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April 18, 2012

Legal pricing (Part 7 of 8): Summing up where firms are today

When law firms begin offering non-hourly alternative fee arrangements (AFAs), they must address two fundamental questions:

1) When bidding for new work, how do I set a price that is high enough to protect profits, but low enough to get the work?  

2) After winning the work, how do I manage the matter so that I make a profit (or at least break even) at that price?

To be honest, when we started writing this series a few months ago we thought that it would be limited to the first question: picking a price in the first place.  This requires external knowledge about your client and the marketplace, and internal knowledge about your own cost structure.

But the more we talked to people and reviewed the literature, the more obvious it became that the two questions are so wrapped up in each other that they are very hard to separate.  Add in the fact that most firms don’t even understand their own costs of doing business (see Part 2) and that price wars are forcing bids down for many practice areas (see Part 3), and you have the makings of a very confusing situation.  

Many lawyers would like to believe that if they could master the art of value pricing (Part 4 and Part 5), they could make more money than ever before.  Maybe some can.  But with competition constantly forcing prices lower, we have not seen much evidence for this yet.  Some believe that pricing will become more sensible when lawyers learn how to develop value metrics (Part 6), but we are not yet convinced.

As we described in our recent Bloomberg Law Reports article entitled “The Rise of the Pricing Director,” the two questions above are so difficult that firms like Baker & McKenzie, Fish & Richardson, Mayer Brown, Reed Smith, Vinson & Elkins, and Winston & Strawn are setting up committees and creating new positions for pricing directors.  Last week, Akin Gump joined that list when they hired Toby Brown as their new Director of Strategic Pricing and Analytics.

Responsibilities and methods varied for the people we interviewed, but none had independent decision-making power. Partners are ultimately responsible for pricing, so they must understand the principles before they will accept help from a pricing director or committee. Some firms are moving to develop policies which limit partners’ power to set prices, depending on their training and experience, but these policies are very much a work in progress.

No matter how a firm is organized, pricing analyses inevitably get pulled into the question of how to manage matters.  To set the right price, you must know what the work requires.  In the good old days when lawyers did not have to worry about how much things cost, that was relatively straightforward.  But now that so many clients are demanding efficiency, the work must be done differently.  That will inevitably change the cost of delivering a quality service, and ultimately its price.

Which takes the pricing discussion right back to a topic we have been talking about for years: legal project management (LPM) and process improvement

The best way to implement LPM varies from firm to firm, and even from one practice group to another within a firm, depending on its culture, clients, and goals.

In our experience, the approach that works best most often is to start with just-in-time training for a small group of influential partners who are open to change.  We introduce LPM basics very quickly and then get them to immediately apply key concepts to actual matters. The focus is on changing behavior to produce tangible results.  When these lawyers are successful, they can motivate other partners to embark on the same journey.  Case by case, lawyer by lawyer, the firm begins builds its experience in LPM and AFAs, and gradually changes the way it meets the needs of its clients.  For an example of how this worked in one firm, see our recent post entitled Legal project management in the real world: The case of Williams Mullen.  

One key to profitability is continuing business from a firm’s most important clients. For clients who demand AFAs, it helps to work in an atmosphere of mutual trust on a portfolio of matters. The firm may lose on some matters but with the right strategy and tools it can offset the losses with enough wins to profit overall.  For some real world examples of this, see Rachel Zahorsky’s recent ABA Journal article “Facing the Alternative: How Does a Flat Fee System Really Work?”  

If we needed to summarize where legal pricing stands today in a single phrase, it would be “in transition.”  Next week, in the final part of this series, our predictions for the future.

This post was written by Jim Hassett and Matt Hassett.


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