The State of Legal Pricing: Whither Rational Pricing?

Topics: Billing & Pricing, Business Development & Marketing Blog Posts, Client Relations, Corporate Legal, Data Analytics, Efficiency, Law Firm Profitability, Law Firms, Leadership, Legal Innovation, Legal Managed Services, Practice Innovations, Process Management

pricing

This article was co-authored by Toby Brown, Chief Practice Management Officer at Perkins Coie, and Jill Nelson, Senior Director of Product and Business Management at OnePlace for Finance at Intapp. A special thank you to Ryan McClead for his input and editorial guidance.

The state of legal pricing continues to evolve. From its early beginnings 10-plus years ago, it has become a mainstream role at most major law firms. That being said, the market still lacks true rational pricing, in the economic sense.

It is still difficult for clients and law firms to determine a value — price nexus. As a result, there remains a significant amount of chaos in the legal pricing market. This article examines the state of that chaos and gives a sense of where things are and where they might be headed.

The Current Legal Market

Every market craves rational pricing. That is pricing where the buyer has some semblance of the value associated with their needs or the goods they are purchasing, and the seller has an expected revenue for each type of good or service. Unfortunately, the extreme range of services provided by participants in the legal market and the dynamic nature of that market have not been conducive to the emergence of rational pricing for legal services at a product level.

This dynamism comes about for several reasons. First, in our experience, there are not a lot of easily comparable legal service offerings from firm to firm, or even from matter to matter within firms. Litigation in a given category has a broad range of service types and pricing levels. From the highly complex to the mundane, prices vary to a significant degree.

Secondly, firms don’t sell widgets. While there is a push for task-coding of time entries as an attempt to establish pricing data on a per task level, a client does not buy one deposition, two filings, and a side of legal research. They buy resolutions to disputes. (For a more thoughtful approach on standards, check out the SALI Alliance.)

Segments of rational pricing are appearing at the commodity level (e.g., patent prosecution). It is reasonable to expect that this commodity pricing will “evolve up” within certain market segments over time. Given this challenging market environment, we turn to the behavior of the market participants driving such chaos.

Client-Side Pricing

We can state the obvious here: In-house legal departments are now facing the same cost-saving pressures as other corporate departments. So, what are these law firm clients doing about that?

Discounts

The first and most obvious line of attack for in-house legal departments is the discount. In recent years, in-house legal departments have significantly increased pressure on their outside law firms for higher discounts. We are even seeing mandated discounts in Outside Counsel Guidelines. Discounts are an easy way for General Counsel to demonstrate savings.

Clients have also begun experimenting with various Alternative Fee Arrangements (AFAs) and have expanded the use of Requests for Proposals (RFPs) in securing legal work. Here they may ask for fixed fee proposals in order to compare pricing from competing firms.

Data Analytics

What most clients ultimately want is to know is that a patent litigation will cost X-dollars through the Markman hearing, or that an acquisition will cost Y-dollars for due diligence and Z-dollars to close the deal. But an acquisition service may have a price range of $10,000 to $10 million — from experience, that type of fee range is not an exaggeration — and what drives the range is a combination of scope, size, and client business goals related to the deal.

In summary, the client-side of the market is grasping for ideas, data, and hope for some level of rationality. But they are not the only players creating chaos and hoping for some sense of calm.

Law Firm-Side Pricing

Following the economic downturn in 2008, clients started pushing back on law firms’ requested rate increases. Having had such a great run prior to this, many law firm partners are not well-versed on how their firms actually generate profit. In response, law firms are finding it necessary to educate partners on what exactly makes their work profitable.

The Pricing Professional Role

It is not surprising that firms, when faced with this new economic reality, would seek professional guidance, but there is a very broad range of pricing professionals across the sector. Some law firms have dedicated teams with broad-ranging roles, while other firms are just beginning to consider creating such a function.

To illustrate the chaotic nature of the pricing role itself, it may be worthwhile to explore each of its functions in greater detail. Some pricing roles may span across all of these functions, but many are responsible for only one or two.

  • Client Fee Discussions & Negotiations — This function includes talking directly with clients about fees and pricing options. The goal is to ascertain a client’s specific rate and fee concerns, so that best-fit pricing options can be developed.
  • Partner Coaching — Many lawyers prefer to avoid fee conversations all together, but as the strongest point of connection with the client is often the relationship with the partner, it is beneficial to keep the partner involved in the discussion of fees. Another basic skill that lawyers often need help with is, somewhat ironically, negotiating.
  • Budget Building — More and more pricing situations require some type of budget. Budget building can take many forms, depending on the demands of a client and the necessary level of precision.
  • Pricing Development — With knowledge of a client’s fee needs and with a general budget developed, various pricing options can be determined. The typical drivers for any option are cost savings; predictability (g., over a given time period); certainty (e.g., for a matter or group of matters); or even risk-sharing (where a firm takes on some level of fee risk as part of the arrangement).
  • Profit & Scenario Modeling — With a pricing option in place, or as part of that effort, matter staffing needs to be determined. With a known breakdown for how a deal will be handled and managed, it can be modeled for profitability.
  • Monitoring — Once a pricing deal is in place, monitoring is the function that keeps the lawyers updated on the financial status of the deal.
  • The Rest: Process Mapping, Process Improvement, Project Management & Practice Innovation — Many legal pricing professionals are being drawn into various practice re-engineering roles. Over time these needs are driving the creation of separate roles.

Legal Pricing Strategy

The newer the legal pricing role, the more likely it is to be defensively motivated. By defensive, we mean the pricing role is narrowly focused on holding the line on profits. The more mature it is, the more likely it is focused on proactive business development efforts. But even in the most well-established legal pricing roles, the offensive push is still very limited.

For firms that are just now contemplating whether to create a pricing role, consider this: your law firm is competing in the same market with firms who already have this role. If you do not have someone in this role, your partners are probably agreeing to whatever pricing option clients request in order to hold onto the work.

This caution highlights the most important function of a pricing role, that of developing a rational pricing strategy. In part this means capturing pricing deals as they occur and monitoring them over time. Without this basic knowledge, firms will not learn and improve their pricing strategies over time.

Technology’s Role

Technology needs to support the intersections where pricing and budgeting meet — from business development (pitch and proposals), within the intake process, on behalf of pricing teams, and among partners to provide visibility on activity, progress, and profitability where they have influence and accountability.

While a successful technology-based pricing strategy supports the bottom line for a firm, it can also do much more. Firms can leverage technology to make pricing more of a process, rather than a one-time effort, and gain visibility into an engagement as it progresses from pricing and scoping to execution and delivery. Good pricing technology creates a seamless, closed-loop system that allows firms to stay on top of engagements throughout their lifecycles in several ways.

And what about artificial intelligence? Other than cropping up everywhere, with most people having some expectation as to its application (and level of boredom or skepticism), AI is a real thing. At the very least, pricing teams and lawyers need a basis to start, or challenge, the ultimately commercial vehicle that works for the client and the firm — the goals inherent in developing a pricing function in the first place. Pricing teams will benefit from software that integrates with other solutions such as timekeeping and accounting.

Conclusion

Pricing has become an embedded function in most large law firms. These roles will continue to grow both in numbers and responsibilities. Firms looking to effectively compete in the market will definitely want to make investments in this space.