I know this ages me but to me it very much sounds like a “Claytons” fixed fee-”; the fixed fee you have when you are not having a fixed fee.”
In short it is just billable hours in disguise.
And therein lies the problem many firms are struggling with 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 (primarily because their internal measurements and rewards are built around time and they are therefore still required to fill out timesheets). But unless you manufacture your time (i.e make it up), no one can ever predict how much time you are going to spend on something in the future - certainly not to within 6 minutes or even an hour or maybe even a day.
Because those fixed fees are still based around time, 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 dudded because it was never a fixed fee after all.
Another problem with fixed fees calculated this way is they rarely, if ever, reflect nor encourage any lawyer to have a value conversation with a client before any work is scoped or priced and if you do not have a value conversation, it is virtually impossible to create value for a client.
It goes without saying 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 away from the “we sell time” paradigm. That is what makes it difficult for many lawyers.
The concept of value-based pricing of itself is simple but it is more the unlearning rather than the learning that is hard.
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. I didn’t learn to swim by staying on the beach or by just dipping my toes in the water. At some point you will need to dive in.