The Process of Pricing: What Legal Lean Sigma® Can Show Us

Topics: Billing & Pricing, Business Development & Marketing Blog Posts, Client Relations, Efficiency, Law Firm Profitability, Law Firms, Leadership, Legal Innovation, Legal Managed Services, Midsize Law Firms Blog Posts, Practice Engineering

ALSPs

I wrote previously about how important it is for law firms to understand their own economics in order to get a better grasp of their pricing performance. This time I discuss another aspect of the pricing mechanism — the process of pricing and how it can be improved.

We can discuss pricing and budgeting mechanisms, but it’s important to also look at pricing from a process improvement and project management standpoint. Or, more accurately, at the intersection of three concepts — process improvement, project management, and both of their relations to pricing.

In this situation, efficiency is part of the engine that generates value – to both the firm and clients. The old notion of “Doing More With Less” — which was a mantra for years — has now evolved into an efficiency model created by improved processes and management when producing legal work as well as business operations. And this naturally segues into the combination of concepts, frameworks, and tools in both Lean and Six Sigma. This is what we at the Legal Lean Sigma Institute call Legal Lean Sigma®, and this application of methodologies that came from manufacturing to our world does require a fair amount of bridging.


When you pull the economics into the picture and look at the data surrounding the cost associated to produce the work, you’ll find that most law firms are losing money in this way.


Lean identifies waste in a process, and Six Sigma identifies defects in those processes. In short, we combine Lean (do the right things), Six Sigma (do things right) and project management (doing the thing right the first time, every time). We apply these concepts to the legal profession.

This is just broad strokes as I explain it, but to apply it to the legal profession, you need to apply the tools on a macro- to micro-level by using different process improvement methodologies that analyze how we perform legal work.

Using Tools to Find Problems & Objectives

Let’s look, for example, at client intake. Client intake goes through a series of steps — first, it goes through a conflict check, then through opening the file, assigning the work, and clearing financial due diligence. And all these different steps contain multiple tasks within each one. The client intake process is a prime example where you can take a hard look at the different pieces that make up the process and apply Legal Lean Sigma® concepts.

These concepts provide different tools for defining the primary problem, such as identifying waste, and the objectives or outputs. We also look at client requirements to determine optimum performance; we will then develop a plan to “manage” the process and the initial and continuous improvements. For example, what about timekeeping and billing? That’s always been a problem and always will be a problem in law firms. It amazes me how firms can do the work, but often don’t bother to capture the time. Would this be a process issue or a management issue? It’s both, and it should be addressed methodically as such.

We use a slightly more sophisticated approach, but one easy way to think about the dollar value of improving timekeeping is to take a conservative estimate of only one hour per week of time per timekeeper that doesn’t get entered and multiply that by number of timekeepers and average hourly rate. Have you factored that result into your productivity, profitability and/or realization numbers? Most firms don’t — and they should. That is a lot of money left on the table, and it gets in the way of doing some accurate pricing. If we do not know how much it costs us to do something, how do we price it?

It astounds me when you ask an attorney how they know a matter is profitable, and they respond, “Well, I’ve got a sense that this is what the work is worth.” Then, when you pull the economics into the picture and look at the data surrounding the cost associated to produce the work, you’ll find that most law firms are losing money in this way.

Clearly, the days of an attorney speculating that this or that case is worth $50,000 is no longer the way to operate. It’s still a buyers’ market and it’s going to continue to be a buyer’s market, of course, but I think any market disruption (like another recession) is going to up the ante with clients, especially institutional and corporate clients.


Clearly, the days of an attorney speculating that this or that case is worth $50,000 is no longer the way to operate.


These clients are continually looking for efficiency and budget predictability, but it falls on the law firms to be more proactive in how to deliver them. That means, however, that firms need to analyze the way their legal work is being managed — and that opens the door for evaluating and improving processes.

Naturally, this evaluation and efficiency process will impact pricing and profitability. Indeed, if you distill it all down, law firms are going to be forced to start looking at processes to eliminating waste, just as a way to keep pace with competition. And while it may be easy for some of them to say, “We’ll just automate or use more technology” that’s really not the end-all solution.

Process improvement is becoming the answer to the driving forces on law firms, pushing them to keep an increased focus on project management and create pricing mechanisms that will satisfy the client’s need for efficiency and improved value. To test this, review the last dozen Requests for Proposals/Information your firm received. How many mention efficiency, value, process improvement and project management? Of course, focusing on this will simultaneously also generate greater client satisfaction and more profit for the law firm.

Monitoring Performance

The key ingredient not to overlook with process improvement and project management is continued monitoring of the performance of the process. To date, I believe that’s where the pricing mechanisms have fallen apart to some extent, because law firms weren’t paying attention to the processes or the economics. It was a “lack of management” problem.

Firms are doing the legal work, but yet no one seems to be monitoring the process as a whole to make sure the time being invested in the work was commensurate with the fee that had been quoted, especially if you’re in a flat fee arrangement. One of the misperceptions in pricing is the constant focus on rates. On the contrary, the smartest strategy is to price the work based on the cost to produce the work and then determine a profitable arrangement. When I conduct various Legal Lean Sigma® Certification courses, the economic mantra continues to be monitor, monitor, monitor.

One of the messages I give to law firms when I’m introducing them to Legal Lean Sigma® is that another recession is certain to come. And that means that now more than ever, law firms have got to step up their game and look at their processes and at how they’re managing these processes — while always striving to find ways to make the processes more efficient and more cost effective. Finally, to keep going on that track, firms need to be monitoring and controlling their processes to the point where the process is naturally generating what you want it to do.

And that’s really when the price mechanisms become essential.

Remember, pricing is going to be impacted greatly by the ability of a law firm to improve its processes in order to generate legal services and monitor those processes properly to generate profit. Firms that step up their game will differentiate themselves among their competitors, and firms that are slow to the pickup are the ones that are going to fall behind and bear the brunt of the next economic downturn.