The global market environment

The best that can be said about most of the markets in which firms operate is that they are comparatively flat, with capacity almost universally exceeding demand and overall fee earner productivity declining.

No country or market has a monopoly on this state of affairs, with law firms in the United Kingdom, continental Europe and the United States all bearing the brunt of this fundamental and irreversible recalibration. Only in parts of Asia, Africa and Latin America has there been a slightly more positive outlook with high-growth economies driving demand for legal services.

The need for most firms to chase a relatively static level of demand and therefore differentiate themselves has led to an increased focus on pricing and delivery.

As margins have come under pressure, so the need to manage the margins has become more acute. 'Near enough is good enough' is simply no longer good enough from either the client's or the firm's perspective.

At its most basic, profitable business is about selling services for more than they cost to produce. When firms' profit margins come under attack, they traditionally seek to address this problem by stripping cost out of the business. This manifests itself in a variety of initiatives - from redundancies and reducing premises costs to process reengineering, outsourcing and satellite production facilities.

Recognising the need to address the revenue part of the equation, many firms have sought to do so through intensive marketing and business development strategies, and the acquisition of more clients and work through organic growth and/or merger.

However, revenue is not the same as profit. Some firms are at last understanding the difference between the two. Pricing sophistication is a potential game changer. It is the only initiative within the law firm management paradigm able to deliver immediate and quantifiable financial improvement from the same clients and the same work.

The importance of pricing

Pricing pressures and challenges for the legal profession have escalated over the last few years. These are the result of economic pressures and regulatory changes, the proliferation of diverse delivery models, better informed consumers, the accessibility of web-based information and resources and the increasing application of disruptive technology.

As a consequence of these continuous developments, most clients now expect:

• More pricing and payment options
• Greater involvement and engagement in the pricing aspect of the relationship
• Greater pricing transparency
• Greater pricing certainty and budgetary predictability
• A stronger correlation between price and perceived value
• More risk sharing around fees

In order to remain profitable, competitive and relevant in a rapidly changing legal environment, all lawyers, regardless of where they practice, what size firm or what field they practice in, must rethink their pricing strategies. This innovation process goes well beyond merely tinkering with hourly rates. A fundamental paradigm shift is required.

A sophisticated approach to pricing should have two objectives; the first is to maximise profitability and the second, and equally important is to use pricing intelligently to significantly reduce the ubiquitous tension in the pricing aspect of the relationship between law firms and their clients. The business case is irrefutable.

"Great companies do pricing very well. The link between pricing and profitability recurs both anecdotally and in more detailed analysis. One study suggests that pricing has between two and four times the potential to influence profitability relative to other business levers. Companies that actively pursue pricing as an important part of this strategy typically outperform industry peers on several financial metrics…"

Deloitte Review

"Numerous studies have confirmed that pricing has a substantial and immediate effect on company profitability. Studies have shown that small variations in price can raise or lower profitability by as much as 20% to 50%... Superior pricing is almost always based on skill. The companies we found that had achieved better pricing all had top managers who championed the development of skills and price setting (price orientation) and price getting (price realisation)…"

MIT Sloan Management Review

Intelligent pricing is no longer in the nice-to-have category of law firm management and operations. It is not even solely a matter of useful differentiation and competitive advantage. Increasingly, it is becoming essential to the relevance and viability of law firms.