Editor's Note: All questions were asked by attendees of the February 28, RainToday.com webinar, Death To The Billable Hour: How To Develop Value-Based Pricing, with Ron Baker, and were answered by Ron Baker. Visit RainToday.com to see our list of upcoming webinars or click here to buy a recording of this event.
Question: What if the organization hires you to work with their managers, their managers see great value achieved but the organization's rep sees less value. How do you handle this?
Ron Baker: There's always going to be different perceptions of value throughout any organization. The goal is to convince the economic buyer of the value. Once they are on board, others will follow.
Question: When transitioning from the government to the private sector, how do you discover value?
Ron Baker: I'm not sure I understand the question. Are you saying as a firm you are moving from government work to private sector work? If so, I would think it would be easier to comprehend and communicate value in the private sector than the government sector, as there's no bottom line imperative in the latter. The best way to discover value is through a deep conversation with your client.
Question: Strategy work should transform the way a client does business, but the absolute value is uncertain. How do you value price in that situation?
Ron Baker: You have to have a clear set of expectations before beginning any work. What does the client expect to get from the engagement? How realistic are those expectations? What would be the financial impact to the organization if it reached its goals? What about the non-financial, non-objective benefits of your work - increasing the company's intellectual capital, for instance? You are in a better position to manage the value expectations of your client before you do the work, since value is difficult to manage retroactively. McKinsey does strategy work, and they charge an enormous premium, even though it's uncertain. How do they do it? Success leaves clues.
Question: What about when your solution is a product and service mix - does that change the playing field?
Ron Baker: I think it makes it somewhat easier, since you are then able to bundle a complete offering. This is what IBM, HP, Accenture, and the like, do - bundle hardware, software and services. By focusing the client on the totality of your offering you are in a better position to value price.
The higher value services place an umbrella over the lower value services, allowing the latter to move up in price in a bundled offering. Bundling is an incredibly effective pricing strategy, allowing you to offer different bundles at different value/price points (think American Express Green, Gold, Platinum, Black cards - a bundled package of services for each level, allowing the customer to make their own value/price trade-off.
Question: But what if it takes 6 months to a year to achieve that value?
Ron Baker: Then what's the net present value? Much better to have a discussion of the value up-front and manage the client's expectations rather than waiting until six months has gone by to discover the client doesn't see the value for the price paid. There's always an element of risk with any product or service, so the more you can lower that risk for the client, the higher your value. If appropriate, a service guarantee is one effective method of doing this.
Question: Can Ron please clarify what he meant by spreading risk over your clients and by doing you can charge a premium?
Ron Baker: The airlines don't make a profit on every single flight. Sometimes mechanical delays force them to put passengers up for the night. They don't charge separately when this happens, they absorb this risk. They spread it out over all their flights, knowing a certain percentage are going to require additional expense.
Same with your firm. You deal with hundreds (maybe more?) clients a year, you can spread risk across your base, whereas your client usually is only dealing with one firm of your type. A service guarantee is a classic example. Less than 1-2% will pull the trigger requiring you to issue a refund, but since you offer this to all your clients, you command a price premium from 100% of your base, more than making up for the 1-2% who call for a refund. This is how an actuary thinks.
Question: How do you change a monthly retainer contract of hours/month to a value-based contract? Does that mean all contracts are lump-sum contracts?
Ron Baker: Meet with the client and inform them of your new pricing strategy. Tell them you want to give them certainty in price, not nickel and dime them for every 10 minutes. Bundle in unlimited access - meetings and phone calls, for example - so you are changing the new fixed price contract from the old hourly rate method.
Experiment with different bundles. Engage the client in a conversation about their expectations, goals, objectives, etc. I think you'll find they'll be delighted to get a fixed price and not worry about hours. It's how they buy everything else.
Question: We're "categorizing" clients similar to your plane theory. Do you have recommendations as to what % of our clients should be "top tier" (which we determine based on their strategic opportunities as well as profit potential)?
Ron Baker: I think it's dangerous to throw out percentages without knowing what type of services you plan to offer that top tier. My colleague offers a full concierge service to his first-class clients, meaning he'll drop everything and turn work around asap.
