Responding to today’s legal value challenge – one team’s story implementing value-based pricing
Lessons from Maria Polczynski
“We are living in very interesting times that both demand and provide new opportunities for the delivery of legal services” according to Maria Polczynski, former Head of Group Legal at Bendigo and Adelaide Bank, who spoke at the ILANZ Annual Conference in May this year.
The traditional model of legal service delivery is being increasingly fragmented. Disaggregation, direct briefing of barristers, lawyers-on-demand, legal service processing, outsourcing and offshoring, technology-based delivery and multi-disciplinary and new niche disrupter firms are proliferating.
Just as the options are increasing, so too are the pressures. Increased regulation and greater political and financial uncertainty in the post-GFC world create higher demand for legal support. At the same time reduced business margins mean legal teams have ever leaner legal budgets, while being held to greater account. Richard and Daniel Susskind speak of this pincer as the ‘more for less challenge’ in their new book “The Future of the Professions”.
Maria recommends that a spirit of experimentation is required to respond to this challenge and to new opportunities. This involves trial and error and many lawyers (trained in precedent) are uncomfortable with ‘making it up as they go’ while most are strongly adverse to the idea of making ‘errors’.
Maria says just try it anyway, working with trusted providers as a buffer against the big errors. It is only through practice that we can learn how to ‘work’ the new legal options to best effect.
Six years ago, Bendigo Bank’s legal team started experimenting with how to use external providers of legal services. Using disaggregation, they tested some new market offerings, but also engaged closely with their institutional panel firms.
Maria says “We wanted to hold onto the good things in our relationships with the firms – like their knowledge of our business and multiple personal relationships based on mutual trust. So we deliberately decided to work with the relationship firms and try to develop in them what we liked in the emerging models.”
The Bank wrote into its terms of engagement that when briefed, the firm must provide a value-based price or a reason why a value-based price wouldn’t work. By 2011 if a value- price wasn’t offered by the firm the legal team were consistently asking why not. “We listened and repeatedly asked ‘why’ or ‘why not’ or ‘what if…’. We questioned assumptions underlying firms’ resistance to pre-agreed pricing – like what was unpredictable or so urgent that work had to start before it could be scoped. Then we questioned the assumptions underlying those assumptions – and then the fears behind those underlying assumptions.”
Over time the Bendigo legal team realised that the discipline and collaboration required to ask and address these issues deepened their relationships and mutual trust with the firms. They and their firms learnt about each other’s operating parameters, creating opportunities for continuous improvements.
After a lot of conversations, reflection and experimentation, by mid-2012 all institutional panel work was commenced on pre-agreed fixed prices for pre-scoped work.
That sometimes proved hard to sustain as the matter progressed. Focussed as always on the legal issues, firm lawyers would go the extra mile as they understood it, but their internal processes were still based on hourly rates. They were not monitoring work against original scope to engage with the client. The bill might reflect the pre-agreed price for the pre-agreed scope plus hourly rates for what the firm considered ‘out of scope’ – which did not always align with the internal team expectation.
The Bank wanted firms to pre-scope and pre-price, including for variations and scope creep. It wanted them to actively monitor scope and pre-agree prices for all work, including variations or scope creep. So the legal team asked the firms to accept the pricing risk if they did not.
Specifically, hourly rates were deleted from the terms of engagement for a 2014 pilot that has since been established as the norm. As Maria explains it, “We do not require our firms to start work without a pre-agreed price, but if they undertake work that has not been pre-priced, after-event discussions about the price are based on the Bank’s honest but subjective assessment of value delivered, not time.”
Nowadays Maria has lost the sense of the pejorative in “making it up as we go” since the team has done this to very good effect for legal savings across the portfolio. Even with some mistakes on individual matters, at the portfolio basis, the legal costs have dropped dramatically.
Maria likes to talk of “learning from mistakes” with the focus on the learning, a.k.a. continuous improvement. That is what the “more for less” challenge is all about – and “it will never end”, she says. For her pioneering work, Maria has been recognised as an ACC Global Value Champion and hopes that other legal teams will pick up the challenge.