A common feature of international law firms is a dissonance between the firm’s organisational and operational structures ... internecine price competition and clients feeding on the carcass of a firm with no clear cross-border pricing strategy...
We were commissioned by Managing Partner magazine (www.managingpartner.com) to produce this article for the April 2014 issue and it is republished with kind permission.
A common characteristic of large law firms seems to be a dissonance between the firm's organisational and operational structures and the way in which those firms with an international or at least multi-office footprint develop, deploy, execute and control pricing strategy across the organisation. The result can be internecine price competition and clients feeding on the carcass of a firm with no clear international pricing strategy.
It is helpful to frame the discussion by reference to the three main recognised operational paradigms that underpin these firms.
These firms centralise their management decisions and most of their assets at their head office. These firms treat the world market as an integrated whole and focus on the need for global efficiency. Although these firms may have considerable global holdings, management decisions with firm-wide implications are made from the head office. This approach to globalisation reflects an ethnocentric attitude.
These firms eliminate structural divisions that impose artificial geographical barriers. The trans-national firm expects overseas offices to contribute actively to the development of the firm's capabilities, to develop knowledge and share it with worldwide locations, and to use both centralised and decentralised methods to promote interdependence and specialisation of units. The transnational form may be the ideal way for a firm to "think globally" and "act locally." This type of firm reflects a geocentric attitude.
Multi-domestic firms decentralise management and other decisions to the local country. This type of firm doesn't attempt to replicate its domestic successes by managing foreign operations from its home country. Instead, local partners manage the business and strategies are tailored to that country's unique characteristics. This type of globalisation reflects a polycentric attitude.
I'm going to outline my thoughts and observations from the firm perspective and then the client perspective.
There are large law firms that operate predominantly along multi-domestic lines but try to exercise centralised control over the pricing function. Conversely, some firms exhibit a multi-domestic approach to pricing but in all other respects management, governance and policy is relatively centralised.
Whether this asymmetry is a good thing, a bad thing or makes no difference at all is something that is probably worthy of research and analysis. But it still begs the question, whichever model a firm with a multi-office footprint, particularly international, chooses to adopt, how should the pricing function be treated?
At one end of the continuum we obviously have the potential for a substantially centralised pricing function where the satellite offices are effectively told what they are going to charge and how that is to be implemented.
At the other extreme, the satellite offices exercise almost complete autonomy around pricing levels and execution.
The 3 pillars of pricing best practice...
As with most things, the better approach is one that avoids those two extremes so if the conclusion is that both the head office and the satellite offices have a role to play, what is a logical demarcation of roles?
I have written previously about the three pillars of legal services pricing best practice. These comprise pricing governance, pricing analytics and pricing execution. The terminology should be reasonably clear but to elaborate:
• Pricing governance refers to decisions such as how pricing is used to assist the firm to achieve its strategic objectives, what role pricing plays in the firm's messaging, where the pricing function sits within the firm, where pricing authority and accountability resides, policy decisions about pricing mandates (write-off approvals and thresholds above which approvals are required), policy decisions around the interplay between pricing on the one hand and the marketing and business development function on the other hand, etc.
• Pricing analytics refers to the firm's human and IT systems capability and in particular the ability to collect, analyse and disseminate within the firm actionable data that is integrated with legal project management initiatives and that sheds light on profitability as measured by fee earner, practice team, sector, client, matter, office and region.
• Pricing execution refers to the skill set of individual partners and the resources available to assist them with the challenges associated with crafting, documenting, communicating, negotiating and where necessary defending sophisticated, innovative and imaginative pricing proposals on a client by client and matter by matter basis
For most firms, the best outcomes will be achieved where pricing governance and pricing analytics reside with the firm's head office but pricing execution sits fairly and squarely within the remit of each individual office. Even if profitability objectives, margins, realisation rates and other KPIs are imposed on the satellite offices, satellite offices should be left to their own devices as to how they achieve them, a major component of which will be pricing execution.
Centralise v decentralise...
Governance and policy require centrality and a cohesive approach. This certainly does not mean that partners in satellite offices should not have input into the development of pricing governance and policy. Obviously they should. However, someone needs to exercise oversight in relation to those issues and the head office is probably best placed and best resourced to do this through clear articulation and enforcement.
Similarly, centralisation at the firm's head office of the pricing analytics function makes sense, not only from a resourcing point of view but because analytics fulfills an important role as an early warning system for departures from agreed pricing governance and policies.
However, pricing execution has to be deployed by the partners on the ground. These partners understand better then anyone the subtleties and nuances of the market in which they operate, the vagaries of their client base, prevailing macro and micro economic conditions, cultural and socio-economic factors and 'what works'.
Too frequently however, these same factors are advanced as excuses for sub-optimal pricing behaviour. Everywhere I go, partners tell me that their market/region/practice area is more challenging than most and that their clients are particularly demanding and difficult. This is often followed by a comment in hushed tones to the effect that, “…the guys in [insert name of head office] have got it easy, they just don't understand what we have to deal with out here!"