This requires that he have spare capacity at all times, even if some of that time his team members are idle (they're not really idle, but doing other things to add to the firm's intellectual capital - CPE courses, reading, teaching, etc.). He can't have much more than 5-8% of his client base in first-class. So the it depends on the type of capacity and services you'll be providing for each section of the plane.
Question: Do you have suggestions for how to get the client to establish criteria for success or achieving value = they know when they have received value?
Ron Baker: Ask them. Engage in a deep, meaningful conversation with them, before you begin any work. Help them discover the value drivers. Do more planning up-front about value, milestones, expectations, etc. You'll be amazed at how much value you can uncover.
Question: Isn't creating value for a client easier with transactional legal advice? How does it work with litigation, particularly litigation defense costs?
Ron Baker: No, I think litigation is higher up the value curve than transactional legal costs. First, there's more risk to the client. Second, there are more options for you to add value - settle earlier, ADR, etc. With litigation you have to do a good job scoping a case, and providing a price for each phase. For a great example of how to do this, read this blog post, inspired by my colleague Chris Marston, Exemplar Law Partners LLC, whose law firm is 100% Value Pricing and no timesheets.
Question: This is EXACTLY where my firm is going. We're not 100% off timesheets yet, but now we only use them for accurately review profitability as a project is underway (comparing actual costs vs. what we estimated it would cost us), and to review profitability after the job's done.
Congratulations. You can also wean your firm off of timesheets. There are better methods to track profitability, etc. These resources might help:
Question: Do you ask after establishing value with the client, do you ask them about their budget, or do you just tell them what you are going to charge?
Ron Baker: I'd probably rather get a feel for their budget sooner rather than later in the conversation. However, always take the budget number with a big grain of salt. If the value is there, they'll make room in the budget for your price. Budgets aren't written in stone. Results, ROI and value are what count.
I think you'll find the budget is more elastic than most people think. And here's the most important point: This conversation has to take place before you begin any work. A service needed is always more valuable than a service delivered.
Question: Even work which you can flat price - i.e. drafting a contract, how do you handle when the other side wants to heavily negotiate? have you tried flat pricing for creating the work product, and then hourly pricing for negotiations?
Ron Baker: You have to scope the work you know is going to happen. I would strongly suggest you not employ hybrid pricing methods - some fixed, some hourly. Hourly is the problem, not the solution. For more information on how to scope legal work, read this blog post inspired by colleague Chris Marston, Exemplar Law Partners LLC, whose law firm is 100% Value Pricing and no timesheets.
Question: How do you determine an engagement is profitable?
Ron Baker: You do an After Action Review and this is when you can check how close your actual costs were to projected costs. With Value Pricing, you are estimating your costs before you do the work, since costs are really driven by price, not the other way around. So, in effect, you are filling out your timesheet in advance. It doesn't do much good to know your costs after the fact if the client doesn't like your value and/or price.
I also need to point out that standard hourly rates are not cost accounting, since they have a profit component built in. You will be far more profitable focusing on value, and pricing to capture more of it, than you will by being a better cost accountant. This is how Toyota is able to operate without a standard cost accounting system. And besides, you know when an engagement is profitable or not, without looking at financial data. It's wisdom and experience.
These resources may help:
Question: How can you stray from hourly billing for consultants, hours spent with clients?
Ron Baker: Not sure I understand this question. Clients don't pay for consultant's hours, they pay for the results they can achieve. The entire paradigm is the wrong one. You have to focus on the output, value and results, not the inputs, efforts, activities and costs.
Question: I couldn't agree more that what clients really want is results. But TRAINING them to look at their contract that way can be a challenge. :-) How can we address the "OK, how did you get to that price? How many hours does that get me?" If you don't have a good Ron Baker you look like you're trying to cheat them.
Ron Baker: It's always the seller's job to communicate and convince clients of value. If they ask for number of hours, say "We don't know, we don't keep timesheets. We rather spend that wasted time figuring out how better to serve you and add value."
If you follow the McKinsey maxim of not doing work that doesn't add at least 3-4 times in value over your price, you'll find the question of hours goes away. Why would the client care how long it took? In fact the shorter time it took the better. This is nonsensical in an hourly billing model.
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