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Pricing legal services with purpose and confidence

Process improvement, productivity gains, pricing strategies and project based legal service delivery: responses by legal service providers to the competitive pressures of today’s legal services market can be placed into these four broad categories.  Out of the four, pricing strategies seem to generate the most heat.

Alternative fee arrangements becalmed

The demise of the billable hour has long been predicted by many, but it will still be around for quite some time yet.  This is not necessarily a bad thing.  There needs to be a range of pricing methods, including the billable hour, which can be offered to meet particular needs of different clients and matters.

Recent surveys of legal market trends show the growth in popularity of alternative fee arrangements (AFA’s) seems to have stalled somewhat over the last year or so.  While consumer client’s in particular are more appreciative of fixed pricing, commercial purchasers of legal services appear a little more ambivalent.

Richard Susskind has suggested that this is because corporate counsel have in fact seen relatively little in the way of cost savings by signing up to fixed pricing, the most common form of AFA (see ‘Tomorrow’s Lawyers’ p19).  Others have suggested the ambivalence simply reflects the background of corporate counsel, who started out at private practice law firms whose business model is based on the billable hour – a case of preferring the devil they know.

Economic principles

Many would suggest the most common means at arriving at a fixed fee – calculating the most likely number of hours required to complete a matter and then multiplying by the standard hourly rate – barely counts as ‘alternative’.  Truly alternative fee strategies require that thought be given to assessing the ‘value’ delivered by the legal service provider.

Value based pricing strategies soon demand consideration of concepts such as product / service differentiation, market definition and value proposition.  Unfortunately many lawyers are just not very comfortable with economic concepts and financial planning techniques.  For example, it is still not uncommon to find lawyers who confuse ‘cost of production’, with ‘price charged to the client’.

Professionals in the financial services sector (which include potential investors into the legal services market) often complain that lawyers fail to understand basic concepts of finance and economics.  These complaints appear too regularly – and publicly, on the legal conference circuit – for them to be without substance.

Pricing in practice

If this were not enough, implementing effective pricing strategies successfully requires more than an understanding of basic economic principles.  Marketing and selling techniques need to be applied to communicate pricing information to the market and convince individual client’s that prices quoted are appropriate for the services offered.  All this requires time, effort and the application of skills lawyers do not acquire as part of their standard legal training.

This in part explains the rising numbers of business development staff employed by law firms.  In larger firms, pricing specialists are also becoming more common.  It is reasonable to expect, as law firms become more commercially sophisticated organisations, that a greater number and variety of business development professionals will be found in the legal services sector.

Standing on a precipice?

Notwithstanding the rise of business professionals and with it the (slowly) increasing pricing sophistication in law firms, it often appears that many lawyer’s regard AFA’s with a degree of scepticism.  AFA’s come with no guarantee of short-term profitability.  To  be fair, adopting sufficient sang-froid to accept the possibility of some losses while pricing strategy and skills are refined is easier said than done.  So little wonder that many lawyers contemplating vigorous promotion of various types of AFA’s (practically all law firms claim to offer them, if asked) fear they are standing on the precipice of a bottomless pit: one slip and they are in free-fall.  It need not feel like this.

Standard project management techniques have long since been applied in other industries as a means of exercising control.  Confident scoping, pricing and management of work inevitably result from the judicious application of these techniques.  Moreover, the techniques themselves are actually not that hard to apply.  So what is stopping lawyers?

Skills applied with purpose

Most successful lawyers already possess core project management skills (else they would not be successful).  So whether they like it or not, they are already, to a greater or lesser degree, ‘legal project managers’.  What is required, especially in the context of legal services pricing, is for the project management skills to be refined, applied more explicitly and with purpose.  The ultimate purpose is easy to discern: to make sure that matters are completed to the client’s satisfaction and at sufficient cost, so as to earn an adequate profit for the law firm.

From economic principles to case management

Ever since my research degree (a 475 page MPhil thesis about the anti-dumping and competition laws of the EC and USA) I have had what some may class as a nerdy interest in concepts such as pricing, market segmentation and product differentiation.  I find it fascinating to consider how, on a macro level, law firms need to apply these concepts in light of the new legal services market while, on a micro level, legal teams and individual lawyers are trying to work out how to manage matters to profitability.

I know from experience that it is difficult, when caught up in the frenetic pace of daily work, for professionals in law firms to consider how best to approach issues such as these.

Take an away day

I recently updated my legal services pricing module which I will deliver as part of a day-long masterclass hosted by Ark on 4th July.  Details of the event, ‘An introduction to legal project management’,  can be found on Ark’s website.  If you think that you or one of your colleagues could benefit from a day away from the office considering, among other things, the pricing of legal services, why not come along?  I would love to see you there.  The last time I ran a similar course for Ark delegates were quite appreciative, and I hope you (or some of your colleagues) will be this time too.

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