Law firms contemplating or in the throes of a merger, ignore or pay scant attention to harmonising the merging firms pricing cultures, governance, analytics and execution at their peril.
The trend towards law firm mergers, particularly in the UK market, continues apace and there is no reason to believe that it will slow down. Quite the opposite one suspects.
Synthesising two law firms represents a huge challenge, even if the balance sheets and P&L accounts are relatively harmonious. The challenges associated with blending culture, values and behaviours are well understood.
Less well understood and in fact often largely ignored is the compatibility of the two firms pricing cultures, resources, governance and execution. Most law firm partners and management would acknowledge that there is often little cohesion on pricing in their own firm, let alone adding another firm to the mix.
In a recent blog post ‘So You’re Going To Nail The Pricing Business This Year?’ we wrote about the three pillars of pricing best practice in law firms; governance, analytics and execution. Very few firms have made a concerted effort to excel in all of these areas. To have done so, represents the exception rather than the norm, at least for now.
It follows therefore that bringing together two or more disparate firms will only amplify and aggravate any existing weaknesses in either or both firms approach to pricing, particularly where the firms are cross-border which brings additional cultural, language, 'customary practice' and regulatory asymmetry.
When it comes to operational issues, there is in our view nothing that trumps pricing as the single most important factor impacting firm turnover and profitability. This is not to decry the importance of managing fixed and variable costs or the importance of business development and other such initiatives. But, at the end of the day, they count for nothing if we can't extract by means of a fair pricing structure, the maximum return from the value we are delivering to our clients.
In another recent blog post, ‘Pricing Cannibalism aka Necrotising Fasciitis’ we wrote about the internal relationship damage that is wrought and the destruction of revenue and profitability as a result of an unfortunate characteristic of most firms; pricing dissonance between partners.
We gave a couple of examples including a partner (often the client relationship partner) presenting another (often more junior) partner with a pricing fait accompli that falls well short of a fee that they would have regarded as appropriate (“You will do this job for X£/$/€ because they are a good client of mine and I don’t want them upset”).
Or, a client accustomed to certain price expectations based on dealings with one part of the firm is not properly managed into another part of the firm where higher (or lower) pricing is the norm.
We have not attempted to quantify the damage that this inflicts, not only in financial terms, but also in terms of inter-partner, inter-office and inter-departmental relations. However, every instinct and experience tells us that for a large firm, it would easily measure into the hundreds of thousands of £/$/€ a year, possibly more.
It does not require a stretch of imagination to see the potential for a pricing train wreck if the fusion of two or more law firms pricing cultures, governance, analytics and execution is not taken very seriously. How might such chaos manifest itself?
(a) Vast pricing anomalies and inconsistencies between individual partners
(b) Clients experiencing irreconcilably disparate treatment on pricing from different partners and different practice areas within the firm
(c) A burgeoning ‘no-one is going to tell me how my clients will be charged’, mentality
(d) A serious impediment to the sort of seamless fusion that both firms will be striving for post merger
(e) Large volumes of revenue and profit ceded for no good reason
(f) The development of 'grey markets' within the firms international network
This aspect of the merger of law firms not only represents a potentially significant risk, it also represents a great opportunity. Increasingly, firms are starting to take the whole issue of pricing far more seriously. The new post-merger firm has the opportunity to start with a clean canvas and completely reinvent itself under the banner of pricing capability.
Many firms view merger as desirable if not a necessity in the new trading environment. However, most of the research around this issue would suggest that clients are for the most part underwhelmed and relatively indifferent one way or another, unless the merger will produce tangible benefits from their perspective. Having the ability to offer clients post merger, a sophisticated, innovative, flexible and client centric approach to pricing could be exactly what the clients are looking for.
We have the knowledge, expertise and professional sensitivity to undertake an analysis from which we produce a Pre-merger Pricing Report for the merger parties that will provide deep and actionable insight into pricing attitudes and practices in the two firms.
This report and ancillary advice provides a robust platform to enable the parties to address early and effectively any pricing attitudinal and/or execution asymmetry and inform the partners and management on areas for potential improvement.