17 Feb What the Doctor Ordered: Procedure-Based Pricing for Law
What the Doctor Ordered: Procedure-Based Pricing for Law
This article published in the Legal Management Spring 2017 ALA magazine discusses why law firms need to change their business model from the billable hour.
Do law firms need to change their business model from the billable hour? Yes.
Clients, in the words of GlaxoSmithKline (GSK) Associate General Counsel Bob Harchut, want to “make sure we aren’t over or underpaying for value.” and the billable hour is a weak measure for value.
This is why over seven years ago, GSK permanently changed the market for services. They began their outside counsel negotiations by setting scope at center stage, i.e., putting to market the total possible scope of their matters and reengineering the pricing process through reverse auction. Within the parameters of the total possible scope, firms were then invited to compete for the business.
From the client side, this has generated a wave of simulators, the rise of procurement departments, and a market neck-deep in enormous downward pressure on fees. From the firm side, this has caused the rise of pricing groups to answer the call for better and increasingly complex pricing models.
Where this leaves us now is with some firms breaking away in terms of financial success. According to the Peer Monitor Q3 Report, these firms answer clients’ demands by focusing on adopting software to transform their operations to pitch, price, budget, leverage experience and monitor their matters.
The lesson of GSK is that scoping is integral to the requirements of client centric financials. “Procedure pricing” is the full maturation of scoping and acts as a significant market advantage for firms able to deliver it.
The Path to Procedures
The good news is, we are already on the path to procedures. When a partner says, “I need to price a matter,” the response from the pricing or legal project management (LPM) professional is, “Well, what’s it going to be made of?”
This is scope. Properly defining the scope of any matter is already entrenched and vital to pricing, and key to setting up the firm to deliver client-centric, value pricing such as the procedures method. Partners are already creating budgets, pricing, and specifying the effort to do a deposition; procedures simply matures this to building the associated list of services and pricing it.
Procedure pricing translates the building blocks of all the components that can comprise a matter to be scaled to different sizes in any combination for matters of all composition. By example, the medical industry is the king of procedures — this is because they have already developed a set of standards.
The legal industry is highly analogous. Litigation is a clear example of how these building blocks could work: one set of blocks would include depositions, which are then broken down into plaintiff, fact witness, expert witness, etc. The concept extends from there: Define the various components that make up what that matter is, what the scope’s going to be, and what each scope’s going to do. Then combine the blocks into the matter’s ultimate engagement structure.
The Holy Grail of Pricing
Most importantly, this approach to pricing is what clients want. Procedures make sense to them, and it is the most transparent path to ensure no one is “over or underpaying for value.” This is because the benefits of procedure-based pricing flow in both directions: changes in scope and quality assurance are substantially simplified and streamlined. Need one more expert witness added to this matter? This conversation can now be handled in completely transparent terms by reference to the associated list of services: i.e., “expert witness building block costs X.”
As well, by removing elements of the billable hour, the firm can look at other aspects of service delivery such as technology efficiency and try to understand if those embedded costs are also elements of the cost of service or not. In some ways, the client is neutral on this if you’ve extracted them from the billable hour. The value is a fixed fee — but because it’s unitized, you’re taking less of a gamble on both sides.
How Do We Get There
This is the hard part. Better scoping is setting us on the right path, but most firms price with spreadsheets and create budgets from whichever software they happen to own. No one, when they built the data they’re exporting to Excel, focused on standardized coding.
Moreover, our billing systems — including the leading billing systems in the legal industry — were designed for the billable hour model. As a result, there are distinct technology gaps we need to solve to move toward procedure-based pricing that will require new software that not only makes procedures a possibility, but as a repeatable methodology to win and deliver new business.
The best place to start — as reflected in the Peer Monitor report — is through adoption of software that is built for clientcentric financials and can help firms pitch, price, budget and monitor their matters for better scoping, and the capability to mature to procedure pricing.
It is also good to know that the issue of standardization is being tackled currently through the Matter Standards Committee. This is a good place for your junior partners to collaborate and contribute to a vital conversation that is happening now. The Matter Standards Committee is a crossfunctional committee sponsored by several key organizations, from the ABA to ALA, ILTA, LMA and Ark, working toward the coding essential to procedure pricing.
It’s an exciting and immeasurably important dialogue taking place — and I would argue, for firms who get to mature procedures early or first, there’s huge, long-term competitive differentiation.
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