Using FPAs Has Many Advantages

There are at least ten benefits of using FPAs.

1. It pre-qualifies the client. Discovering the client’s perception of value—before your firm commits any resources—is a better strategy than finding out after the service has been performed that the client has a lower value perception than you do, no matter how you price your services. Discussing price up-front puts these issues on the table, and in the long run will save countless hours and back-end costs in pricing disputes, write-offs, collection issues, and other problems that could have been avoided had there been better communication at the beginning of the engagement.

2. It provides an opportunity to cross-sell. By brainstorming with the client regarding future goals and aspirations, you will inevitably learn of many opportunities to cross-sell your firm’s services. You cannot expect to automatically receive additional work from the client—you have to earn it by demonstrating your firm is a better alternative than the competition. Empirical evidence proves that with an FPA relationship you will be more successful in obtaining additional work by focusing on value.

3. Value pricing gains “ego investment” from the client. All of us want to be in control; it’s human nature. By giving clients a sense of ownership over your firm’s services, offering them choices, and customizing your delivery to meet their needs, you will get their “ego investment.” Most often, once people make a commitment, they will behave more consistently.

4. Quoting fixed prices projects confidence and experience. It indicates that your firm is experienced and confident, traits clients value. Imagine an airline not quoting airfares before the flight but instead charging by the minute. How would you feel? Would you begin wondering if the pilot is deliberately prolonging the flight? Would it lower your confidence in the airline? The argument that the legal profession can’t provide fixed prices, up-front, is specious. Every other business does, and we are subject to the same laws of economics, consumer and price psychology as everybody else. If you cannot quote a price before performing the work, perhaps you don’t know enough about the nature of the work and shouldn’t be doing it in the first place. Change orders are designed to cover any scope creep or unforeseen circumstances which may occur (and will be explored in the next article).

5. It increases a customer’s switching costs. The more services you perform for the client and the more you know about a client, the more expensive it will be for the client to defect. Creating a partnership with your client links your destinies and prospects for prosperity.

6. It forces your firm to be effective. By offering fixed prices, you must delegate the work to those in your firm who can perform it most efficaciously. It also forces you to review every procedure and work review level to ensure that each task adds value to the client.

7. It overcomes buyer’s emotions. Using FPAs diminishes price resistance (sticker shock), price anxiety (buyer’s remorse) and payment resistance (not paying the invoice). By discussing value, price, and terms up front, you will reduce the negative impact of these emotions on the client, not to mention your firm’s profitability.

8. The firm maintains the pricing leverage. A service that is needed is worth more than a service that has been delivered. If this is true—and it is—then why do firms insist on pricing their services after they’ve been delivered? Because they don’t know down to the last six-minute increment how much time the task will take. This is precisely the problem with the labor theory of value: since no client buys hours, they don’t care how much time is spent. They only care about the value provided relative to the price charged. And they want to make that decision before they buy, just as you do when you, as a customer, buy anything. By pricing your services before you begin, you will obtain a higher price since you are removing the risk of the transaction from the buyer. You will also have the opportunity to educate your clients as to the value you are providing (if they don’t agree with your price) or to withdraw from the engagement completely.

9. Prices can be increased more easily. When was the last time you raised your hourly rate? Do you believe there is a concomitant increase in value to any one client? I can assure you your clients don’t view the world that way. However, when you have customized services and pricing for each client, it is easier to increase the price.

10. It provides a competitive differentiation. Since each price is customized, the perceived value of your firm increases. In contrast, by using hourly billing, you are simply treating all clients the same, which is not a prescription for success in today’s marketplace. Clients prefer fixed prices, up-front, and will continue to gravitate to those firms willing to offer them.

Obviously this is not an exhaustive list of the advantages of value pricing, just some of the most important ones.

