‘That’s not a revenue model’: firms stuck in factory age, says Tim Williams

1 August 2017

The Australian Financial Review

IN Business BY Katie Walsh

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Leading US-based consultant and former advertising executive Tim Williams has a strong message for professional services firms that still bill based on time.

Your revenue model? Well, it isn’t a revenue model at all.
“Apple has a revenue model, Tesla has a revenue model – professional service firms don’t,” he says, sipping a latte in a back alley in Sydney.

“They only have a costing model.”

That costing model is driven by a Karl Marx-inspired labour theory of value, and Williams argues it’s economically unsustainable. So much so, he predicts within the next decade very few firms will price on billable hours.

l Marx-inspired labour theory of value, and Williams argues it’s economically unsustainable. So much so, he predicts within the next decade very few firms will price on billable hours.

“Accountants would go into a factory and count the cost, and the owner would work out cost-plus pricing. That’s not pricing, that’s just costing.

“In the past 20 years, there’s been an explosion in pricing innovation. There’s tremendous creativity. Even Disneyland has varied pricing. You can subscribe to a Cadillac. Rolls Royce don’t sell jet engines, they sell uninterrupted flying time.

“Professional services are alone in having missed the pricing revolution. They’ve instead chosen to stay in a paradigm.”

Williams, who founded Ignition Consulting Group after two decades in the advertising world, feels a tipping point is getting closer: one that will force unprecedented change.

“Something happened within the last 18 to 24 months; we’re at the end of being able to save our way to success.”

It’s a change that, from his perspective, should have come a long time ago: the labour theory of value is not only unsustainable for firms, but simply wrong.

“This theory was disproven and replaced long ago with the subjective theory of value, which is the model followed by free enterprise today — except, of course, most professional firms,” he says.

For the legal profession in particular, besieged by competitive forces – as global firms crowd the space and poach talent, new start-up firms proliferate, accounting firms reenter, and automation accelerates – it’s a hard message.

Where’s the ‘art’?

Despite market rhetoric, traditional firms often say clients still want hourly billing –  it’s a measure they’re familiar with. Another concern is the reliance by costs assessors in litigation on billables; which means even if firms do use a different billing method, they must keep track of hours to support costs claims.

Williams argues firms must re-educate buyers, and stop giving away their “magic”: the high-value, problem-solving, innovative work. The challenge is becoming acute as the day-to-day “logic” work like contract reviews that have propped up revenues are increasingly automated. According to McKinsey, a 2 to 7 per cent boost to return on sales is possible from a focus on pricing strategies.

For bigger firms, it means having the equivalent of a “chief pricing officer”; for others, it might mean a small council comprising senior executives making the most important pricing decisions.

There is data to support a focus on the “magic”: the top drivers for in-house counsel in selecting firms for their average $2.6 million yearly legal spend are specialisation, individual lawyers, past experience and tailored advice, according to the Association of Corporate Counsel. Most consider hourly rates aren’t ideal or appropriate.

Allens chief pricing officer Pier D’Angelo is among those leading the transformation drive locally; globally, K&L Gates hired former McKinsey and PwC consultant Bart Gabler as pricing director in mid-2014, overseeing the “development of creative fee arrangements”. From the client side, startups like Lawcadia are offering procurement platforms.
Despite signs of an awakening, timesheets still rule the day, dividing it into six minute chunks. Targets at some of the nation’s largest law firms range between 5 and 7 hours a day according to the latest The Australian Financial Review Law Partnership Survey.

New model law firms have the agility to more easily embrace creative billing arrangements, but that doesn’t mean the billable hour has disappeared.

Keypoint Law celebrate that they don’t keep timesheets, but CEO Warren Kalinko said lawyers can still elect to bill on an hourly basis because the firm does not dictate policy. Instead, lawyers are empowered to decide, tailoring to each matter.

“As a result, lots of the firm’s work is done on agreed price and other value-billing methodologies,” he said.

“It’s part of our philosophy of giving our senior lawyers more control over the business decisions affecting their work.”

LegalVision CEO Lachlan McKnight says fixed fees provide provide cost certainty for many clients, but innovative structures like subscription work for others.

Still, the firm, which separates the sales and legal teams, can’t “step away entirely from the classic economic wisdom of pricing”, he says.

“So factors like internal costs and what others in the market are doing are relevant to how we quote. But we add to the mix a strong emphasis on how much value a client would place on our services.”

“Traditional law firms often confuse their own perception of value with what the client actually values.”

At Plexus, services are almost exclusively offered on fixed fees. CEO Andrew Mellett says clients want value, transparency and predictability in pricing.

“Hourly rates don’t support any of those objectives,” he says.

More ‘black boxes’

Williams warns that most firms still look at pricing as a science and are simply getting better at the wrong thing: looking at competitive rates and cost-plus.  They need more “black boxes”, proprietary offerings, high-value expertise not found elsewhere – and the courage to sell creative pricing for it to clients. They must find ways to align economic incentives and free staff from “feeding the time machine”, he says.

His firm practises what it preaches: no timesheets, no hourly rates, no day rates. Pricing ranges from fixed scope fees to outcome-based.

Like Williams, local consultant John Chisholm, who has led mid-tier firms Maddocks and Middletons, wants to see time billing die. But it’s a slow transition.

“It’ll never be killed while we still measure and reward on time.”

He says firms should separate sales and legal functions. In most firms, partners can price their own work — and in Chisholm’s experience, they can be the worst at it.

“Not everyone’s good at everything,” he says.

“We had a couple of great rain makers, but what did we do? We usually tied them to a desk for certain hours of the day because we had targets.”

Chisholm says firms who have killed the billable hour “love it”.
Moores law firm in Melbourne, a client of Williams, has a pricing promise not based on time.

The firm brags on its website: “Frankly, we’d rather spend time helping you realise your opportunities and solve your problems than filling in timesheets.”

The firm brags on its website: “Frankly, we’d rather spend time helping you realise your opportunities and solve your problems than filling in timesheets.”

Paying for minutes of magic

There is a clip Williams likes to show clients. In it, internationally renowned graphic designer Paula Scher reveals how she designed the logo for financial services monolith Citigroup, after the Citicorp and Travelers merger in 1998. At an initial meeting with executives, Scher picked up a napkin and scribbled a drawing, combining Citicorp’s lower-case typography with an umbrella from the Travelers logo.

The executives walked out with the logo now recognised worldwide.

“A lot of clients like to buy process and think they’re not getting their money’s worth; like I solved it too fast,” Scher explains in the clip.

“It [takes] a second, and it’s all over the world. But it’s not done in a second, it’s done in a second and 34 years.”

For Williams, it neatly encapsulates his pricing point.
“She’s able to do that because she’s got 34 years’ experience,” he says.

“What should she then put on her time sheet – five minutes?”

Williams began his career as an ad exec on Madison Avenue in New York in the late 1970s and early 80s. Today, most of his clients are advertising and marketing agencies, but he says the pricing and strategic principles have broad application to other professional services firms. In Australia, that includes around a dozen law firms.

Among his bugbears are “institutionalised imitation” (“firms looking around and copying rather than innovating”), and the “ubiquitous use of ‘full service’.”

“What is the alternative? Half service, a quarter service?”

As client size and sophistication increases, he says clients are looking for a “best in class” advisor.

“No firm could ever possibly be full service, even the largest firm on the planet. Much of my life is spent helping firms understand the benefits of focus. Saying that you do everything and offering every service is not a strategy — strategy is deciding what not to do.”

Read the full article on The Australian Financial Review