f/k/a . . . the archives

April 21, 2005

ron baker: sensitive guy?

Filed under: pre-06-2006 — David Giacalone @ 11:55 pm

I don’t know the private personality of value-pricing guru (and hourly-billing nemesis) Ron Baker, but he sure does care about price sensitivity. As I discussed in a post two days ago, Ron left a Comment asking me to read his work more thoroughly, before concluding that he’s insensitive to the ethical aspects of value billing and premium pricing by lawyers.

RonBaker Yesterday, while waiting to see whether Ron would send me a copy of his latest tome, I clicked on a link from my Referer Page to the Google query [Ron Baker hourly billing], and instantly came upon his articlesHourly Billing Limits Profitabilty” and “Pricing Strategies” (SmartPros, Jan. 2000), which eventually led me to a few other articles and then back to his book The Firm of the Future. I thought that many of Ron’s analogies and examples were inapt (e.g., airline tickets, insurance policies, mortgages) for pricing strategies to be employed within the special relationship of lawyer and client for the provision of legal services — especially to the less-sophisticated client. Mostly, though, I was struck by the centrality of price (in)sensitivity in Ron’s pricing strategy, as he campaigns against hourly billing and its “limited” profits.

Baker advises professionals to maximize their “leverage” over each client, maneuvering so that the client is far less price-sensitive. This allows the professional to charge “premium fees,” well over the amounts that would be yielded using the billable hour method, resulting in increased profits (and more leisure time for the professional). This is apparently Ron’s ethics-sensitive alternative to client dissatisfaction with hourly billing. His position is justified with a self-righteous condemnation of the billable hour system itself (rather than its abuse or the profit motive that fuels its excesses) as unethical. His definition of “value” is no longer the provision of a quality product at a reasonable price, but instead the provision of services at whatever price can be leveraged out of the client. The professional gets significantly richer and the client gets the subjective feeling of receiving more value.

hat rabbit So, yes, I’ve read more of Ron Baker’s teachings, and I’m even less convinced that “what-we-can-get-away-with” is an appropriate pricing strategy and ethos for lawyers. I’m also amazed by the ethical blindness created by the glow of pots of gold. Lord, please save the client from such professionals, such ethics and such fiducial protection!

click here to see excerpts from Ron’s writings on the subject of price sensitivity, leveraging and premium pricing in the context of so-called value pricing; some editorial annotation is also supplied. You might especially check out Mr. Baker’s proposed use of the Change Order to “leverage” premium fees from clients who have signed a Fixed Fee agreement. E.g, in Change Orders: What a Concept!“, Ron says:

“A favorite way to make the client insensitive to premium fees is the use of Change Orders when services are needed beyond those covered in the initial fixed-price arrangement [no kiddies, pricing can't really all be done up front]. “

Ed. Note: In addition to adopting a more guru-new-agey image, Baker has taken some of his most frank, troublesome, avaricious phrases out of articles mentioned here at f/k/a.  In some instances, the version quoted is no longer available online, and we’ve had to link to subsequent, scrubbed versions.

for the fat green from
crouched on the log
time is flies

…………… by George Swede from Almost Unseen

in my thicket
they’re out of time…
fireflies

cherry blossoms–
residents of this world
a short time

spring mist–
people without hoes
wasting time

……………………………. from Kobayashi Issa, translated by David G. Lanoue

1 Comment

  1. Hello David,

    I apologize for the delay in responding to your comments. I am currently under deadline for two more books you won’t purchase, which limits my willingness to engage in a debate. But I must reply to your recent post, with your procrustean quotes of my work, and misguided editorializing.

    My discussions on pricing leverage and price psychology are rooted in centuries of empirical evidence about human behavior. I am simply making a self-evident statement: a service needed is worth more than one delivered, and hence all businesses price when they have the leverage. It’s not about taking advantage of someone. Adam Smith pointed out in 1776 that in order for any transaction to take place, both parties must benefit, and I take it as a given that people are quite capable of selecting, and determining the value of the services provided by, their attorneys.

    I am beginning to wonder if you think all other businesses are unethical by providing their customers with a price before they buy, as opposed to after, as professionals do who utilize hourly billing. If hourly pricing was such an enlightened method of pricing, why doesn’t every business do it? How about doctors for elective surgery, such as Lasik or plastic surgery? Curiously, they give you a price before you engage them, rich and poor alike. They certainly have a fiduciary duty, don’t they? United Airlines, which I fly every week, has my life in their hands, literally, which is more than I can say for my attorney or CPA (is that a fiduciary duty?). Yet, they give me a fixed price before I fly. Why? In both cases, I hardly think they are taking advantage of their customers. You are free to choose their price, or shop elsewhere.

