Ugly metaphor maybe, but true...

Commonly known as flesh-eating disease or flesh-eating bacteria syndrome, necrotising fasciitis, is a rare infection of the deeper layers of skin and subcutaneous tissues. Its relevance to legal services pricing? Almost every law firm that operates discrete practice areas suffers from an economic version of it.

So what do the symptoms look like? Profound frustration, resentment, indignation and lost profits. And the cause? Invariably one of two things.

Either, a partner in another part of the firm (often the client relationship partner) has presented another (often more junior) partner with a pricing fait a compli that falls well short of a fee that they would have regarded as appropriate. 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.

No-one happy...

The end result can be a bit of a shambles with no-one involved in the process particularly happy:

• The delegator who often has the relationship with the client and is intent on ensuring nothing and no-one jeopardises that relationship, resents having to justify their actions to the delegatee, taking the view that they personally are the best judge of these things.
• The delegatee resents having to subsidise someone else’s client relationship, particularly where it directly impacts their performance metrics and remuneration. The delegatee and their direct reports can become quickly disillusioned and resentment builds.
• A lack of both communication and a cohesive firm-wide approach to the pricing aspect of the clients’ relationship with the firm can leave the client being priced very differently across different parts of the firm. Expect a very negative response from the client.

Partners can be worse than clients...

This is one of those insidious costs that ‘flies below the radar’ for the simple reason that it is not quantified. Everyone knows that it occurs but it is one of those ‘too hard basket’ conversations, particularly in view of the fact that the principal offenders are often some of the most senior and forceful personalities in the firm.

In fact it is worse than an avoidable abstract fixed or variable cost because it has additional side effects that can be toxic and corrosive in terms of the firms’ culture, relationships within the firm and the clients perception of the firm as a cohesive unit.

I have had partners express the view that when it comes to charging a decent fee and preserving margins on work, the clients are the least of their problems. It is intra-firm pricing issues and behavior that do more damage than any hard-negotiating client. I suspect that this is a little bit of an exaggeration but the point is well made and is perhaps symptomatic of the level of frustration that the practice can engender.

It is the perennial debate in every firm across a wide range of issues; to what extent are we willing to cede some authority, autonomy and control for the greater good? Surely this is one aspect worthy of serious reflection.

Low-hanging fruit...

Let’s assume for a moment that this issue has the effect of attacking margins by 2% across the whole firm; not inconsistent with our observations. If the firm has a gross profit margin of 20% and a PEP (profit per equity partner) of £300,000 per annum, that profit could be lifted by over £30,000 a year by eliminating some of this aberrant conduct.

Okay, no-one is going to retire early on the strength of this addition to PEP. The point is that it is ‘low-hanging fruit’ and it is well worthwhile securing, and not just for economic reasons.

How does a firm tackle it? The answer lies in a broader issue that ails many law firms and that is a lack of pricing governance and policy and a lack of firm-wide pricing infrastructure. As a general observation, there is too much pricing autonomy within firms. The result is that departments and even individuals are allowed to do their own thing to an extent that wouldn’t be tolerated in many other enterprises.

Firms well understand the firms finance function and the marketing function and the business development function. Yet many do not have a clear view on what the pricing function should be or where it belongs. It is the Orphan Annie of law firm management, and yet we would argue that pricing is at the intersection of those functions and the glue that binds them.

Internal cannibalism of margin is just one of a number of challenges that could be effectively addressed with a greater focus on pricing governance.