The New Normal
Firms Need to Offer Incentives for Trying Value Pricing—Or Lawyers Won’t Do It
Posted Jan 28, 2011 4:03 PM CDT
By Paul Lippe
While Pat Lamb and I are joined at the hip as “rebels,” co-bloggers and by the burden of my “advice”—I’m on his firm’s advisory board—I don’t always agree with him.
But my friend Pat has certainly nailed it when he cites the Hildebrandt report (PDF) saying shifting one’s management paradigm from a rate-focused to an efficiency-focused business is not easy.
It is extremely difficult for law firms or any business to run "dual-mode," i.e., do most of their work (and set most of their metrics and compensation systems) according to an hourly billing system, and then deliver some of their work according to a value system. It is axiomatic in any management system that “you are what you measure,” and so measuring hours and realization makes those the dominant mode of management discourse (and therefore culture) in large law firms, as opposed to, e.g., profitability of each engagement or client satisfaction.
Having "seen this movie before" for nearly a decade with many innovative clients, it doesn't inevitably work out the way one thinks it should. Even when clients move to value-pricing schemes, firms that are accustomed to measuring hours usually don’t embrace the chance to experiment with a different pricing model, innovate their delivery system underneath it, and assimilate the new practice across the firm. Instead, many firms will treat the value-pricing engagements like invading organisms, surround them with antibodies and hope they go away. In this sense, law firms have often behaved fundamentally differently from most other "suppliers," who have embraced cost and quality pressures from teaching customers, improved their own processes and passed their improvements down to their own suppliers.
The good news is that most firm chairmen would understand and embrace this. But the reality is that some relationship partners may not, and the folks in between (practice group heads, chief financial officers) will clearly reinforce the classic model because that’s how they’re being measured.
The sensible thing for any large firm leader to do is get a consensus that there is a reasonable probability (more than 20 percent, less than 100 percent) than law service delivery quality and cost will change along the lines that we have discussed and Hildebrandt is now endorsing. Given that uncertain future, the prudent thing for the firm to do is define a “zone of experimentation” where partners can work with clients on different service delivery and pricing models, and it becomes the firm’s job to reconcile the way those engagements get paid with the way partners get measured and paid, so that everyone is incented to maximize the value and learning from those engagements.
I’ve spoken to many firm chairmen who in frustration tell me “we’ve proposed innovative pricing models to clients, and they just say ‘give us a bigger discount.’ ” Leaving aside the obvious facts that not every general counsel is innovative, and that a GC might reasonably assume that a firm proposing alternate pricing would only do so if it were advantageous to the firm, the likely reason for lack of receptivity is that the GC intuits that if the firm’s delivery, measurement and compensation systems are not aligned behind the innovative pricing model, then there really isn’t much commitment to make it work.
Pat has the luxury of a green field start-up firm aligned around a core idea about value and pricing; it is a far greater challenge for large, established firms to find ways to embrace nonhourly pricing. But to ignore what seems like a necessary change in the legal industry because it is difficult or uncertain would be the essence of imprudent, poor management.
Paul Lippe is the founder and CEO of the Legal OnRamp, a Silicon Valley-based initiative founded in cooperation with Cisco Systems to improve legal quality and efficiency through collaboration, automation and process re-engineering. Lippe formerly was an executive at the electronic design automation company Synopsys and later was CEO of Stanford SKOLAR, a medical digital library and e-learning company sponsored by Stanford Medical School.
Editor's note: The New Normal is an ongoing discussion between Paul Lippe, the CEO of Legal OnRamp, and Patrick Lamb, founding member of Valorem Law Group. Paul and Pat spend a lot of time thinking, writing and speaking about the changes occurring in the delivery of legal services. We hope you will join their discussions.