The Client Revolution

"How do you set your prices?"

This is the question I hear the most. (It isn't, sadly, "How did you get to be so flippin' handsome?" That's second.) Unsurprisingly, I get this question mostly from other lawyers, and sometimes from in-house counsel. They ask this question because my firm, Shepherd Law Group, hasn't billed a single hour since 2006. We work for employers lowering their workplace risk and charging fixed prices for our services. So lawyers are always asking this question.

The question is at the heart of lawyers' hesitation to break their addiction to hourly billing and make the leap to fixed pricing. It is the root of lawyers' fear that they will make a mistake in setting their prices.

As if. The funny thing is that lawyers don't seem to have any trouble setting their hourly rates. And just to be clear: rates are a form of pricing, albeit an unsophisticated, rudimentary one. Ask a lawyer (we'll call her "Monique," because that sounds French and sophisticated and I'm about to make fun of people who try to sound French and sophisticated) who's just hung out a shingle how she set her hourly rate:

Well, I used to charge $525 an hour when I was a seventh-year associate at my BigLaw firm. I figure people will expect me to charge less because my firm is so much smaller. On the other hand, my practice is very specialized, and I really own my niche. [It's pronounced "nitch," by the way; it does not rhyme with quiche; saying it that way does not make you sound French and sophisticated. But I digress … told you.] On the other other hand, my office is in the suburbs instead of downtown. So I'm charging $425 an hour."

Monique's (made-up) monologue accurately reflects the thought process — explicit or just intuitive — that most lawyers undertake to set their rates. Think about it. Layered beneath the I-was-a-big-firm-lawyer pomposity and the now-I'm-on-my-own-what-do-I-do? abject fear is some pretty sophisticated market analysis. The legal marketplace often does put a lower value on work done by a lesser-known firm. The legal marketplace usually does place a premium on the skills of a specialist. The legal marketplace does place some value on a law firm's location on Wall Street as opposed to Maple Street.

My point is: Monique did not come up to me and meekly ask how she should set her rates. (In part, on account of her being imaginary.) So why should it be so different when we're talking about real (that is, fixed) prices instead of rates?

The answer is: because lawyers seem to think that the price has something to do with the (perceived) cost of providing the service. Something to do with the hours spent on doing the work.

As if. (This is my new favorite sentence.) Look, genius: let me first dispel the notion that legal work that takes more time costs more. You pay your associates an annual salary, right? Very few firms pay their lawyers by the hour. So the firm's "costs" do not rise when a motion takes six hours to write instead of three. Yes, yes. I know. "It's the opportunity cost. The extra three hours means that lawyer can't be working on something else, and that adds up over time." Sorry — I'm not buying that. If you have more work than you have lawyers available to do it, then congratulations — and hire more lawyers.

But more importantly, as I have said before (see "Hourly billing: the end of the beginning"), your customers don't care about your costs. The price they will pay is less than or equal to the amount that they value your service at that time. Period. What Monique did in her rates analysis is estimate how her potential clients would value the suburban small-firm nichework she has to offer. She did not wonder how much providing that work would "cost."

So ask your question again:

"How do you set your prices?"

I'll tell you. (Just promise not to tell anyone else.)

• I analyze the client.
• I assess the importance of the situation.
• I assess the urgency of the situation.
• I pay attention to what my competitors charge.
• I consider the relative values of the different possible outcomes.
• I figure out how hard it would be for the client to get better service elsewhere.
• I determine how important my firm's expertise is to the likelihood of a successful outcome (in other words, is this going to be easier because of our particular skills, or could any trained monkey use the Interwebs to find the answers?)
• I consider what we've charged other clients in the past for similar work
• I consider whether those charges were heavy or light in retrospect
• I consider the likelihood of getting more work from this client
• I assess how much work we've done for this client already
• I wonder how important getting this particular job is to our firm (if it isn't, I might raise the price)
• I decide whether to do a single price for the whole gig, or whether (and how) to break up the job into minigigs with separate prices
• and then I say, "This is our price."

Simple, right? No, it's not. Price things too high and you don't get the work. Price things too low and you get work you don't want, or clients you don't want, or you just don't make enough money.