    Value is not determined, as you say, by a quality product at a reasonable price. Value, like beauty, is in the eye of the beholder. The idea that labor inputs, costs, and profit desires of partners (the components of the hourly billing rate) determine value has been thoroughly discredited since the 1870s with the Marginalist Revolution in the economics profession. If everyone wanted just lower prices, as you say David, no one would own an iPod, we’d all be driving Yugos, and no one in their right mind would pay $12,000 to fly first class to Australia from San Francisco when they can pay $499 on priceline.com. Your billable hour pricing theory completely fails to explain all of these examples, yet you seem most content to keep your profession mired in the mentality it sells time. But no client buys time, and hence you are focusing on the wrong thing, not to mention trying to sell something people don’t buy––not very sophisticated marketing. Customers want innovation, dynamism, creativity, and value for the price they pay, not merely cheap prices. You claim my entire notion of “you are what you charge” is a call to increase fees, but that is specious. It is a call to increase value, which, ultimately, determines price, not costs.

    I’ve never said a law firm should not serve low-end of the value curve customers. As a professional pricer, we like to see industries with a wide-range of prices, which offer various value propositions to different customer segments. I have no problem with the priceline shopper paying $499 for a flight to Australia, but you seem to have a problem with a first-class passenger paying $12,000 for the same flight. After all, there is not much of an internal cost difference to the airline to fly those two people, yet why is one price 24 times the other? Are the first-class passengers just stupid and don’t know they are being ripped off by the evil airlines, and they need the help of self-proclaimed legal ethicists to make them aware of this fact? I would argue they received more value, which is why they are willing to pay the higher price.

    You further state “many of the lawyers who appear most attracted to your brand of value billing are dealing with less-sophisticated clients…I believe the lawyers need to be giving more thought to ethical and fiduciary duties before falling under the spell of a billing format that promises them higher fees and greater profits.” I suppose you have some demographics on the individuals who purchase my books, or some other evidence, other than anecdotal? I can tell you the people who purchase my books are not just dealing with less-sophisticated clients (which is highly condescending, by the way), but with very sophisticated clients who understand value is not at all predicated upon hours spent.

    Then you assert: “I continue to believe, however, that clients want alternative billing methods in order to have lower overall fees, not because they believe their lawyer is worth more than his or her hourly fee.” You are entitled to your opinions, but not your facts. What is the empirical evidence for this assertion? Most empirical evidence studying why people hire, and fire, lawyers is based on interpersonal skills, how they feel they are being treated, and service quality, not low price. Price certainly plays a role, but only as it relates to value. I have even heard corporate counsel inform their law firms they want certainty in price and effectiveness in legal services, not simply lower prices. In fact, they would (and do) pay a premium for a fixed price because of the certainty it provides (they have budgets after all), which is analogous to why most customers select a fixed-rate mortgage rather than a variable rate. The notion all clients just want lower prices is absurd, and not based on real-world empirical evidence. In fact, I defy you to show me any empirical evidence where more than 10% of clients say they hire or fire an attorney solely based on price. Just so there is no confusion, if a firm wants to deal with those 10% who do solely shop on price, I still advocate a fixed price in advance and a service guarantee, even with a relatively cheaper price. H&R Block effectively utilizes this strategy for the 19 million tax returns it prepares annually, at an average price of approximately $125 each.

    Out of curiosity, if it’s unethical for a business to charge high prices, is it also unethical for customers to seek out low prices? I trust in the freedom of capitalists to engage in capitalist acts.

    I am also beginning to wonder what you have against businesses making profits, or attorneys getting rich? Is it a Marxist disdain you have against profit, or is it that you think the average customer of legal services is so benighted they can’t determine value without the help of omnipotent ethicists, or some other third party (legal auditors?) to intervene and inform them they don’t know how to spend their own money, which they worked so hard to earn, wisely.

    Are you aware of Richard C. Reed, and the three seminal books he published with the ABA between 1989 and 1996, on alternatives to hourly billing and advocating value pricing? I suppose you wouldn’t be, as these books are quite expensive as well. I am simply going down a trail blazed by Reed, though I provide much more economic theory and solid business reasons for being against the billable hour.

    Are you aware of U.S. Supreme Court Justice Stephen Breyer’s Foreword to the ABA’s Commission on Billable Hours report? I’ve written some negative things about the billable hour, but Breyer tore it apart, and one reason is because of its negative effect on the profession’s propensity to offer pro bono legal services to the poor, the very customers you seem concerned about. His argument is compelling, and I concur with it.

