The benefits of value-based pricing vs the billable hour for SME law firms

The billable hour is under scrutiny. Despite being the default way to charge clients and measure fee earner performance for many decades, a recent report has highlighted that a significant number of law firms – 43% – are offering alternative fee arrangements post pandemic, such as fixed fees. 

Another study found that although the fixed fee model is widely implemented, it does create issues, with 64% of UK firms saying that billing write-offs are on the rise as they are unable to justify the work undertaken for each matter.

However, the move towards alternatives is mostly being driven by clients who are now, more than ever, seeking out firms who offer – among other things – results, value for money and no unexpected extras.

So what does this mean for the billable hour, and do firms really need to ditch it? Shaun Jardine, a former CEO of a top 250 law firm, who now focuses on helping firms increase profitability by embracing value-based pricing, believes so.

“The billable hour model is out of date,” says Jardine, a non-practising solicitor. “Clients don’t care how long it takes someone to draft them a will, or buy them a house, but they do care about the outcome. Firms need to think about time in a different way; there aren’t enough meaningful conversations with clients about the transaction, which leads to client dissatisfaction if the bill is higher than expected.”

What is value-based pricing?

A value-based pricing model can help SME law firms create the right environment for long term success – and it benefits lawyers too, freeing them of billable time and targets. Solicitors can have more open and transparent discussions with clients that build stronger, more trustworthy relationships.

Jardine explains that value “is contextual and opaque – it’s the client’s perceived value of the service they’re paying for, which isn’t simply about how long something took to complete.

“Determining a price for a service is not about the six minutes it takes me to tell you the answer, It’s the six minutes plus 36 years’ experience that create the value, which requires a change of mindset for lawyers when considering the price of their services.”

“Value-based pricing offers a different value proposition and an appealing solution for both clients and lawyers alike. For the former, it offers fair value for services and for the latter, if priced properly, it offer a reasonable profit for work performed and experience delivered.”

Jardine says that it’s important to offer options to clients in the same way that different levels of service are available when buying things like car or home insurance: “In the same way that we’re presented with different cost options for a service, firms might consider offering clients with a ‘shopping list’ of legal services, which helps to establish expectations from the start. Lawyers need to be brave enough to ask for the right price based on the complexity of the work and the client, not the service. The balance is wrong if the client is receiving a gold plated service but paying for a tin one.

“A good starting point for firms is to determine what a good, better and best level of service looks like, which helps the client to understand the different levels of service they can buy and what to expect for that service.”

The benefits of adopting value-based pricing

Jardine argues that law firms looking to achieve long term success need to adopt practices that will give them a secure future, which can in part be achieved by building lasting client relationships. “Relationships are not built on charging for time, but on providing a price that is fair to both parties. In many cases, a change in mindset and operational practices is needed to build a more secure future for legal practices. Remember, other than turnaround time, clients don’t care how long it takes us to do anything. They simply want positive outcomes.”

He points to “several benefits” of adopting effective business habits, including a value based pricing approach to legal services, which he says, “benefits your financial performance and long-term success by empowering your employees, providing your firm with a competitive advantage, and making your clients happy.”

Jardine believes that the key benefits to the wider firm include the “ability to differentiate your firm from the competition – being able to say to the client that you will always agree with them a price for the work that you carry out. It also enables leaders to increase their profits, since debtors reduce and cashflow improves.

“I’ve also seen value-based pricing successfully trickle through firms so that teams behave as teams – there’s no need to hoard work – and since lawyers can preauthorise fees, they avoid discounting work and it removes the pressures of billable time and targets. Clearly, firms that adopt this model are likely to attract proactive lawyers and improve team morale.”

According to Jardine there are distinct benefits to adopting the model for clients too: “I’d say the top three benefits from the client’s perspective are predictability and certainty; transparency (no extras on the bill at the end); and building up trust within the client/lawyer relationship.”

Jardine is no stranger to value-based pricing, having assisted nine law firms in the design and implementation of the model into their businesses. “There is not one size that fits all; it really is a question of finding out where the log jams are within teams and helping them overcome the reluctance to try. In many cases, it’s an issue which arises from lack of confidence on the part of the lawyer, but that can be overcome.”

The role of legal tech in adopting value-based pricing

It’s important to consider whether law firms have the right technology, infrastructure, digital tools, and people skills to achieve a change is pricing strategy. As Jardine points out,  “a simple audit will enable you to establish whether you can utilise your existing resources or whether you need to look at investment for your long-term success.

“Regardless of what digital tools lawyers require, it’s important that law firm leaders ensure they’re available and that they’re easy to adopt, which enables lawyers to be more productive, accurate, and effective for the long term.”

Jardine adds that at a recent  survey he commissioned 77% of lawyers agreed that they would benefit from training in how to adopt value pricing, whilst 64% said that better use of data and information systems would assist them in doing so.

It’s true that having visibility of your existing financial position, write offs, profits, workloads and productivity, makes it much easier to start forming your base costs which enable you to begin planning a value-based pricing conversation , not to mention the benefit – and importance – of having your financial information, data and processes in one centralised system.

Recommendations to implement value-based pricing

Jardine points out that if law firm leaders don’t have value-based pricing on their strategic to do lists, “they surely will when their competitors start doing so and, more importantly, when clients start asking for fixed prices. But wouldn’t it be better if firms take the lead on this, rather than reacting to client demand?”

He recommends that firms take action now and that leaders need “to prioritise pricing collectively. They need to be committed and not be afraid to speak to clients about pricing, not to mention turning clients away who aren’t right for the firm.”

Jardine also stresses that leaders need to focus on “the importance of train and ingrain. It’s a culture change and it’s important to recognise that value pricing is an art, not a science, so you’ll inevitably get it wrong at times whilst you fine tune your new approach to pricing. The key is learning from mistakes and analysing what went wrong, before making incremental continuous improvements for long term benefits. It’s important for teams to remember that getting things wrong is ok – it starts the path to success.”