But it's not that hard. You don't hear car manufacturers and watchmakers and restaurateurs and baseball players and movie stars whinge about how hard it is to set a price. They set the price. If people buy at that price, great. Increase the price. If they don't, zut alors. (Oh, so sophisticated.) Lower the price and try again.

That's how I set my prices.

Hourly billing: the end of the beginning

Over the past day and a half, I've gotten bunches of emails and tweets all asking the same questions: Had I read the Wall Street Journal story? What about the Corporate Counsel piece? Is the billable hour really dead? What do you have to say?

Here's what I have to say:

Come on in. The water's fine. What took you so long?

(Our firm, Shepherd Law Group, completely abandoned hourly billing nearly three years ago. We haven't billed — or even tracked — a single hour since 2006.)

In fact, the billable hour isn't dead (yet), but you're forgiven if you thought this had happened based on what you read Monday. Quick recap: The front page of The Wall Street Journal had a story called "'Billable Hour' Under Attack" (subscription possibly required). The story was written by Nathan Koppel and Ashby Jones, who wonderfully cover the Journal's legal beat. It's a great piece (although I have no idea why "billable hour" is in quotes in the headline). They report on the efforts of companies like Pfizer, Cisco Systems, and American Express to rein in legal spending by moving work away from hourly billing and into fixed-price arrangements. They write:

The companies are ditching the hourly structure — which critics complain offers law firms an incentive to rack up bigger bills — in favor of flat-fee contracts. One survey found an increase of more than 50% this year in corporate spending on alternatives to the traditional hourly-fee model.

Make sure you also watch the video sidebar with an interview of Amy Schulman, Pfizer's general counsel (it's about three minutes):

Also Monday, Corporate Counsel magazine ran a piece called "Two Veteran Lawyers Say Now Is the Time for Fixed Fees." WilmerHale lawyers William Lee and Benjamin Heineman wrote it (I hope they didn't suggest the title). In it, the veteran lawyers decry the billable hour and trumpet the benefits of fixed prices:

For in-house counsel facing tremendous budgetary pressures, the fixed fee addresses the problems caused by the hourly rate, such as unpredictability, high costs divorced from actual value and, most importantly, the maddening law firm definition of "productivity" — defined as more lawyers and more hours per matter.

Both articles are steps forward in the war on the legacy systems and guild mentality entrenched in most law firms and reflected in the billable-hour business model. But don't think for a moment that this is the end of the billable hour, or even the beginning of the end. But it is — to paraphrase Churchill — perhaps, the end of the beginning.

As I've often said, the issue is not about invoicing methods. It's much deeper than that. We're talking about changing the dominant business model of an entire industry, and that's not going to be done with a couple of articles. In fact, these two articles show how far we have to go.

Let me explain: There are three basic concepts that are at the root of misunderstanding about how the law-firm model works. They are cost, profit, and price.

• Cost. No customer anywhere gives a flying something through a rolling doughnut what a law firm's costs are. That's the firm's problem. Think about it: have you ever gone to a store to buy something and wondered about the retailer's costs? Of course not. Yet when you read the veteran lawyers' article in Corporate Counsel, costs are about the only thing they talk about. Clients don't care about whether you can reduce your costs, boys.
• Profit. Profit is what's left for a firm after you subtract cost from revenue. A customer shouldn't really care about your profits, other than having a vague understanding that a vendor needs to make profits (eventually) to justify being in business in the first place. Beyond that, though, the customer doesn't care. In fact, there's no earthly reason why the customer should even know what your profits are. It might be different if you were publicly traded, but no American law firms are. It's ironic that large law firms voluntarily self-report their profits (and more importantly, their profits per partner) and then have clients complain about the firms' profit margins. When you listen to the Journal's video of Pfizer's Schulman, notice how many times she refers disparagingly to law firms' profit margins. ("You're going to have to get used to making less money.")
  


• Price. And what is price? Get ready to write this down: Price is simply the measurement of something's value to a customer. It's as simple as that. It has nothing to do with profit. It has nothing to do with cost. The price of anything is the value that thing has to a particular customer at a particular time. Anyone who tells you otherwise needs to go audit Economics 101 at the local community college.

