(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.
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.