Markets are unique...
The differences between markets must be acknowledged and recognised but it requires strong pricing leadership within each of those satellite offices to prevent the making of excuses from becoming the default justification for poor pricing behaviour.
The critical role of head office is to ensure that partners operating at the far-flung reaches of the firm are imbued with the skills, pricing confidence, capability, resources and support, thereby equipping them to craft their own pricing solutions for their own markets rather than prescribing solutions from afar. As Winston Churchill said in 1941, “…Give us the tools and we will finish the job!"
So to conclude, from the firm's perspective too much decentralisation and autonomy results in a fragmented pricing free-for-all that can only ever be a shambles, compromising revenue and profitability. 'Viva là difference,' but a steady hand on the tiller from head office is essential.
Conversely, a centralised approach to pricing necessitating the micro-management of partners at satellite offices not only creates a great deal of resentment, it actually does nothing to assist those satellite offices to achieve their financial and related objectives. In fact it will often serve to stymie pricing creativity and ingenuity and compel partners to force a pricing round peg into a square hole.
And the client perspective...?
Which brings us to the client perspective. What I have described so far is a very inward looking view. My comments and observations so far are completely irrelevant to clients. Clients are simply looking for best value and they very often don't care too much where they get it.
As globalisation or at least internationalisation has simultaneously impacted law firms and their clients, it has dawned on many companies with an international footprint that their similarly expanded law firms have the capability to deliver what the company requires from more than one location.
This in turn has given rise to comments such as; “…yes, I know that we have always dealt with you in New York for much of our North American operation and that you as our relationship partner are based in New York where I am used to paying $700 an hour but it has just occurred to us that you have quite a significant operation in Sydney, Australia so why can't we get much of the work done there at $400 an hour?"
To be clear, I am not talking about the trend towards third-party legal process outsourcing, or on-shoring or consignment of back-office function to a relatively low-cost location. I am talking about the migration of work between major offices of the firm that, like the laws of physics concerning water and gravity, always wants to find its lowest level.
Sorry, you're my client...
Protestations to the effect that, “I'm sorry, it doesn't work like that, you are a client of the New York office and so you have to pay the New York rates", are not well received by clients. They do not care that your ambitious international expansion plans might actually backfire and result in cannibalism of your existing revenue stream. In fact, your firm's affliction with a sort of pricing necrotising fasciitis is something they will happily exploit.
Many international firms have found themselves increasingly caught out by this conversation with little to offer by way of justification or viable alternative. And there is a good reason for that; there isn't really a justification that makes any sense to the client.
Firms are however on much more solid ground pushing back against an even more opportunistic and aggressive request and that is, “We want this work done by the people at your London office because that suits us but we want it done at the same headline rates that apply at your Kuala Lumpa office".
That is about as rational and reasonable as booking a holiday in a standard hotel room and expecting to occupy the presidential suite. The answer must be “No, we can offer it to you at two different prices; you choose where you want it done! The work undertaken in our London office by our London people at KL rates is not one of the options".
Inter-office workflow osmosis...
Unfortunately, the free flow of work between offices is often impeded by issues that have nothing to do with what is in the best interests of the client such as the firm's own internal meritocracy structures, reporting and remuneration structures and (please don't shoot the messenger), partner's egos. Again, at the risk of stating the obvious, these are of absolutely no interest to clients.
But Big Law's whole approach to pricing needs to change and change rapidly. When clients become aware of imaginative, innovative and client-centric pricing and payment alternatives being provided by viable competitors, maintenance of the pricing status quo becomes virtually impossible, as some have already discovered.
So, what to do?
The challenges are systemic and the solutions are multi-faceted and beyond the scope of the remainder of this article. A soon to be published follow-on article will look at the solutions in more detail. For now, a 'taster' from the next article;
(a) We can learn a lot from other global industries/professions and their large players who have had to deal with similar issues.
(b) The solutions must be built from the client perspective, not the firms.
(c) Most of the solutions are not popular with firms because they require them to approach the allocation of resources and the way that they construct their internal meritocracies very differently from the way that they do at present.
(d) Part of the answer is the construction by the firm of proposals that compel the client to make trade-offs.
Notwithstanding these significant challenges, they are surmountable. Unlike some, I don't under-estimate the capacity or willingness of Big Law to adapt. Nor does such adaptation have to be synonymous with declining profitability. Indeed, I remain firmly of the view that even the most profitable firms are still leaving money on the table because they are not using the power of pricing to its full potential.
Note: Throughout this article, I use the phrase “head office" to signify the office where the preponderance of the firm's people involved in management and governance as well as the bulk of the management infrastructure is located. Not always, but invariably, this will be where the firm has its origins. By definition, “satellite office", means the firm's other offices. I want to stress that I do not use the phrase “satellite office" in any nugatory or pejorative sense.