Nearly all law firms practice cost-led (or more accurately, cost-plus) pricing. In other words, they base their prices on their costs. WilmerHale does. Pfizer's "legal alliance" firms do. All these firms track their lawyers time on timesheets, and base their associates' performance and pay at least partly on hours billed.

Read what the Wilmer veterans have to say about cost:

As in all business, a total price for a matter or a book of business is built up from costs (and, at times, also derived from the significance of the matter). One of the most important issues in setting fixed fees is distinguishing between a law firm's actual costs (which firms see), and the actual costs, plus profit margins for the partners (which is what clients see in a firm's bills). A second, related problem is that the history of costs to the company may be an imperfect guide. Past bills are an aggregation of hourly rates (plus out-of-pocket costs), which may reflect inefficiencies.

Huh? No, fellas. The price depends on only one thing: the amount the customer will pay at that time. You can prattle on all you want about costs and budgets and efficiencies and inefficiencies, but it doesn't matter a whit. It's up to you to set a price that is less than or equal to the value the client places on your service. If you do, you'll be hired for the job. If the value to the client is high enough, you should be able to charge enough so that your revenue exceeds your costs, giving you a profit. But don't expect your client to care about your costs or your profits — that's not their job.

Both articles talk more about controlling costs and lowering law firms' profit margins. They don't talk about increasing value to the client. To really change the system, value — not costs — must lead pricing. Then firms won't have any use for timesheets.

As I said, it's the end of the beginning. But there's a long way to go.

Glengarry Glen Ross, LLP?

My brother Bill Shepherd is a world-class salesperson. Literally. He has sold many millions of dollars of services and products all over the world. (Fans of our sister blog, Gruntled Employees, will remember Bill from "Of sticker shock and empathy," which describes his near-death experience — my wedding).

Bill and I often talk about business — at least when we're not talking about the Red Sox. He often has terrific ideas on how I can further grow my law firm's business. Many of them are about running the firm more like a business than like a law firm — which is something I've consistently tried to do over the past eleven years.

One of his suggestions was to do what most businesses do to stimulate sales: hire salespeople. That's an idea that makes a lot of sense. But there's a major problem. Salespeople are generally paid on a commission basis. Rule 5.4 ("Professional Independence of a Lawyer") of the Model Rules of Professional Conduct (which govern the conduct of lawyers in almost every state) mandates that

A lawyer or law firm shall not share legal fees with a nonlawyer ….

(There are four exceptions, which aren't relevant to our discussion; they have to do with dead lawyers and things — call Haley Joel Osment). Bottom line: you can't pay commissions to nonlawyer salespeople. So that idea's a bust.

Or is it?

If you can't pay commissions to nonlawyer salespeople, what about paying commissions to lawyer salespeople? Saleslawyers, if you will. (You would never call them that, of course. They would be business-development attorneys, or something.)

As our friends over at the incredibly well-written, popular, and snarky blawg Above the Law have chronicled, it has been a tough year for associates at large law firms. (See their joint project with Law Shucks: the Layoff Tracker.) There have been more than 5,000 associates laid off by major US law firms since the beginning of last year.

What percentage of the 5,000 laid-off associates would have the aptitude and desire to be commissioned saleslawyers? They would still be lawyers, of course. But their focus would be on selling their firms' services to prospective clients. They would get valuable experience interacting with clients and learning about their firms' practices, but they wouldn't have to worry about billable-hour requirements and office memoranda. And if they were good at their jobs, they could make a bunch of money.

What do you think? Too Willie Loman? Too Alec Baldwin in Glengarry Glen Ross — "Always Be Closing"? (Warning: Alec Baldwin had a NSFW vocabulary even back then.) Too unlawyerly?

I particularly want to hear from associates, especially laid-off ones. Could you see yourself working as a business-development attorney? Put your thoughts in the comments below, or reach out to me with an @reply or DM on twitter at @jayshep.

• • •

By the way, just how popular is Above the Law? Well, last Thursday, ATL ran a seven-word blurb in its daily "Non sequiturs" post that included a link to this blog. Those seven words plus a link caused Client Revolution traffic over the next two days to increase by 2,300 percent. Yowza. Thanks, guys!

