A small but growing number of firms have identified both the problem and the solution. Pricing capability and sophistication at a firm-wide and individual partner level is being harnessed and for those firms it is having a swift and significant impact.
"Finance functions continue to identify 'Pricing and Profitability'…as their top future priority (85% - a 10% increase on the 2014 survey results)".
This is one of the key findings from the latest PwC Law Firms' Survey.
The PwC report reveals that the more successful and profitable law firms in the top 100 have identified the fact that pricing sophistication has the potential to help address the needs and concerns of an increasingly discerning and critical client base whilst at the same time, significantly improve margins and profitability notwithstanding continuing downward pricing pressure.
The report concluded that; "Pricing continues to be a top priority, with firms recognising that a strong understanding of their clients is critical to successful fee discussions. Providing partners with the right tools and methodology for pricing decisions is also considered key.
In our experience, this depth of understanding of the client is a critical precursor to being able to create and articulate to the client an effective pricing strategy or methodology on a particular matter. To the extent to which consideration is given to pricing at the outset of a matter, most of that time and effort is devoted to pricing the job as distinct from pricing the client.
Pricing is contextual and current pricing methodologies and attitudes that are predicated on a one-size-fits-all assumption (for example, a fee earner having a single hourly rate) are profoundly flawed. Such an approach results in unnecessary levels of client dissatisfaction and perversely from the firms' point of view, the failure to monetise the full value of what the firm is often delivering.
In the context of marketing and business development, the report noted that; "A strong understanding of the client's approach to pricing was listed as a key factor in firms' ability to manage pricing and profitability. High performing marketing and business development teams are providing their partners with clear information to support targeting and pricing decisions, including gathering and maintaining information such as clients' purchasing sophistication and perceptions of value."
Against this background, increasing numbers of firms have taken a conscious decision to escalate their pricing and profitability capability. The report found that within the last 12 months more than 50% of all top 100 firms had completed a business improvement program, two significant drivers of which were 'Revenue growth/Pricing' and 'Profitability Enhancement'. These are no longer considered to be items in the 'nice-to-have' category; they are essential.
Firms often find themselves juggling multiple initiatives. Prioritising these initiatives can be an ongoing challenge against the backdrop of finite personnel capacity, cash and other resources. Inevitably this involves a balancing of short, medium and long-term initiatives.
One of the major of advantages to firms of a pricing improvement initiative is the return on investment timescale that falls squarely into the short-term category. In our experience, the payback begins immediately in relation to partner pricing confidence and capability. The PwC report found that even IT projects whose objective is improvement of matter pricing, have an average ROI timescale of only four months.
The survey asked respondents to express their views in a structured manner around how well they felt the partners were executing the pricing function relative to the importance of those matters.
Two of the matters that were identified as very important where:
- "Partners have a good understanding of clients approach to pricing e.g. purchasing sophistication, perceived value and price sensitivity".
- "The firm has a clear and well-controlled approach to pricing decisions, requiring consultation at practice level and above for key decisions"
Alarmingly, the report concluded in relation to these and other disciplines that; "…few firms are confident in their ability to manage these activities effectively and, in particular, to take into account the estimated profitability of matters when making pricing decisions".
Not surprisingly, lack of pricing governance, granular insight into profitability and a lack of pricing execution sophistication at partner level continues to result in what most firms would regard as an unacceptable level of what the report referred to as "Unplanned fee income write-offs".
Again, the figures are sobering, particularly when one considers them against the backdrop of what are already significantly reduced margins compared to even a few years ago;
- <5% of fee income (19%)
- 5% to 10% of fee income (23%)
- 10% to 15% of fee income (29%)
- 15% to 20% of fee income (22%)
- >20% of fee income (7%)
In our experience, firms in the lower half of the UK top 100 are over-represented in the higher write-off categories.
The principal culprits for these unplanned fee income write-offs were poor matter management and related time recording (89%) and partners not billing for changes in scope (84%). Both of these failings are eminently capable of being remedied through a combination of better policies, systems, processes and commitment to partner pricing capability professional development.
Concerning though the report's findings are, it is important that we don't lose sight of the positives. A small but growing number of firms have identified both the problem and the solution. Pricing capability and sophistication at a firm-wide and individual partner level is being harnessed and for those firms it is having a swift and significant impact.
The other important take-out from the report is that pricing capability and sophistication is not the exclusive domain of any particular sector of the market. It is accessible by any firm with the appetite and a commitment to do so.