“I’m the innocent bystander
Somehow I got stuck
Between the rock and the hard place
And I’m down on my luck
And I’m down on my luck
And I’m down on my luck”
— Warren Zevon, “Lawyers, Guns and Money”
I was the innocent bystander yesterday while visiting Portland. Through a series of live meetings and conference calls, I spent quite a lot of time speaking with partners at two leading law firms. This got me thinking about the direct correlation between the decline in professional fees and the antiquated billable hours model among most professional services firms.
In this new millennium, most law firms are squarely stuck between a rock and a hard place. Even though their rainmakers are chartered with strategic growth planning, they are acting like Industrial Age relics.
Their business clients–mainly General Partners–are chartered with cutting their legal costs. And they are successfully doing that by demanding more flexible fee schedules and fixed price contracts from their legal counsel. According to one senior partner and lead rainmaker, “It is forcing us to re-evaluate how much work we personally deliver, and how much we distribute to the more junior attorneys.”
I asked these two partners — both working for competing firms — how they were addressing these client demands. Their comments are thought-provoking:
Law Firm A told me “We cannot look at more creative fee structures because our accounting system will not allow for that.”
Imagine if you told your client “We cannot accommodate your needs because our computer system is inflexible.” How long would it take for you to go out of business?
Law Firm B told me “We are still uncertain about the viability of these new fee structures, but we have agreed to forge fixed price agreements with our new clients. First, we are working on a small assignment with them on an hourly basis, and are willing to work on a different contractual arrangement on the subsequent assignments.”
If you were that new client, what would be your perception of Law Firm B? Probably slightly more positive than Law Firm A.
Law Firm C, on the other hand, sheds a ray of hope on this tectonic pricing shift among professional services firms. Eversheds, an international business law firm headquartered in the United Kingdom, is unique in its industry because they are known for delivering consistent service across 25 countries and 40 cities. Ten years ago, their clients expressed a need for a more sophisticated approach to rewarding their law firms.
According to Stephen Hopkins, Partner and Head of International Integration, “Our clients felt a lack of control over the legal spend, a lack of transparency over how the spend was amassed, and a need to align the billing to the goals of the business itself. Law firms have a poor reputation when it comes to billing. If you measure or bill by the hour, then the behavior you get is to encourage the recording of more and more hours.”
Eversheds penned an agreement with Tyco in 2007 to handle their commercial legal work across Europe, Middle East and Africa for a fixed fee. Tyco used to work with 282 firms. Now they work exclusively with Eversheds in the EMEA region. Hopkins explains that “Prior to beginning any legal work, Eversheds’ team is required to provide an estimate for that particular matter into their Global Account Management System. Nobody is allowed to start any work until they complete that form. We check it in the UK, and send it to the relevant client/decision maker for approval. The client either accepts the estimate, requests further information, chooses to do the project in house, or challenges the estimate. We never bill above that estimate. Any revisions to the estimates require prior client approval.”
When it comes to pricing litigation-related services, Eversheds withholds 10 percent of their fees. Hopkins continues, “If the outcome achieves the goals agreed with the business, they bill another 10%. If it is a poor one, we get only 90% of our fees. If it exceeds the business objectives, we get 125% of the fees. We are working with Tyco on ways to reduce or avoid litigation We will get a bonus if we can either reduce the number of lawsuits brought against Tyco, or if we can reduce the number of lawsuits that Tyco issues, by 15% The cost saving to Tyco more than compensates for the bonus we are paid.”
Their client has already reaped the rewards. This new pricing model has helped reduce the Tyco legal spend by 20-25%. Hopkins estimates that this equates to at least a $2M savings.
I encourage every company who is trapped in the antiquated “hours for dollars” paradigm to escape now. Here are some strategies to get you started:
* Do your homework. I am shocked at how many times seasoned professionals “wing it” before an important client discovery/exploratory call. They come across unprofessional and unprepared.
• Remember that perceived value and the quality of the relationship are the basis of the fee, not the hours worked. Spend less time focusing your time on lowering the fees and more time tracking your client results.
• Translate the importance of your services into the long term benefits and gains as perceived by the client. Stop basing your value on deliverables, versus measurable outcomes. These deliverables may be a design consultation, a workshop, a series of manager interviews, online assessments, or a coaching session. In reality, these are commodities. If you don’t believe me, use your web browser to search for “sales training.” See if you can differentiate between the twenty seven million search hits.
• Develop a relationship with the “economic buyer.” An economic buyer must fulfill several key characteristics: They can either write the check, order the check to be written for your services, and establish priorities for their organization. “Million Dollar Consulting” guru Alan Weiss states that without this economic buyer relationship, “…the client may not do the right thing ethically (delay payment, argue about your value, arbitrarily change objectives.”
• Believe that you really can deliver a high level of value to your client. The fees reach a level that equates to your level of self worth. Could Weiss be right when he says that consultants—not clients—are the main cause of low consulting fees?
Mindsets around value can make or break your business growth. Consider these strategic growth mindsets as you interact with clients. Ask yourself whether your own personal definition of value might be the biggest wall you need to scale.
How can we make hourly rates the mark of a bygone era, once and for all? The ghost of Warren Zevon will smile upon us.