Over the past 18 months, many large law firms have hired a director of pricing, according to a report published recently.
The report, undertaken by ALM Legal Intelligence and entitled ‘Pricing Professionals: Essential to Law Firms, An Ally to Clients’, also shows that 38 per cent of the firms polled have ‘made this job a dedicated role within the firm’ and that over half of firms include a pricing professional within their senior leadership team.
Indeed, here at Totum we have seen a huge rise in the number of pricing roles we have been asked to assist with.
So what has caused this trend?
A primary reason can be traced back to the closing months of 2008 when the recession began to bite. Law firms already knew they needed to become more commercially oriented, including addressing outdated pricing structures. But the realisation by 2009 that we were facing a global recession that would impact all aspects of the business world, accelerated that change.
For CEOs, driving shareholder value would become ever-more critical with an increased usage and deployment of professional procurement teams. Such steps would combine with broader economic factors to profoundly alter the relationship between law firm and client.
‘Clients are looking to ensure they are getting maximum value for their legal spend, are seeking budget certainty wherever possible and want clear visibility of the status of their work by external providers with a no-surprises working relationship,’ says Darran Stevenson, Head of Commercial Analysis at Berwin Leighton Paisner LLP.
When it comes to fees, the power has shifted dramatically in favour of the buyer. No longer do the sellers of legal services have carte blanche to set the price on an hourly basis. Now they must consider the real value to the client of the services delivered.
Despite the shifting relationship, the need to retain clients and sustain long-term revenue and profit has become a huge priority for law firms everywhere. Consequently, pricing strategy has been placed firmly at the top of the agenda list at every partner’s meeting.
So what are law firms doing to get ahead? How can they gain and maintain market share while also getting their pricing management right?
With the downturn, all firms looked to protect profits. Costs have been cut, often painfully, and reactively, by law firms. However managing expenditure can only go so far. Firms also needed to focus on delivery models to drive top-line growth too.
At first lawyers started to offer simple discounts to clients against headline rates or based on volume. Perhaps predictably, the impact of these discounts on profits and resulting low margins placed great strain on cash flows.
So in more recent years lawyers have had to approach pricing in a more innovative way. This has meant focussing on what the client wants, and the client’s perception of commercial value. The lawyer needs to understand how the client – not the lawyer – perceives value. If the client sees value in a particular piece of advice (e.g. on helping to solve a complex problem, avoiding or settling litigation), then price accordingly. The same goes if the client's perception is that the service is routine.
‘Pricing needs to be flexible with differing techniques adopted for appropriate packages of work,’ says Stevenson. ‘To remain competitive firms will have to adapt the way services are provided and challenge their thinking around the resources and delivery models that are deployed. Pricing specialists working closely with process improvement, project management and business development specialists will play a key role in supporting this change within the sector.’
Clients too are keen to see their lawyers engaging in project management and process improvement techniques in order to help them to manage their legal budgets, and this is where finance professionals can provide a great deal of partnering support to legal teams and other areas of business services to drive change in this area.
‘Today's management professionals are bringing with them some well-honed skills and experience gained from outside the legal sector, particularly from the outsourcing industry where margins tend to be thin,’ says David Thomas, Head of Legal Service Delivery at Berwin Leighton Paisner. ‘Today's professionals are increasingly adept at financial modelling, performing trends analysis and taking advantage of opportunities to generate incremental fee income using established project management techniques as they go.’
Effective pricing is now an essential ingredient of a successful law firm and it needs to be on the agenda at partners’ meetings for small and large law firms alike.
Laurence Kaye, Digital Media Partner at national law firm Shoosmiths, says, ‘Before pricing a piece of work, put yourself in your client's shoes and ask yourself - honestly - where is the value I will get? It is likely to lie in a combination of factors, whether in saving the client time and money, "just" managing overflow or, alternatively, getting a “business critical" job done. The value may also be personal to the client, such as building an in house lawyer's reputation within his or her organisation. Then rank all these value points and build the pricing model from there.’
Looking to the future, it is clear that the role of pricing specialists is not likely to disappear anytime soon, with the majority of firms predicting that their pricing function will grow over the next 12 months.
As for today, law firms need to deal with some major pricing issues now or risk falling behind their peers. Those that respond quickly will almost certainly strengthen their financial position internally and improve their competitive edge.