Free your mind, the cash will follow

During our family vacation last month, I was sitting on the beach talking about my blogs with my mother-in-law. (I mean, doesn't everybody do that?) Lily is pretty sophisticated about the world of tech; she was the first person I met who had starting using The Google back in the day. But she was concerned about my blogging.

Specifically, she was worried that I was giving all this (theoretically) valuable information and advice to you fine folks in the blogosphere. How do you make any money when you give away stuff for free?

A fair question, and as it turns out, the central question of Chris Anderson's fantastic new book, Free: The Future of a Radical Price. This from the book's jacket:

Now, in Free, [Anderson] makes the compelling case that in many instances businesses can profit more from giving things away than they can by charging for them. Far more than a promotional gimmick, Free is a business strategy that may well be essential to a company's survival.

Obviously, technology features heavily in the book. Google is the poster child of the Free Economy. Think about all the Google goodies you use in a day: Gmail, Google Docs, Google Maps, Google Reader, and The Google itself. Now think about how much money you spend on these products and services. That's right: nothing.

Yet Google took in $22 billion in 2008, of which $13 billion was profit — a 60 percent profit margin. That's some pretty good cash for a company that gives away so much for free.

But don't think that the whole premise is based on the Google model, which gets its money from all the advertising it sells. (Google is an advertising company, not a search company.) Other examples abound: Anderson talks about free CDs, free silverware, and almost-free air travel (on Ryanair). The secret (hugely oversimplified here) is to give away something for free (bags fly free on Southwest; the Genius Bar at Apple Stores) to increase customer demand, then find a way to charge for the things (plane tickets, iPhones) around the free thing.

And giving things away doesn't necessarily mean making less money on the free thing. Moby released a new album, Wait for me, and decided to give away a track for free. He wrote in an email (not to me):

But here’s something funny: the best selling itunes track is ’shot in the back of the head’. Why is that funny? Because its the track we’ve been giving away for free for the last 2 months and that we’re still giving away for free. Odd.

Not odd if you read this book. And you should.

Lawyers: what can you give away for free to help increase your business?

Buy Free here. Or read some of it for free on (ironically) Google Books.

How lawyers save the world ... with disclaimers

So I'm watching the Red Sox beat up on Roy Halladay and the Jays on NESN, and during the C-break (that's cool TV-speak for commercial break) in the middle of the eighth, I see the one million and seventh ad for the New England Toyota Dealers. The Toyota dealers have long been a sponsor of Red Sox games on NESN, and their ads are always noisy and tedious, usually with an evil earworm of a jingle.

The current run of Toyota ads all follow the same pattern: We see an old, nondescript (and non-Toyota) car in a driveway or at a drive-through window, with a voiceover that asks, "Need a new car?" Then a huge crane-claw (is that what they're called?) reaches out of the sky and grabs the car, breaking all the windows. (Apparently, it's a form a skyhook. Whatever.) The car gets lifted up about 20 feet, and then a brand-new Toyota drops out from the old car and crashes to the ground. Oh .... kay. Why or how this happens is completely beyond me.

But that's not what gets me. It's the disclaimer in tiny white letters that appears at the bottom of the screen:

"Do not attempt."

What the what? Seriously?

Some lawyer for the New England Toyota Dealers watched this ridiculous ad and said, "Uh, you know, someone might try this at home and get hurt and sue us. We better put a warning on it." And apparently the dealers listened to this joke of a lawyer, because they added "Do not attempt" to the ads for a fleeting second or two. (Of course, if they were really worried, they might have made the disclaimer actually visible to humans.)

This is why real people hate lawyers. Because it shows that lawyers think real people are stupid. So stupid that they might hurt themselves trying to lift their old Renault 18i (or whatever) with an imaginary skyhook in hopes of getting a shiny new Toyota to drop out of it. But everyone knows that's impossible. You can't even find a Renault 18i anymore!

Lawyers: quit assuming that real people are stupid. And car dealers: if you think you need a disclaimer like that to defeat a lawsuit from an unfortunately injured carjacker, then you probably need better lawyers.

