3/4/14

The Second Tier Pull on Pricing

Image [cc] Allen Sheffield
As an observer of the legal pricing market, I try to keep a keen eye on the underlying, economic forces driving changes. I have previously posted on the internal forces acting on in-house counsel to save money. And recently, I am seeing a stronger emergence of another aspect of this force.

To set the stage for this, I hearken back to previous comments on how clients are segmenting their work into first, second and third tier work. The thinking around this concept is that clients are implicitly (and occasionally explicitly) recognizing that not all of their work requires a Tier One solution. As a result they are applying more and more pricing pressure to their outside firms.

But what is the shape of this pressure?

Are they actually segmenting their work out and aligning their pricing sensitivities around that? It doesn't appear to be happening that way. One piece of evidence for this is that clients ask for "across the board discounts." Whatever discount they negotiate, they want it to apply to all of their work and to all timekeepers within a firm. Rarely do clients exempt out certain types of work or specific timekeepers from a discount. On its face, this shows clients are not thoughtfully segmenting their work by pricing tier.

You might say, "So What?" It just means they are getting better deals on all of their work.

Two thoughts:

First - This means clients are not necessarily making cost decisions based on value, even though the market claims they are. To put this into context, consider a client getting both Tier 2 Litigation work and Tier 1 Tax work from the same firm. These two services have vastly different value propositions for a client. Run-of-the-mill litigation is something a client must tolerate, but it is not a make-or-break situation. Whereas top-line tax efforts can easily reduce a client's tax burden by substantial amounts. Yet more often than not, clients will lump these two together under the same discount arrangement.

Second - Guess which work drives the discount level? And that's the moral of this story. Clients, or more accurately, the market is pricing most services using a Tier 2 value filter for all of their work.

This is further evidence of the chaotic nature of pricing in the legal market. Pricing everything with a Tier 1 filter was not logical, but neither is this Tier 2 approach. As an economist, I yearn for a rational pricing market for legal services. Heck - as a someone in legal pricing I want it too. My prognostication is that it is going to take awhile before we see that - if we ever do.

In the meantime, I remain entertained by all of this.

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3 comments:

Sam said...

Discounts should be straightforward and based on the client's needs and financial profile. Otherwise it become unfair and just plain confusing.

Keith Maziarek said...

I agree with the blog post--price should align with value, and one would think that corporations would understand and agree with that, because they tier their pricing in a similar fashion for the products or service they sell. Nobody likes to leave money on the table if there's a measureable market value the goods/services in question.

Framed appropriately, this can be a productive conversation if the client really wants to foster an ongoing relationship, but many times they just need to drive savings, which I understand has its place in the equation. In such cases, I find many times that it's the law firm lawyers that are afraid to defend and justify the value of their Tier 1 work, which can be done in a compelling manner in any number of ways. I agree this will change over time...likely a long time, but it will evolve...

Steve Lauer said...

Toby-

I'll play your game and give you two thoughts in response:

First, combining different types of work in one "award" can lead to greater efficiencies, thereby justifying a greater discount than might be possible by awarding only one or the other types of work included in that award. The two types need not be the tiers that you describe, but simply two distinct types of work that a single firm might be able to handle appropriately. We did this in the RFPs that we issued at Prudential Insurance in 1996.

Second, if the pricing of the combined work doesn't reflect the distinct value propositions that the types of work represent, I ascribe "fault" for that to the firms that failed to articulate an appropriate fee arrangement. Rarely if ever does the corporate law department propose a fee arrangement; typically it responds to an arrangement proffered by outside counsel.

 

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