    You seem to approve of the 100% service guarantee, but say it doesn’t cure the problem. But the problem, David, is the hourly billing method itself. Clients hate it, feel abused by it, and are seeking alternatives. Look at all the ethical problems that result from this antiquated pricing method, and the legal auditing industry it has spawned. Do you need an automobile auditor to help you determine if you paid a “fair” price for you SUV? You say you’ve been trying to figure out an alternative to hourly billing for the average client, and I’ve provided one. Give them a fixed price, with certainty in payment terms, delivery, and utilize change orders if scope creep occurs, thereby allowing the client to authorize any and all work outside of the original scope, just like a contractor or auto mechanic. These are sophisticated, proven, pricing strategies, and are surely easier to offer to low-end value curve customers. It’s what your profession offered (sans the service guarantee) up to around the 1950s, before the dreaded billable hour came into existence. Customers love fixed prices, and are willing to pay a premium for them, which any lawyer is free to forego. To say mechanics and contractors don’t have the same relationship as the client/lawyer is to miss the point completely (both do have to price, and the former use more effective policies). The professional relationship is built on trust, and putting the client’s interest first (we agree on this), and this is accomplished far better with fixed prices and guarantees than with hourly billing, which can be, and is, abused. It’s abused, most of the time, not because lawyers are unethical, but because they don’t think they are being adequately compensated for the value they are providing.

    You will not find another writer more pro-customer; I am not pro-business. I am a free market economist in the Austrian tradition (Ludwig von Mises, Friedrich Hayek, Joseph Schumpeter, creative destruction, and so on). We don’t give a damn about any one business or industry, only care about the welfare of the customer. If a superior alternative arose, say, to the CPA profession, I would say good riddance. No one owes anyone a living. In fact, if you want low prices, competition delivers, not cartels, guilds or ethics rules. One of the major problems with accounting and law is they had to be dragged, kicking and screaming, into the marketplace, where you must compete for customers by adding more value. Lawyers and CPAs are subject to the same laws of economics as all other businesses, and it seems the professions don’t like this fact. Too bad, it’s reality.

    If you ever do read my books, you will learn my arguments against the billable hour are far deeper than merely sub-optimal pricing. They go to the heart of why the professions really exist and how they create wealth for their customers (the only reason any business exists). No lawyer entered the profession to bill the most hours. The timesheet in fifteen-minute increments is killing the morale of our professions, and it simply has to go. It is a relic of the days of Frederick W. Taylor and his time-and-motion studies on manual laborers. But professionals are knowledge workers, and there is an enormous difference between these two types of workers. There is nothing sacred about timekeeping, and I have destroyed it both theoretically and in practice. This is an entirely different dimension than what you have focused on so far on this Blog, and I am going to go out on a limb and say you would most likely agree with my conclusions, and Justice Bryer’s, on this particular issue.

    I liked the example you gave of your mediation practice, because it points out the deficiency of hourly rate thinking. Why can’t you give your clients a fixed price? You can give them a range before you start, so why not a fixed price? They want certainty, David, not surprises, and giving it to them is part of your value proposition. When you quote a range, what do you think they hear? And what do you hear? (Hint: they hear the low price, you hear the high price). Just give them a fixed price. Normally, I would recommend you quote the high end of your range, offer the 100% service guarantee, fix the payment terms, then do the best job you can. But in your case, I will make an exception––you, perhaps, should quote the low-end of the range, since your imagination seems incapable of coming up with innovative ways to add value in any other way but the cheapest price. And that’s fine. Wal-Mart does it, Southwest Airlines does it, H&R Block does it, Jacoby and Myer does it, and I have no problem with it (there is always more profits to be made serving the poor than the rich; McDonalds earns more than the best 5-star restaurant in New York).

    However, most attorneys I work with, and who read my books, don’t want to be the low-price leader, they rather be Disney, Ritz-Carlton, FedEx, and Nordstrom––that is, price makers, not takers. I know you’ll rant against these examples, and say they are not relevant to the client/lawyer relationship, and I would just reiterate preemptively, that is one of your biggest problems. You think you are merely a profession, not a business. But you are both, and ever since the Bates case in 1978 our professions have learned that lesson the hard way. We must compete in the free market for customers, and constantly add more value, all the while trying to be different than the competition down the street. The reason I have sold over 30,000 books is because your colleagues want help in achieving these goals. It’s not unethical; it’s all about adding value and creating wealth for the customers you are privileged to serve.

    By the way, I have attached below an article from the Chicago Tribune reporting how one law firm is offering their clients alternative pricing arrangements to the billable hour. Since you seem to advocate a free market test (except where high prices are concerned), keep your eye on them. They will gain a competitive advantage from doing this, their clients will love it, as they perceive the firm is adding more value. (This, of course, assumes they execute it properly; pricing, total quality service, and a competitive value proposition are difficult to sustain in any business, and many firms find this shift too hard since the hourly billing paradigm is part of their DNA). Yet many professionals firms, from CPAs and lawyers to advertising agencies and architects, have made the shift, and overwhelmingly report their clients love it.

