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Most law firm’s current discussion around transitioning towards or at least incorporating value-based pricing as a defensive strategy to mitigate the incursion of AI into billable hours, is worryingly simplistic and for the most part will fail.

Elephant

Unless…

We began this series of short posts noting (as we have regularly written about for the last 6 years since the first wave of AI really emerged) that the increasing capacity for AI to displace billable hours was going to ultimately have a tectonic if not existential impact on most law firm’s current economic models.

Not surprisingly therefore there is now an increasing realisation that new ways of pricing legal services will be required and that something other than a predominant billable-hours model will need to be conceived.

At the risk of sounding like a broken record, we have never subscribed to the view that the billable-hours model is either good or bad and should be retained or dispensed with entirely. Such polarised and simplistic articulation of the advantages and disadvantages is unhelpful.

But there is no doubting that law firm’s pricing repertoire needs to be expanded, and rapidly. That discussion has to date revolved around the need to develop ways of capturing the value delivered that have little reference to input costs i.e. quintessential value-based pricing which is determined largely by the value the client perceives they are getting rather than being determined by reference to the production costs or inputs.

As a result, firms are showing much more interest in the topic of value-based pricing in its various manifestations. One firm told us recently that the board had recently made a policy decision that there will be a firm-wide ethos of value-based pricing going forward.

And a top 10 UK firm recently made contact, noting “…As you can imagine we are busy thinking about AI and the opportunities and challenges it presents and we recognise the role that a solution like VPD [Virtual Pricing Director® - new generation pricing software for lawyers] could play as we organise for a quicker move to more value-based fee arrangements…”

Although fixed fees are only one of a great many value-based pricing methodologies, it is the most widely understood and therefore the one on which the most focus has been directed recently.

However, with justification, many lawyers regard fixed fees as being synonymous with exacerbated scoping challenges, scope creep, difficult conversations with clients at the end of the job, write offs, poor realisation and poor profit margins. In other words, we’d rather give them a miss. But that is simply not going to work anymore.

Everyone knows that fixed fees only work from the law firm’s point of view if the billable time comes in equal to or less than the fixed fee. And here is where it all turns into a train wreck.

And the reason? There is a spectacular disconnect between the mindset and processes required to implement value-based pricing, and most law firm’s current reporting and meritocracy structures. Let me rephrase that in the simplest possible terms. Firms are going to ask the lawyers to price work a certain way whilst continuing to incentivise them to do exactly the opposite. Yeah, I wonder how that will play out.

Still a little opaque? How about this for a conversation to illustrate the point…

Supervising partner (SP)“XXX, we have been asked to do a shareholder’s agreement for A and B [existing clients]. Can you do most of it and I will run an eye over it before you get them to sign it, okay? Here's the note I took.”

Associate“You've given them a fixed fee of £5,000?”

SP“Yes, they insisted on a quote. So don't overdo this, we need to come in at or even under the £5,000 on the clock. I've been getting in the neck about our margins. So, don't go over the £5k.”

SP, as the Associate is leaving the partners office] – “Oh, it's the 27th and I was looking at your time report. You better have a look at that because you aren't going to hit time budget.”

[Associate thought bubble]“Make up your mind, what do you want, lots of hours or few hours?”

Most of us are familiar with Pavlov’s classic conditioned response experiments (Pavlov’s dogs). It is therefore obvious to most that the best way to get the behaviour you want is to provide rewards for doing so. The flip side is that you must make sure you’re not inadvertently providing incentives for behaviours you’re trying to discourage.

Which begs the question, what do we really want and therefore what do we measure and reward?

PROFIT! That’s it.

Incentivising people to meet profit targets (both in monetary and marginal percentage terms) drives a whole different set of behaviours.

Suddenly you will find your lawyers willing to quote £20,000 for a job which the client is happy to pay because they feel that it is commensurate with the result they will be getting, but instead of the lawyer thrashing their timesheets to within an inch of their lives, they will now be myopically focused on how they can finish the job with less than £20,000 on the clock and still bill the client the agreed fixed fee of £20,000.

There is a great piece by William Josten at Thomson Reuters on the issue of shadow billing.

Short of cutting corners which is completely unacceptable, how might they do that?

  • Responsibly delegate everything to the lowest level at which the work can be undertaken competently, effectively and efficiently
  • Reuse documentation
  • Use project management and process improvement to strip wastage out of the job
  • Use technology (AI or otherwise) to undertake relatively menial tasks at scale and speed
  • Resist the temptation to unnecessarily over-engineer the job

It’s not rocket science.

But what is the incentive to do this if it means that the lawyer will fall short of their billable hours target? Absolutely none.

As things stand, firms can scream value-based pricing until they are blue in the face, but while they continue to reward people based on billable hours targets that is what they are going to get. Until firms to turn their minds to current reporting and meritocratic structures, they should not even begin to waste their time trying to implement a value-based pricing strategy. It will fall well short of potential, if not fail completely.

And the challenge shouldn’t be underestimated. 40 years ago, most legal work was value-priced but for a variety of reasons cost-plus pricing manifesting itself in billable hours and maximum leverage became the norm. As a result, except for a relative handful of very senior practitioners who can remember back that far, the profession has largely lost all understanding of what value-based pricing looks like.

An entire generation of lawyers truly believes that their raison d’etre is to sell six-minute units because that’s what they think clients are buying, and that they are personally endowed with an intrinsic value bereft of context – a deeply entrenched mindset that is Kryptonite to value-based pricing.

Richard Burcher


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