7/15/13

The State of Legal Pricing 2013 - Part 1

(This is part 1 of a 4 part series.  You can download the entire SOLP 2013 here.)


Friends, Romans, Countrymen! (8423468943)
IMage [CC] -  Frank Kovalchek   

Partners, Executives, CFOs, CIOs, CPOs, Marketers, and Legal Pricing Aficionados of all types, titles, and roles, I have come to report that the current state of legal pricing is absolutely chaotic.

There are three methods of dealing with a chaotic situation. First, the completely rational approach is to dig a hole, climb inside, and wait for the noise overhead to subside before coming out. Personally, I fight the urge to do that on a regular basis. The second option is to lower your shoulder and plow into the fray, driving hard and hoping beyond hope that the chaos has another side upon which you might one day emerge. This is the approach most of us are now valiantly attempting. And finally, you can stop pushing and seek a higher vantage point from where you can watch the chaos unfolding below. From there you can study the movement of the mob and look for patterns, repetitions, possibilities, and opportunities.

This State of Legal Pricing is my first attempt to describe our current situation from that higher vantage point.  From this modest beginning, and with the help of my colleagues and the community at large, I hope we can begin to calm the chaos and create a rational market for legal services.

The Current Legal Market

The market has fortunately grown tired of the Alternative Fee Arrangement (AFA) buzz-phrase-term and has begun to more properly focus its attention on the broader function of pricing. Pricing as a profession has been around for some time now and generally refers to the task of determining best prices for products and services in order to maximize profits. It should be noted, especially for those in the legal space, that profit maximization is not focused on a single sale. Instead it is measured at the firm, client, or product offering level. So for this discussion about the legal market, we will presume that the legal pricing function serves at that broader level, where prices attract customers and support the business.

Every market craves rational pricing. That is to say pricing where the buyer has some understanding of the value associated with their needs or the goods they are purchasing, and the seller has an expected revenue for each type of good or service. Unfortunately, the extreme range of services provided by law firms and the dynamic nature of the legal market itself have worked against the establishment of rational pricing for legal services at a product level.

The dynamism in the legal market comes about for several reasons. First, in my experience, there are not a lot of truly comparative legal service offerings from firm to firm, or even from matter to matter within firms. Litigation in a given category has a broad range of service types and pricing levels. From the highly complex to the mundane, prices vary to a significant degree. While we may eventually see fee-level pricing appear at the more commodity level for certain kinds of offerings, even there, we may never see a transparent market pricing mechanism.

Secondly, we don’t sell widgets. While there is a push for task coding of time entries as an attempt to establish pricing data on a per task level, a client does not buy one deposition, two filings, and a side of legal research. They buy resolutions to disputes. Even if we were to offer a fee per task pricing option, clients rarely if ever make purchasing decisions at the task level.

Suppose, for example, we set a standard price of $25,000 per deposition. Then in the course of a matter, we determined that a CEO or CFO needed to be deposed. Such a deposition would very likely require much greater resources and attention than the deposition of a mid-level executive.  Should the firm honor their “standard deposition” rate for the deposition of a CEO and perform a lot of extra work for free? Should the firm differentiate low, medium, and high level deposition rates? We are now descending a slippery slope hoping for a rational stopping point.

Third, even if universal task codes were adopted across the industry, and were used effectively, the per task market price would still not be achieved without establishing much more detailed market information. As a market we haven’t even determined standard case types at this point. How much resource will we expend to agree upon task-level pricing for one sub-type? In the process, we may commit a significant amount of industry resource to develop a standard number that ultimately has no meaning within the specific confines of any specific case.

A rational market does not ascertain useless pricing data. It has no patience for that. So unless clients start buying depositions rather than resolutions, there will never be an incentive for the market to determine a price for depositions. Even if the market could determine such a price, it would only be for a certain level and type and would not be universally applicable. I just don’t see the market needing that level of detail in product pricing especially when it struggles to find reasonable pricing mechanisms for much higher product levels (e.g. - the matter level).

The most likely outcome of any overt attempt to create something like a legal pricing market is that rational pricing behaviors will only appear within tiny pockets of the market. To some degree, we can already see this beginning to happen at the far end of the commodity spectrum (e.g. patent prosecution). It is reasonable to expect that this commodity pricing will “evolve up” within certain market segments over time, but I question how far up it will or can go.

Given this challenging market environment, tomorrow we will turn to the behavior of the market participants driving such chaos.



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4 comments:

Scott Preston said...

On the topic of task codes and whether or not they are useful, I can agree that the client is not buying one deposition, they are buying results. The appropriate use of depositions has an impact on price/cost and results. Where I have a problem is the notion that tasks codes are being used to establish a per task price. The intention of tasks codes (at least from a project management standpoint) is to understand the component costs to make a more informed decision on what is a good price.

To use a car analogy, the car buyer is not concerned about the unit cost of a dashboard, they just know they need a dashboard to make the car complete. So from a pricing standpoint, the car buyer doesn't need to be concerned about the unit cost of a dashboard, nor with the labor costs associated with its installation. You can, however, bet your mortgage payment the manufacturer of that car wants to know the cost of the dashboard, the amount of time it takes to install it and what the labor costs to do that installation will be. That’s how they know when they are selling at a loss or profit. The same concepts apply to legal project management (and the use of task codes). If you do not know the “work effort” to deliver some task (or series of tasks) how will you know what is profitable and what isn't? Yes, complexity of the matter also plays into the equation.

Merely having task codes associated with tasks does not tell the entire picture, but if you don’t have something like task codes to normalize the data points, you will not be able understand the work effort or the cost to complete a task, phase or entire project.

Task codes are not useless pricing data unless that is the only data from which you plan to set price.

Toby Brown said...

Scott makes some great points, and for added points he used a car analogy.

I should clarify - this article is about legal pricing and not about profitability per se or project management. My points re: task codes are in their use to establish prices. Task codes will have value related to project management and determining cost of delivery for a task and hopefully service, or more importantly over time, reducing the cost of delivery. This in turn goes to the profitability of work.

As an economist and a pricing expert, I find the current market fascinating. But I also have to live it in in a very practical way. Being able to price services at a task level is not a need I currently have or foresee for the majority of legal work I price. As most any reasonable economist will add - I could be wrong. We'll have to see what the data eventually tells us.

John Christenson said...

Excellent article Toby. You managed to articulate many of the thoughts and discussions that my work colleagues have had.

The attorneys we deal with for the first time are typically overwhelmed by the amount of detail and analysis that should be performed to ensure the defensive role of pricing you described. On the other hand, attorneys that have embraced the process and analysis have been able to create some impressive, proactive pricing proposals that have resulted in new work.

I would also like to add that many of the legal financial system providers have yet to develop products that comprehensively deal with all of the aspects regarding legal pricing and project management. This situation will hopefully improve over time.

I agree that it is a fascinating area to be working in.

Lee said...

To follow on from Scott's comments (and to try and gain points for another car analogy) when you go to a mechanic and say "My car is broken" you are looking for a solution, not a breakdown of which tools the mechanic used or how they found the fault against all odds. Good mechanics will usually identify the problem (and the solution) and then give you a call to talk to you about the cost of rectifying the problem. As a client you can then choose whether or not to pay. Unfortunately, it is all too common in law firms to receive instructions, provide a very rubbery estimate or quote and then produce a bill (after the work has been completed) that is 2 or 3 times the estimate and expect it to be paid.

This is the behaviour we need to change.

 

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