As pricing analysis, policy and strategy becomes increasingly important for firms competitiveness and profitability, they are looking for increased expertise in the area, new breed is very slowly emerging – the Pricing Manager/Pricing Director.
’10 Jobs That Didn’t Exist 10 Years Ago’
Forbes magazine recently ran an article entitled, ’10 Jobs That Didn’t Exist 10 Years Ago’. It is a bit of a cliché but everyone understands the concept that jobs that could not have been conceived of a few years ago, emerge from the employment primordial ooze to address the needs of the day.
The article cites as examples; app developer, market research data miner, educational admissions consultant, millennial generational expert, chief listening officer (I kid you not!), cloud computing consultant, elder care consultant, sustainability expert, user experience designer and social media manager.
Indeed, we could add to this list without any hint of irony, international legal services pricing consultant.
For the legal profession, a new breed is very slowly emerging – the Pricing Manager/Pricing Director. As pricing analysis, policy and strategy becomes increasingly important for firms competitiveness and profitability, they are looking for increased expertise in the area. This is proving to be a huge challenge because the skill-set for the role is a rather unique one, falling as it does in a sort of no-man’s land between finance, business analytics, business development, marketing, sales and delivery/performance of the legal service.
What makes a good pricing manager?
There is no shortage of financial and analytical skills in well-resourced firms but what is often missing is the ‘bridge’ between this analytical approach and the subtleties and nuance that frankly only an experienced practicing lawyer can bring to the analysis.
It is often said, and I agree, that pricing is a blend of art and science. Synthesising the art and the science of pricing is where the real alchemy occurs; turning base capabilities into something precious and very valuable from the firms’ perspective.
Little wonder therefore that people with that combination of skills, qualifications and experience are like the proverbial ‘rocking-horse droppings’; thin on the ground.
AFAs driving need for more pricing sophistication..
One key factor that is driving change is the increased emphasis on alternative fee arrangements (AFAs). Many lawyers think that this usually means fixed fee arrangements. It can do, but there are at least fifteen distinct strategies that could be characterised as AFAs to say nothing of the almost infinite number of combinations of these and their variants.
According to Altman Weil’s 2011 Chief Legal Officer survey (USA), AFAs now account for about 14% of all legal fee revenue. This is still small compared to the 86% billed on an hourly basis but it still measures in the billions. More importantly, all the research shows that the proportion of AFAs is growing, albeit slowly.
A theme that I have advanced for years is that pricing (by which I mean assessing an appropriate fee, negotiating and communicating the fee to the client and constantly managing the pricing aspect of their relationship), is a skill, not a mindless administrative function.
In the good old days of hourly arrangements with rates that went up every year, it did not require sophisticated financial analysis to send a bill that multiplied each lawyer’s hourly rate by the number of hours spent. But to make AFAs profitable, law firms need to spend a lot more time thinking about pricing. Failure to do so will produce poor outcomes for the firm.
Why does it often go wrong?
There are several reasons firms have for example had very mixed results with the profitability of their fixed fee arrangements:
- Inadequate historical data mining to provide a foundation for new proposals
- Failure to adequately scope the work
- Failure to apply even rudimentary legal project management disciplines to the performance of the work
- Failure to manage scope creep
- Failure to continuously manage the clients price expectations throughout the job
- A lack of understanding of behavioural economics and pricing psychology
Do we need a pricing manager? What is the alternative?
So, do we need a pricing manager, you are asking yourself? In mid to large firms, it should be given very serious consideration. But this comes with a significant caveat. Top pricing managers have a very unique and very valuable skillset for the reasons I have outlined. Demonstrably, the right combination will without any doubt at all, generate more profit for the firm than most of the firms’ partners. This is a role that will grow in stature and importance within firms over the next few years. Expect therefore to have to pay commensurately.
Okay, that’s not an option right now, what do we do? First and foremost and irrespective of whether creating a pricing manager role is contemplated, partners and senior lawyers need to learn pricing skills. It is one of the great challenges associated with legal services; the sales and marketing, pricing and service delivery functions are all inextricably intertwined.
Whilst a pricing manager can be a very valuable resource available to partners, they can never be a substitute for partners having a sound working knowledge of pricing disciplines. At the end of the day, they are the ones who need to be able to have those critical conversations with the client.
So, whether you are a small firm, a large regional or national firm or an international firm, up-skilling partners in pricing competence and confidence will pay enormous dividends, such that the firm may then have the confidence to appoint a dedicated specialist to help take the partners to a new level of pricing capability. But do not make the mistake of thinking that the pricing function can be successfully centralised and that as a partner, you will ever be able to (or want to) leave the pricing function to someone else.