2023 is going to be challenging.
At least that seems to be the consensus amongst managing partners and firm’s management boards, and few would have cause to disagree. Over the last few months, many have been dusting off and refreshing their contingency plans developed at the start of the pandemic.
So, which levers to pull. Everyone knows what they are – hiring freezes/redundancies, postpone moving to the cloud, shelve expansionary plans and lateral hires etc. Which leaves our favourite topic – pricing. “Done that”, I hear you say. I presume you mean an across-the-board rate increase of 11% (some more, some less)? Hmm, well, yes, that’s a small part of it.
Someone asked me recently if we were seeing a drop-off in our work with firms. Discretionary spend, early candidate for the cost cutting axe etc – and besides, presumably this ‘new age’ pricing stuff only works when things are stonking along, plenty of work, a chocker pipeline, relatively low client price sensitivity…
Well, history would suggest otherwise. In fact it is quite the opposite. When there is a burning platform, it would not appear to make sense to take a blasé approach to the one aspect of law firm operations that has the biggest single impact on the bottom line – pricing.
Validatum® was set up on 1 September 2008, with what in hindsight may have seemed to be appalling timing with the Lehman Brothers collapse and the start of the GFC 14 days later. And yet our busiest periods were then – and now.
So, let’s dispatch the notion that intelligent pricing is a fair-weather friend only. The acid test is whether it makes a difference in a bear market. It does. In fact even greater sophistication and awareness is required to navigate choppy waters.
There are broadly speaking four areas that a firm needs to tackle…
Pricing governance and policy:
The firm needs to debate and reach a consensus on such things as…
- A shared and consistently implemented approach to pricing
- Price policies that are well understood and universally enforced – for example do you prohibit colleagues in different disciplines from committing others to pricing arrangements on a project without discussing it with them first?
- Where do we set the dial in terms of partner pricing autonomy and discretion – a complete free for all, centralised micro-management or somewhere in between.
- Do we have strong pricing leadership in the firm, both at the top and at a practice area level?
- Do we as a firm have a preoccupation with turnover as opposed to profit? Which is more important to us and why?
- Price and market position disconnect – most firms do not understand that price is a powerful proxy for quality. Firms claim a certain market position vis quality of advice and service and then price below that, thereby undermining the message.
- Poor or non-existent triaging and ROI assessment of RFPs
- Poor or non-existent induction training on pricing – the blind leading the blind?
- Do you have a surgical approach to increasing rates, other than the banal and asinine annual rate review letter?
- Are your pricing, marketing and BD efforts synthesised?
Pricing Analytics & Reporting:
- Practice management software has historically provided plenty of data, but data on its own is largely useless unless it also provides actionable insights
- Is your firms' approach to pricing one that treats it as a science or a dark art – or maybe a bit of both?
- Fixed fee arrangements in particular suffer from high write-offs and poor realisation rates due to lack of historical analysis
- Any firm serious about utilising contingent or conditional fee agreements must invest in proper analytics capability, and not simply something cobbled together in an Excel spreadsheet
- Misaligned reporting dashboards that incentivise sub-optimal pricing behaviour
Pricing Skills, Resources & Pricing Execution:
- Do you see pricing as an administrative function or a legal practice and law firm management skill?
- A broad lack of price negotiation skills and a lack of awareness or understanding of the many pricing strategies and tactics available to lawyers, results in pricing that is often a poor 'fit' for the client and/or the firm.
- A lack of pricing collateral, templates, and pricing precedents
- Do you have a strategy and the skills to cope with the increasing involvement of procurement on the client side?
- Incomprehensible client engagement and pricing documentation is often focused on regulatory compliance and limitation of liability, but frequently falls at the hurdle when it comes to providing, clarity in relation to clients' most basic questions; "what are you going to do for me, who is going to do it, when will it be done and how much will it cost"
- Confidence is absolutely critical to good pricing behaviour. Do you set and negotiate prices confidently or from a perspective of fear; fear of losing the client and/or fear of losing the job?
- Do most of your lawyers still pluck figures out of the air based on the last job?
- Do you have an Excel pricing tool that was built internally, can only be used and understood by two people, and which most of your lawyers either don’t know exists or hate and won’t use.
- Are you aware that there is now readily available technology like Virtual Pricing Director® (which works with all the major PMSs including 3E and Aderant) built for the needs of the average busy and stressed lawyer and which, when combined with ‘people and process’ improvements can have a profound impact on profitability and client relations?
Clearly, these issues can't all be tackled overnight or simultaneously. Which issues are picked off and in which order very much depends on the precise status of pricing in a firm at any given point in time. There simply isn't a one-size-fits-all answer to that question.
Before riding off in all directions at once therefore, it can often be helpful for firms to do a pricing 'stock-take' first. "Where are we currently with your pricing? What resources do we have? What are we good at in the pricing space and where are we doing poorly? What parts of the firm are doing well on pricing and which areas are struggling? Why?"
This kind of candid stock-take can help to provide a solid platform for further decisions about pricing. If you would like a free copy of our Pricing Maturity Diagnostic questionnaire, drop us a note.
Richard Burcher, Managing Director