    Your comments, by the way, simply make my point that most of these weblogs are a mile wide and an inch deep. Taking a few quotes of several hundred words from a few articles in an attempt to refute the economics of pricing, intellectual capital, and firm leadership, from a writer who has written over 1,000 pages and 325,000 words in two books, speaks for itself. I, too, shall let your readers decide.

    As for your generous offer to send you a book, I am in production, not distribution. I do believe, though, CCH offers a 100% money back guarantee.

    Finally, I, too, don’t know the private personality of you, David, but I certainly admire your tenacity in debate, and how you speak out for ethics and the customer. I promise not to write haiku if you promise to read my books. If we should ever meet, I also promise to buy the first round.

    Sincerely,
    Ron

    Subject: McGuireWoods ad campaign challenges hourly billing

    http://pm.typepad.com/professional_marketing_bl/2005/04/mcguirewoods_ad.html

    [Image removed] From the April 18 Chicago Tribune:

    Hourly legal fees under attack
    Traditional billing by time spent is standard at most big law firms, but
    McGuireWoods is advertising alternatives

    By Ameet Sachdev, Tribune staff reporter

    Year after year, the most pressing concern for in-house corporate law departments is controlling skyrocketing legal costs. While most law firms pay lip service to helping companies address this issue, at least one is staking its
    reputation on it.

    In an advertising campaign to begin Monday, McGuireWoods LLP will market its ability to tailor fees for its legal services that go beyond the traditional hourly rate. The ads, to appear in Crain’s Chicago Business, the Midwest edition of Fortune magazine and other local publications, is expected to create a stir in the Chicago legal community because the Richmond, Va.-based firm is taking
    shots at the competition.

    In one ad, a pudgy, balding, middle-aged man in a business suit leans back in a chair and blows bubbles into the air. The caption reads, “Law firms that charge
    strictly by the hour are about to have their bubbles burst.”

    In the genteel world of corporate law firms, this sort of edgy advertising is highly unusual. Most big law firms rarely advertise, and when they do, they usually brag about big verdicts or how hard they work.

    McGuireWoods also is attacking one of the sacred cows of the legal world: the billable hour.

    McGuireWoods is challenging conventional wisdom, in part, to raise its profile in the highly competitive Chicago legal market.

    The marketing campaign comes nearly two years after the firm made a big splash in Chicago by acquiring the 101-year-old Ross & Hardies. While the merger more than tripled the size of McGuireWoods’ office, to about
    175 lawyers, the firm still is trying to establish a name in a city with nationally prominent players like Kirkland & Ellis, Mayer Brown Rowe & Maw and Sidley Austin Brown & Wood.

    One way to do that, McGuireWoods’ leaders say, is to be more responsive to clients.

    Survey after survey of in-house law departments shows that their top priority is reducing the money they spend on outside law firms. Some of the growth in legal expenses is out of their control, as companies deal with more lawsuits and regulations and turn to outside lawyers to handle these matters.

    But one of the biggest factors in the rise in corporate legal spending is tied to the hourly rate. Billing by the hour inevitably creates incentives for lawyers to be less efficient, legal experts say. Mergers between law firms also have created upward pressure on hourly rates, as
    larger firms tend to charge higher rates.

    It’s no surprise, then, that calls for alternatives to hourly billing have fallen on deaf ears inside law firms.

    Less than 3 percent of in-house counsel reported that their law firms offered alternative fee arrangements, according to a 2003 survey of corporate counsel that was performed by Serengeti Law, which sells Internet-based billing systems to companies.

    “Some firms don’t have any inclination to do [alternative fee arrangements] because they can get all the work they want at the rates they are charging,” said Craig Hunt, senior vice president and general counsel at Smurfit-Stone Container Corp., a Chicago-based packaging company.

    But companies want more predictability in their legal costs that hourly rates don’t offer, Hunt said.

    Several types of legal work, Hunt said, lend themselves to fixed, upfront fees, such as filing patent and trademark applications.

    One Chicago firm has found that alternative arrangements work in handling large, complex lawsuits. Bartlit Beck Herman Palenchar & Scott, a boutique litigation firm, typically charges a flat fee, payable in monthly installments. The client retains a percentage that
    it pays only if the firm is successful. Otherwise, the client keeps the money.

    “We like to get paid for results rather than the hours,” said Sidney “Skip” Herman, Bartlit Beck’s managing partner.

    McGuireWoods has been offering alternatives to hourly bills for years. About 35 percent of the firm’s annual revenue of about $300 million comes from alternative billing arrangements.

    Now it wants its lawyers to spend more time talking about fees with clients to come up with the best solution, which could be an hourly rate.

    “We want to be a cutting-edge law firm,” said partner Robert Pristave. “We think this will help us better understand our clients’ needs and provide better service.”

    Comment by Ron Baker — April 26, 2005 @ 11:57 am

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