My colleague Ron Baker is convinced in the normal business world history suggests sellers determine their own pricing structures- not buyers! History would suggest Ron is right. Here in Australia 20-30 years ago law firms changed their whole pricing model (and subsequently their business model) to bill by time instead of scale,weight,judgement,agreement or value and clients bought this change. In fact not only did clients buy this change many clients actually got better at the pricing model than their law firms so much so they turned the tables and used the 6 minute unit of measurement against the law firms themselves to continually drive down the price of legal services.
Took law firms a long time to realise what was happening mainly because there has traditionally been so much fat and profit margin in law firms hourly rates and so much leverage that a few dollars off here and there would seemingly have little effect.
Furthermore even if some areas were takng a hit on rates (such as insurance,retail mortgage lending,etc) other areas of practice were gowing in volume and therefore the leverage was increasing and the market could stand annual rate increases such that the massive profits from these areas could cross subsidize the more price sensitive work.
Now that is all well and good whilst the business market itself was making huge profits from their law firms (yep that's right our clients profit from our work) and in the scheme of things for many corporate clients legal expenses were just a small fish in a large ocean of their business expenses.
Sure it probably annoyed some clients that whatever their legal spend was they couldn't actually budget for it accurately but this was a small price to pay (excuse the pun) for the benefits and value they were making out of their firms- and there was no alternative anyway. Rates were pretty much the same at most law firms and it wasn't like any firm could give them a fixed price or anything because no one could predict how long something was going to take could they?
And then like the proverbial lobster in the warm up pot slowly but surely some clients were asking for estimates and quotes and the odd really bold (or stingy) client was actually asking for a fixed price on the odd legal purchase.Added to this was the emergence of the odd (again very odd) law firm that broke ranks with its peers and started giving fixed prices ( or more correctly) accepting a clients fixed price. This in turn meant the odd client could sometimes find an alternative to how their own law firm was charging.Very odd indeed.
Before long, aided by the GFC (which we dont have here in Australia apparently), work started to dry up a little and clients could no longer annually increase their rates by 5,10 or 12%. Woops now this IS starting to have an affect on law firms profits. Better slash expenses to hold margins and make fee earners work an extra 30 chargeable units per day. That will tied them over until we get over this little economic hiccup.
But now clients have had a smell of "alternatives" they are not so keen to let things go back to how they used to be and more and more corproates are liking the idea of fixed fees so they can budget better. Most clients of course are not going to change their legal providers based solely on price but they may consider it based on a mixture of value and price certainty if they can't convicne their existing providers.
Ron Baker, Liz Harris and my experience with ACLA members at the recent value pricing workshop in Melbourne indicated to us that clients are crying out for the certainty of price and want their law firms to be more innovative on value and in providing options. Most of them could not care less what a law firm "made" out of the relationship as long as they, the client ,were getting good value. They definitely were not after the cheapest price(even though they say law firms often think they are). They dont want to force their law firms to change and would much prefer the firms take control themselves but the clear message to us is they will if no change is apparent.
At the very least if they cant change law firms pricing models they will do their best to influence them!