FPAs Increase Your Bottom Line

Firms around the world have successfully implemented the Fixed Price Agreement and have seen many salutary effects as a result. They are cross-selling more services, obtaining a larger percentage of the client’s wallet, able to extract a premium price since they are bundling services into one FPA, and offering a service and price guarantee that lowers the client’s risk even further. Also, they are speeding up accounts receivable collection since the payment terms are agreed to up-front. Many are also reporting negative WIP in some areas of their practice. Moreover, Change Orders are being used to capture the additional wants of the client, and combined with innovative pricing strategies (such as the “TIP” clause), firms are reporting some windfall profits. One partner I know received a “TIP” of over $1 million for work he would have valued at $180,000 using the outdated hourly billing method. This illustrates the pernicious effects of being mired in the mentality that we sell time.

The future is here; it is just unevenly distributed. The firm of the future will offer fixed prices, up-front, for every service it provides, just like every other business. Firm leaders will remove the artificial ceiling they have placed over their firm’s head by the antiquated hourly rate billing method. As a result, they will finally begin to get paid what their clients already believe they are worth.

Post from: The Complete Lawyer

No related posts.

Say you have to take your car to a mechanic for a tune-up. Do you hand him a blank check and instruct him to fill it out when the job is done? Hardly. You get an up-front price quote.

Two hours later, when he phones to say that he noticed a fuel injection problem that needs immediate fixing, you ask for a price and get another quote, which allows you to decide whether or not he should continue with the additional work.

Set The Price When You Have Leverage

Mechanics don’t suffer from pricing disputes the way attorneys do because mechanics inform their customers about the price of additional services—those outside the scope of the original work estimate—before the work is done. In this way, customers are involved in the decision and gain ego investment on the marginal services.

Imagine what would happen if the mechanic went ahead and fixed the fuel injection problem without informing you up-front, and then attempted to receive the additional payment when you picked up the car. Not a very effective strategy to cross-sell additional services, is it? Yet law firms engage in this practice and then wonder why clients are unwilling to pay the additional price, or dispute the amount of time the additional work required.

Ideally, every engagement a firm performs should have a scope clause wherein the responsibilities of each party are clearly delineated. This will give the partner the opportunity to discuss the scope creep with the client, and allows the client to give input on how to rectify the problem. Perhaps the firm needs more time, or is understaffed; perhaps the client would be willing to pay the firm to complete the additional work.

Remember, firms possess price leverage only before the work begins. Once additional work is completed, firms lose all of their pricing leverage to their clients, and chances are, they won’t be paid. Think about it: who has leverage when your mechanic first calls to inform you of the fuel injection problem? He does, because your car is already on the lift, and unless you are a skilled mechanic you will authorize him to fix the other problem(s).

Thinking psychologically, always set your price when you possess the leverage and when the client is in complete control of authorizing the additional service. This is a true win-win deal for both sides, which is precisely why the change order is one of the most sophisticated pricing strategies you will ever find.

Post from: The Complete Lawyer

No related posts.

Marx is far from dead. Even though Marxist ideology has been thoroughly repudiated by empirical evidence, we still pay him the ultimate compliment: His ideas are so deeply ingrained into our value paradigm we don’t even notice them, let alone analyze their validity. In the nineteenth century, Marx posited a definition of value that has been subsequently called the labor theory of value, which states, in its simplest form, that the price of an item is determined by the amount of labor used in its production.

The Labor Theory Of Value Isn’t Supported By Experience

This sounds reasonable, and in fact this misconception has deceived many great economists, such as Adam Smith and David Ricardo. Throughout history, we’ve measured the value of a product or service as a function of labor time. The word acre in medieval English meant the amount of land that could be ploughed in one day. The problem with the labor theory of value is that it does not comport with human behavior.

Taken to its extreme, the labor theory of value predicts countries that work longer and harder should have higher standards of living. By this definition, China should have the highest standard of living given its large amount of labor hours available. In fact, what we see throughout the world is that countries with less labor inputs, more entrepreneurship, dynamism, and secure private property rights have vastly higher standards of living, including shorter hours for workers.