• • •

By the way: if you do what the ad says and go to buyatoyota.com, you'll see the following disclaimer at the bottom of the website:

You are now in Buyatoyota.com and Toyota Motor Sales, U.S.A. is not responsible for the accuracy of content.

Of course not.

(My disclaimer: The images above (except for my arrows) are copyrighted by the geniuses at New England Toyota Dealers, who care about your safety.)

Are your associates working?

When I talk to other lawyers about our law firm's business model, their reactions range from envious to incredulous. No, we haven't billed an hour since 2006, I tell them. OK, fine, they say. But don't you internally (they sometimes say "secretly") keep track of your associates' hours?

No, I tell them.

Then comes the look on their faces like I'm an idiot or a rube or a naif. Often they wait a moment to see if I wink or otherwise let them know that I'm joking. Once they see that I'm serious, they almost always ask this question:

"Then how do you know if your associates are working?"

I lean in, like I'm going to let them in on my secret formula.

"By managing them."

This is the point where they usually wander off, muttering and shaking their heads.

Seeing a timesheet with a figure like 8.4 hours on it at the end of the day doesn't tell me that an associate has been working. And it certainly doesn't tell me anything about their work. What law firms have done over the past three generations is replace the need to manage associates with an overly simple reliance on hours billed.

A law-firm partner — a manager — has to do more than look at a number on a timesheet to actually manage his or her associates. The partner has to know what the associate is working on, and how it's going, and if he or she needs any guidance. A number on a sheet doesn't tell you this.

If you want to know whether your associates are working, you have to manage them. A timesheet can't manage anything.

Price cuts?

We recently covered JetBlue's dramatic new All-You-Can-Jet pricing program (see "JetBlue and alternative billing"). It struck me that if an airline can offer unlimited flights (for a month) for a fixed price, then companies in other industries — including law firms — could do something similar. Well, just the other day, my wife and I were walking down Boston's tony Newbury Street when we saw this sign:

$495 per year unlimited haircuts. Includes: Haircut • Scalp Massaging Shampoo Conditioning Treatment • Shoeshine & Beverage plus 10% off all services

The company providing the service is called Barbershop Lounge. (Warning: when you go to the website, some mildly annoying Euro-technopop starts playing. Why do web designers do this?) The company pitches itself as a high-end men's salon, and it has done a nice job of getting some press. (See this Forbes article.)

Here's what I like about this from a marketing point of view. The fixed price tells me that I'm going to pay this much and no more, no matter how many haircuts I need to get in the next year. The sign spells out all the things I get in this deal:

• The haircut. OK, well that's sort of a table stake.
• Scalp massaging shampoo. (I would have used a hyphen after "scalp.") Most places are going to wash your hair before cutting, because it makes it easier to cut. Scalp massaging sounds nicer, although it kind of has to happen anyway. How else do you get the shampoo into the hair?
• Conditioning treatment. I think that's just a fancy way of saying "conditioner." But kudos for that.
• Shoeshine & beverage. OK, that's something new. But I'd pay $5 for a shoeshine and another dollar or two for a soda, so I'm happy.
• 10% off all other services. That's where the real genius comes in. Get people to come in for the (relatively) inexpensive haircut. Make the real money by cross-selling higher-value services. Brilliant.

Most companies are too afraid to make an offering like this. As I mentioned in the JetBlue post, they worry that someone might take advantage of them. "What if someone comes in every day and gets a haircut? That's 260 haircuts [they're open five days a week], at an average price of $1.90 a cut. How can we make a profit on that?"

Again, dumb question. Most people won't get a haircut a day. A few may get more haircuts in the course of the year than usual, but many others will end up getting fewer. Rather then focusing on the average price per cut, the company should be looking at the total value of the client relationship. Barbershop Lounge obviously is.

Lawyers: are you going to admit that a barbershop is more sophisticated in its pricing than a law firm? How would you do something like this in your firm? Or would you? Share your thoughts in the comments.

In the meantime, don't be afraid to take a little off the top.

JetBlue and alternative billing

One of the things that scares law firms the most about fixed pricing is the fear that clients will "take advantage" of them. That clients will use their services more than anticipated, driving up their costs (and cutting into their all-important, initial-capital-letters Profits Per Partner). "We can't charge them a fixed fee," they whinge. "We don't know how often they'll call. We don't know what the costs will be."

