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Most of us are familiar with one of life’s latest irritations – the extra fees that airlines now uniformly charge for everything, from additional luggage to an in-flight meal. Providing these services was once “free” (that is, included in the base passenger fare), but the pressures of recession and rising fuel costs led the air carriers to feel that ancillary fees were more palatable to customers than charging higher rates. And, surprisingly, most flyers have accepted the reasoning behind the charges.
An airline has agreed to fly you and one carry-on bag; it didn’t agree to also fly your entire closet of clothes. If the airline is charging those who do carry “extra” baggage (i.e., more than a carry-on), they are not charging others who can fly “lighter” and thus consume fewer resources. Rather than raise the fees for all, airlines are being selective. Just because it’s an extra charge doesn’t make it unreasonable, so long as customers see the reasoning and the value behind it.
The Discounting Trap
This is an excellent lesson for law firms facing client pressures to reduce billing rates and fees due to the recession. Any firm should resist discounting its fees – particularly if the client has earlier agreed to pay the full amount in the engagement letter. Clients who argue about over-billing often just want a discounted bill and try to wangle discounts at the end of the year in particular. They are confident that the firm will give in because partner compensation is based on collections by year-end and that bills collected in January do not count for another 11 months. Accepting such pressure and giving a discount is a recipe for financial problems.
Increasingly, firms try to avoid discounting by offering billing arrangements other than at an hourly rate. Rather than setting price by a standard unit of time, such billing alternatives focus on actions taken to benefit the client, beyond the time of how that value is applied. Take, for example, charging a flat fee at a volume discount. The billing rate is determined and stipulated in the engagement letter, before the assignment even begins, and will vary neither by time nor result.
For the client, this certainty is a benefit; for the lawyer, it’s a two-edged sword. If the flat fee is high enough, it encourages use of technology so that the lawyer can do the work faster and increase the effective hourly rate. However, it’s not possible to make more money while charging less, unless the client is willing to send more business to the lawyer. Volume, or increased market share of the client’s legal needs, may benefit the lawyer. But that is not guaranteed just because there is a fixed, or lower, rate.
The “Unbundling” Solution
The challenge with flat fees is that lawyers generally don’t know their costs of operation. Thus, the fee figure chosen often is a “by guess, by golly” fee, not one based on a cost benefit analysis. Your firm cannot aspire to set an accurate flat fee unless you understand the operation of the firm as a business (budget, collections, profit, loss), the firm’s billing structure, and how each lawyer determines firm profitability. A flat fee is only an acceptable billing alternative if the lawyer knows the cost structure behind it, and if the client accepts the value that the fee represents.
A flat fee may offer value, but a client can still insist that the bill is too high. In that instance, a lawyer can learn a lesson from the airlines by taking valued services off the table – “unbundling” them, in service industry parlance – in order to keep the billing rate steady or to deliver a lower price to the client. In effect, when the client wants a reduced price, the lawyer unbundles the services to accomplish that objective.
In other words, for X dollars, you will do this and for “Y” dollars you will do that less “abc.” While “abc” may not be important, the client gets the message that you’re adjusting the price to fit the appropriate level based on the service to be delivered. For example, if returned phone calls within two hours are part of your regular hourly rate, take that response time off the table if you lower your hourly rate in response to your client’s request. Tell the client that your response time will be 24, or even 48, hours. The point will be clear: you’re not lowering your price, you’re simply changing the value composition of what the client is buying.
Various alternative billing strategies are available to put the unbundling model into operation. They all reflect the fact that service is still the one factor that clients want from lawyers more than anything else. No matter how you charge for it, can you offer something that your competitors don’t or can’t, or create something new that your clients need or want? That is the best way to avoid becoming a commodity to your clients. Consider these examples of how a firm can establish itself as a unique provider of value.
Productizing
“Productizing” a practice is the process of offering a tangible product that leads to the intangible, value-added services you want to offer. For example, an estate planning lawyer might combat do-it-yourself web sites and software by establishing a password-protected part of the firm web site that offers authoritative forms and research that the lawyer has prepared. For a flat fee, a “client” could access this material and draw from it at will. However, if the client has a question or problem that the materials do not answer, the lawyer can provide personalized counsel, at a special rate that reflects the relationship established through the web site.
Another example might be a blog that, for a subscription fee, combines the lawyer’s observations on breaking legal or regulatory issues with specialized content and research – again with the option of asking specific questions outside of the access fee. These offer something that your competitors don’t or can’t, and are new products that your clients need or want. It shows that you offer value and don’t just represent cost. And it enables you to focus your practice on its most professionally and financially rewarding work.
Unique Selling Position
A unique selling position (USP) is another way of offering specific services to clients in ways that are meaningful to them. If you handle estate planning, for example, you could add financial planning as a service, either as part of the fee package or for a designated added fee. Providing better-than-excellent service is all you may need to establish a unique position – for example, calls consistently returned within two hours, or final client documents nicely packaged in an attractive folder.
Finding the USP is not easy, but it is essential to communicate to clients and prospects why they should engage you rather than someone else. This means you need to express your USP concisely and clearly. Develop what marketers call your “elevator speech” – a 20-second summary that you can quickly give to a potential client next to you in an elevator. The estate planning lawyer of our example might say in a USP, “We understand your financial goals and get you there faster.” This is enough to engage prospective clients in a dialogue about how the lawyer can help them.
Defining Value
In today’s tough economic conditions, few lawyers at any size firm likely are considering an increase in their fees. This is of course a matter of economics. The seller of any service must understand costs, set profit targets and gauge market demand. The decision ultimately is a matter of the seller’s choice. As we’ve written before, lawyers have only the ethical obligation to keep fees “reasonable,” not necessarily low. Here we can get into the slippery slope of what the fee should be. If the fee should be low, then is $200 per hour, for example, too high? If so, is $150 per hour too high?
Ultimately, the client, not the lawyer, defines value. But it’s the lawyer who must educate the client about “value.” Otherwise clients may find it difficult to appreciate how value is provided and measured in a transactional matter or in litigation. Providing solutions gets attention – and gets rewarded. Merely charging an hourly rate, with nothing unique about it, tells your client that any other lawyer is just as good as you are.
Any fee ultimately can be justified if you know the cost structure behind it and if the client accepts the value that the fee represents. Identifying and providing unique measures of value will increase your revenues. Through strategies like unbundling, productizing and unique selling positions, you will provide service to clients who truly appreciate the value you provide – without resort to discounts or fee cuts. If it works for the airlines, it can work for you.
Edward Poll (edpoll@lawbiz.com) is a certified management consultant and coach in Los Angeles who coaches attorneys and law firms on how to deliver their services more profitably. He is the author of Attorney and Law Firm Guide to the Business of Law: Planning and Operating for Survival and Growth, 2nd ed. (ABA, 2002), Collecting Your Fee: Getting Paid from Intake to Invoice (ABA, 2003) and, most recently, Selling Your Law Practice: The Profitable Exit Strategy (LawBiz, 2005).