7/18/13

SOLP 2013 - Part 4 - Legal Pricing Strategy

(This is part 4 of a 4 part series.  You can download the entire SOLP 2013 below.)


Image [CC] - Jeffness
The newer the legal pricing role, the more likely it is to be defensively motivated. By defensive, I mean the pricing role is narrowly focused on holding the line on profits. The more mature is the pricing role, the more likely it is focused on proactive business development efforts. But even in the most well established legal pricing roles, the offensive push is still very limited. My best guess is that 90+% of legal pricing professionals currently focus almost exclusively on the defensive side.

This is an indication that the legal pricing role, unlike pricing roles in other industries, has not yet matured to the point that it can focus on maximizing profit. Instead it is more about holding onto market share and hopefully holding onto some reasonable level of profit margin.

For firms that are just now contemplating whether or not to create a pricing role, consider this: Your firm is competing in the same market with firms who already have this role. If you do not have someone in this role, your partners are probably agreeing to whatever pricing option clients request in order to hold on to the work. If, as is also likely, your firm still has a compensation scheme for partners based on their hours billed and revenue realized, then you are actively rewarding your partners for new work, regardless of the profitability of that work. In effect, you may very likely be  rewarding your partners for losing money.

This caution highlights the most important function of a pricing role, that of developing a rational pricing strategy. Even a firm with an exclusively defensive pricing approach, is at least facing the challenge. Given the chaotic nature of legal pricing, a first level goal needs to be developing knowledge about a firm’s current pricing world. This means capturing pricing deals as they occur and monitoring them over time. Without this basic knowledge, firms will not learn and improve their pricing strategies over time. Or as I like to say: The hole will only get deeper.

Conclusions

A small group of legal pricing people got together in late-2011 to establish professional development and networking opportunities. By May 2012, there were 12 people in that group. More than a year later, that number has surpassed 200. The rapid growth of this pricing group is evidence that pricing will be an ongoing function at law firms for the foreseeable future. The members of this group reflect the state of legal pricing at the personnel level. The roles for each person vary greatly in their focus and some members, including a number of CFOs, only perform pricing functions as a subset of their duties. Despite such wide variability in the role, we have reached a point where a large firm without a pricing role of any kind is clearly out-of-step with the rest of market.

In addition to law firm pricing personnel, this group also includes a number of people who work in client legal departments. This reflects the growing need for both sellers and buyers to understand legal pricing. Active client participation in this process is a key requirement if we ever hope to be able to better align legal service value with price.

While the current state of legal pricing is definitely chaotic, chaos  is either a trial to be endured and overcome by individuals, or an opportunity for a community to rebuild their world as it should be. I choose to believe the latter and I hope this paper might be the first step toward understanding and eventually taming the chaos of legal pricing.


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2 comments:

Tim said...

Thank you for this post, very interesting and informative. Look forward to reading more.

Kevin Doolan said...

Toby, this is a great article and wonderfully reflects the view from the inside of law firms. It is refreshing to see a true “pricing expertise” approach to the legal profession, as it is sorely needed. When I was asked to be the partner who should “look after” pricing at my firm I started attending the Professional Pricing Society Conferences in the US to learn more – and find out what techniques would apply to professional services. I absolutely agree that the first line is the defensive one and that law firms have been slow to adopt the strategic, more market facing, approach. I’d be happy to share experiences since 1996 when I started on this journey and the more recent work I have been doing at Harvard. In particular this has been around developing pricing models that partners can use so that the right fee structure is offered to clients. I have recently been working with Mark Burton at Holden Advisors in the US to look at how “real world” pricing expertise can be brought into law firms – it will have a revolutionary impact I feel, and partners are more inclined to listen in tough times! Well done on getting organised. Kevin Doolan, Eversheds

 

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