These concerns haven't stopped JetBlue Airways from doing what most law firms are ascared of. JetBlue announced that it is offering unlimited flights for a month for a fixed fee of $599. (See their press release.) The month runs from September 8 to October 8 — there are no blackout dates — and covers flights to all 57 JetBlue cities. (Sign up here.)

Now let's play law-firm lawyer: "But what if someone takes advantage of JetBlue and flies twice a day, every day during that month? That's 60 flights for $600? How can JetBlue make a profit on ten-dollar flights?"

Dumb question. First of all, no one's going to do that. Or at least not enough people to make a difference. (Maybe one guy, hoping to get on the "Today Show.") Who the heck wants to fly that much, even on a comfy JetBlue plane with individual TV screens? To be sure, some people will take an unusually high number of flights, lowering JetBlue's average revenue per flight for those passengers. But it's just as likely that some people will take only one flight (or even none), increasing the average revenue per flight. And even if it doesn't come out even, it's a safe bet that JetBlue will attract enough new customers to make up the difference — and some of them will become raving fans of JetBlue. And they'll tell their friends and relatives. (Or get on the "Today Show," attracting more publicity and more passengers.)

Keep in mind: airlines are among the most sophisticated of companies in terms of pricing. It is not random that the guy sitting next to you paid twice as much you did for the same flight. They know what they're doing.

How many law firms would admit to being less sophisticated than an airline? Probably not many.

We applaud JetBlue's fixed-pricing move, and hope that they give it a chance to succeed and make it a more-permanent option. (We also applaud their correct hyphenation of "All-You-Can-Jet Pass.")

Lawyers: how would you implement a legal version of the All-You-Can-Jet Pass? Drop your ideas in the comments. Happy Jetting!

Tone-deaf marketing

I love bookstores.

One of my favorite activities is to aimlessly browse a bookstore, looking for titles that catch my attention. But bookstores — like newspapers and record companies and large law firms — are part of an industry facing dramatic changes. Small bookstores have largely been destroyed by the large chains. And Amazon is eating the large chains' lunch.

There is a large Borders bookstore just down the street from my office in downtown Boston. Over the years, I've watched this store increasingly struggle to stay alive. It's located in a down-at-the-heels neighborhood (Downtown Crossing), its customer base has withered, and it has felt the need to hire more "loss-control officers" (they don't use the hyphen) and fewer, you know, booksellers.

But it has made some efforts to lure customers inside.

Like many large downtown bookstores, this one holds frequent book signings and readings. Outside, facing a small park (ish), the store places racks of books, encouraging passersby to stop and browse. (Granted, these are all deeply discounted remainder-table books — books that would otherwise be shredded by the publisher.) And the store pipes music out onto the sidewalk.

And here's where they blow it.

As it happens, I walk by the store several times a day (it's on the way between my bus and my office), so I've noticed that they repeat the same music throughout the day. They generally favor more-sophisticated fare: some jazz, some classical, some Sinatra. But too many times, I've walked by the store as its speakers were blaring that most hated song of all Bostonians ...

No, not "Walking on Sunshine," by Katrina and the Waves. (Gak!)

OK, fine: its speakers were blaring that second-most hated song of all Bostonians: Frank Sinatra's "New York, New York."

ZOMFG! This is Boston, the heart of Red Sox Nation. You cannot play "New York, New York" (which is technically called "Theme from New York, New York," which doesn't make it any more acceptable) on the sidewalks of Boston and expect Bostonians to want to come in and buy stuff.

(For those of you outside the Nation, you should know that this is the insufferable song blared over the loudspeakers at New New Yankee Stadium after every Yankees home win. They play the Liza Minelli version after every loss.)

This is my idea of tone-deaf marketing. You do a smart thing by placing books outside and playing music to try to draw in customers. Then you go and ruin it with tone-deaf moves like having surly loss-prevention goons be the first people you see when you walk in. And by playing that song in this town.

Law firms and lawyers: Pick your marketing moves carefully. Don't ruin your good ideas with dumb execution. Don't be tone deaf.

Go Sox. More Liza.