With the ever-increasing debate around hourly billing and alternatives, and savvier and more demanding clients, professional services firms – and in particular, law firms – need to get smarter about how to manage pricing if they are to remain profitable.
It seems inevitable in some areas of law (insurance, property) that it’s simply a race to the bottom when it comes to fees, but there are things all firms can do to shift the focus from price to value, and avoid discounting their profits away.
JMA spoke with Libby Maynard, Head of Pricing and Legal Project Management at Clayton Utz, for some pricing tips and to learn how even small firms can get on top of the pricing challenge.
Start with the Three Cs
Central to understanding and developing rigorous pricing practices is what Libby calls the Three Cs:
- cost of production
- client expectations
- competitive landscape.
She talks about these three Cs in every pricing conversation she has.
As a starting point, “firms need to understand, on an hourly basis, what their labour costs are, and what their allocated overheads are,” explains Libby. Alarmingly, she says that many firms don’t know what their cost of production is.
Her advice to small firms is that you need to work out what it costs you to deliver your legal services.
Evolving the process from identifying costs to defining value is more complex, because the definition of “value” will differ between clients, matters, and firms. But as Libby explains, “there are core elements that make up a big part of the value equation: scoping, estimating, and then delivering to an agreed scope.”
The strategic element of pricing is in understanding the needs of your clients, and then aligning the mix of pricing alternatives to those needs to deliver value.
It’s about giving your clients choice.
Pricing policies must ensure that the relationship with your client, and the performance and potential of the account as a whole, are factored into any pricing decision.
Libby notes that, more and more, the costs outcome is as important to clients as the legal outcome: they don’t want surprises – they want predictability.
Innovation and new approaches can play an important part in value creation for those firms in commoditised areas, suggests Libby. “These firms can analyse and review the way they produce the work to identify those areas where they add true value, and those that are more competitive and commoditised.”
The first sign that a firm has a pricing problem is usually that they are writing-off a lot, and they have trouble recovering the fees at the end of a matter, in Libby’s experience. This is likely because they have under-estimated, or they haven’t estimated at all, and haven’t managed the client’s expectations.
She also sees a strong correlation between the increasing demand from clients for capped fees, and the increase in write-offs for firms, because they are not disciplined about working to a plan.
Despite a general perception that pricing paradigms must significantly change for firms to stay competitive, existing fee structures will not fundamentally change.
“Essentially, there just aren’t that many options” says Libby. “It’s hourly rates, or fixed or capped fees. You might offer variations, such as tiered rates, but my experience is that most clients will go for hourly rates, or a fixed or capped fee.”
In addition, the common practice of time-recording will not disappear any time soon. “Firms will continue to shadow-record”, Libby says, “and will still need to apply hourly rates to be able to scope and estimate.”
Libby points out that while firms may have to scope and estimate based on time, they won’t necessarily price based on time.
The future of price management
The pressure for law firms to change their approach to pricing will not abate, and only those firms that respond strategically will come out on top.
“The market is becoming so much more competitive, and clients are becoming much more sophisticated. Firms must have a coordinated response to that.”
There are many opportunities for firms of all sizes to take a proactive role in managing pricing – you don’t necessarily need to appoint a dedicated pricing specialist, especially if you’re a smaller firm. Remember to get the basics right, and understand what your clients what.
Get in touch for pricing advice and a value delivery strategy to impress your clients and grow your firm.
Free online resources
Article by Amy Burton-Bradley, Julian Midwinter & Associates: ‘Scoping work simply’
Tips and articles by Richard Burcher at www.validatum.com/articles
Articles and a helpful blog by Jim Hassett (US based legal project management consultant) at www.legalbizdev.com/projectmanagement/
Woldow, Pam, Legal Project Management in One Hour for Lawyers. American Bar Association, 2014.
Lambreth, Susan, The Power of Legal Project Management: A Practical Handbook. ABA Book Publishing, 2014.
Never miss a post
Stay up-to-date with business development insights and tips from our blog.
Remember, nothing is so complex that it cannot be explained simply Albert Einstein was spot-on when he said “nothing is so complex that it cannot be explained simply”. Tenders, bids, proposals, and informal pitches for business are not times to show how clever and capable you are by using legalese (I’m looking at you lawyers), […]