As the last of the ardent believers in the Almighty Hour, professionals must face the fact that this theory has been absolutely repudiated by the behavior of customers in the marketplace. For if the labor theory of value was correct, then a diamond found in a mine would be of no greater value than a rock found right next to it since each took an equal amount of “billable hours” to locate. Yet how many rocks do you see in your local mall’s jewelry store?

Look around your office. Do you have any pictures of your spouse, family, and friends? Under the labor theory of value, I should, theoretically, be able to replace each one of those pictures with a perfect stranger and it should hold the same value to you, since my pictures most likely took the same amount of “billable hours” to produce. When you go to lunch today, perhaps you’ll have pizza. Under the labor theory of value, you must necessarily value the fifteenth slice just as much as you valued the first since each took the same amount of “billable hours” to produce. The labor theory of value doesn’t take into account the well-established law of diminishing marginal utility, which states the value to the customer declines with additional consumption of the good in question.

The Subjective Theory Of Value Is More Accurate

The alternative to an incorrect theory is not to do away with the theory and simply rely on “common sense,” but to posit a correct theory. All learning starts with theory. There is nothing as unenlightening as a fact not illuminated by a theory; if there were, we might as well read the phone book. Fortunately, the correct theory of value was posited by the Austrian school of economists—among others—in the late nineteenth century, in the tradition of Eugene von Bohm-Bawerk, Carl Menger, Ludwig von Mises, and F.A. Hayek.

These thinkers posited the alternative to the labor theory of value—a more correct theory of value—by observing that value is subjective. The subjective theory of value concludes that goods and services have no inherent value; they are only valuable to the extent there is a valuer desiring them. Marx derived his definition of value from the assumption there must be an equality in two goods which are exchanged—namely, labor hours. But the nature of exchange is the exact opposite: it is based on an inequality in the subjective value of the good received and the good exchanged. In order for any transaction to take place, both the buyer and the seller must profit from the exchange and receive more value—in their perception—than what they are giving up. Were this not so, we could simply exchange five-dollar bills with each other and achieve a Marxian Utopia.

Value And Results Matter To Clients—Not Time

In 1748, Ben Franklin wrote, “Time is money.” Over the past fifty years professionals have taken this statement literally to mean time is value.

But time—that is, efforts, activity, and costs—do not equate to value. Results are what count to the customer. If you doubt this, take your car to a mechanic who takes over one month to fix it, and willingly accept his explanation: “Well, I spent the time.” You could easily double your firm’s billable hours tomorrow: simply cut off everyone’s right arm so that it will take twice as long to perform any given task. Think of the activity; think of the increase in your billable hours. It’s an instant ticket to prosperity.

I am being facetious, of course. But that is the conclusion one must reach if you subscribe to the labor theory of value, of which the hourly billing method is a direct derivative. Your labor costs—at least in the short and medium run—are sunk, no matter if your associates are doing high level legal work or making photocopies.

What matters is what your customer is willing and able to pay for your services. We need to focus on the value and results delivered to the customer, which is the true measure of what you are worth. The legal profession needs to replace the labor theory of value with the subjective theory of value.

It is the job of the marketing department in your firm to differentiate your offering from your competitors. It is also the task of every partner, associate and team member who services the customer to ascertain the subjective value he or she places on your service. It is not enough to multiply hours spent by some arbitrarily determined hourly rate. Doing so is redolent of Marx’s labor theory of value, and is absolutely irrelevant when setting a price. No customer buys hours. How can we sell something the customer does not buy? Focusing on hours—which is really a measurement of efforts, not results or value—is chasing the wrong rabbit. Albert Einstein once wrote, “Our theories determine what we measure.” Hourly billing measures the wrong things.

The labor theory of value, like the billable hour, is an idea from the day before yesterday. We need to forge a new paradigm of value for pricing our services as attorneys in the new millennium, and stop ritualistically accepting the false theory proffered by Karl Marx over 150 years ago. Let us relegate the billable hour to the ash heap of history—along with carbon paper, the manual typewriter and the slide rule—right next to Karl Marx’s The Communist Manifesto, as an idea whose time has past.

Post from: The Complete Lawyer

No related posts.