Reconnecting Law Firm Pricing to Cost, Profit, and Value
This article is the first of a two-part discussion of the emerging role, responsibilities, and rising influence of pricing directors in law firms. Part two will discuss pricing strategies and how those entering the fray might think about the practical steps to getting started. (Read part two here.)
In a market in which in-house clients demand that outside firms lower costsoften by discounting rateslaw firms worry about their profitability. In an increasing number of large firms, the charge for change is being led by a small group of leaders focused on bringing a sound business pricing logic to the legal profession.
(Authors note: Major hat-tip to Beveridge & Diamond, PCa leading national environmental, land use and litigation law firmfor which I have been researching leading practices in firm pricing and fee structures; in a great show of collaborative spirit, theyve authorized me to share in this article a number of the interviews and practice captures that I collected for their strategic planning process.)
Toby Brown performs a role that is the fastest-growing new/hot job in large law firm executive management: that of pricing director. From his work at Akin Gump, hes recognized as a leader in this emerging field and practice, which is focused on helping law firms figure out the cost, and then the best price, that lawyers should quote clients for the profitable performance of services. And then begins the hard work of delivering the service for the agreed-upon price.
Corporate pricing experts would argue that the process for determining prices to be charged by most large, sophisticated law firms is not based on sound business practices. Firms look at the rates their lawyers charged last year and the fees they realized, the number of hours worked, the hourly rates charged by other lawyers with similar years in practice at other firms theyd like to compete withand then they add on whatever the partners want to make in increased PEP (profit per equity partner); out pops the new (increased) rate structure and billable hours targets for the coming year.
That approach is based entirely on what the firm wishes to charge, and is not at all based on what clients will pay/the market will bear, or what it costs the firm to produce the service. Its not even based on profitability of service lines. Such strategies may have worked well in a booming economy in which firms could dictate inelastic prices and clients would pay increasing costs without attrition; in many firms, that strategys not working so well now.
In the traditional firm pricing model, profits rose when firms increased rates and hours billed; firms didnt need to understand how to control or cut costs to make work more profitable. Clients were simply informed of the next years rate increase and either argued for a discount (which was usually contemplated in the increased rate) or went right on paying the bills for whatever services they purchasedoften with no idea of or control over the total cost of the matter until all of the monthly bills had been submitted and added up. If there were arguments over the fees, hours, or value of the work, they were over the bills submitted and did not take place during the retention process, when the price could have been rationally discussed. Scoping work prior to its start was not a regular exercise.
As Brown observes: Times have changed: its no surprise that firms were able to profit in spite of their lack of focus on standard business principlesin a world where you can dictate prices and where clients are either ill-equipped to manage them or uninterested in controlling costs, firms didnt have to base their prices on the cost of producing the service or product. And they didnt have to worry that their competition would undercut the market or that their client would shop for other alternatives.
Given the increasingly competitive and tight economics of legal practice today, even in (especially in) the largest and most traditionally successful firms, the market has changed. Price can no longer be disconnected from cost, just as cost cant be disconnected from value provided.
Enter the pricing director. These emerging leaders in firms are sometimes lawyers, but at this stage in the game, most of them bring experience and disciplines developed outside of the lawwhere pricing products and services is not only a norm, but also one of the most critical and revered aspects of business.
While there are still relatively few pricing directors, their numbers are growing so fast that they clearly have to be considered the hot new hire of 2012more than 50 have been retained in the last 12-18 months at AmLaw 200 firms, from what Brown can see. Their vitae list procurement experience, lawyering, corporate consulting, IT, financial roles in professional and financial consulting firms, knowledge management and data/systems analysis, marketing, and sales. And it will likely take the active engagement of all of these multidisciplinary talents for these emerging leaders to surmount the many challenges facing them.
Pricing directors, at their core, are those within firms who help assess which categories the work falls into; which teams and workers are best suited to each matter and purpose or task; what experience, data, systems, or talent the firm brings to the matter that are distinguishing characteristics of the firms value; and how much each of these kinds of services provided to clients costs, profits, and advances the firm forward. These leaders are charged with transforming data and process to drive pricing that demonstrates the firms value to clients. Their growing role demonstrates a new path to profitability for firms suffering from a self-made downward spiral of discounted service.
The Top 5 Attributes of a Pricing Director
While the progress a pricing director makes is necessarily dependent upon lawyers taking responsibility for thinking about the cost (and then controlling/managing the cost) of their work, Toby believes that nothing happens to develop a pricing focus firm-wide until theres staff in place to drive it.
Not only do firms need a pricing lead on staff, but strong leads for other areas: finance, personnel, knowledge management, professional development, tech, marketing and business development, etc. Its just not feasible to try to run a sophisticated business based on the efforts of volunteers who have full-time jobs and often lack the experiential or academic backgrounds to make their efforts succeed. This job requires expertise, full-time focus and multiple hands if the firm is asking lawyers to volunteer to do more than advisory committee-type functions, its likely that theyre misdirecting lawyers best use of time and talent, and under-using staff.
I asked several leading pricing directors to put their heads together to pull forward shared attributes and the most important skills they need to draw from in performing their roles (even as their personal backgrounds/disciplines and firm practices/requirements vary). Heres what they came up with:
1. Excellent Communication and Stakeholder Management Skills
Stuart Dodds, director of global pricing and project management at Baker & McKenzie, says that what a pricing director does is essentially questionand then often ask people to changepersonal and longstanding behaviors. And thats not an easy thing to do or to hear.
My goal is to help my lawyers get comfortable with a pricing discussion, and make it less threatening. I am often asking them to do something transformational to their practice, and Im aware of how challenging that is. We started our effort by focusing on top-level partners in leadership roles, and were expanding out to include all partners and associates, too. If I am not able to communicate well with all of these folks, I cant build the trust necessary to give them the confidence necessary to change the way they work: I need to get them to talk to me, I need to be able to listen to them, and I have to get my ideas across in a clear and actionable fashion that encourages them to work with me, not in spite me.
Dodds notes that since most pricing directors he knows are not lawyers (he is not a lawyer either, coming out of a business consulting background), there are differences in their approach due to their non-legal background that communication must help bridge. The natural advantage of coming from another discipline is that I can bring credibility, objectivity, and a fresh perspective to the conversation that most lawyers know they and the firm need, he says. On the other hand, since Im not one of the club, I have to make sure that Im sensitive to how much about legal practice and culture I dont know. Im listening closely.
Dodds adds, It helps that as a business consultant in a former life I was a fee-earner, too; at least I can share the pain in practically applying all this great pricing theory to real-life clients, business generation, and ongoing client relationships and service.
2. Analytical Strength and Numeric Literacy
Many lawyers would be the first to admit that they attended law school because they were told there would be no math involved. That was a lie. Great lawyers in the new normal not only feel comfortable with numbers, they apply them and analytic data to their practices every day: in reading client financials, in reporting their numbers, and in assessing data that can help them drive greater value in their relationships. Multiply that by 10 for the pricing director who seeks to support them. Every pricing director with whom I spoke felt a great kinship with and team support for their in-house staff colleagues in marketing/business development and tech, but they felt that their strongest staff relationships with the nice folks in finance and accountingwhat they do as pricing directors is truly a numbers game, and it is a game won or lost by its ability to impact and improve the firms bottom line.
Chris Emerson, director of the practice economics group at Bryan Cave, served for over a decade as a software engineer and the manager of the firms client technology department, building the firms financial dashboard, financial warehouse, and cost allocation system, in addition to multiple legal workflow applications. Over the course of that work, I learned a great deal about law firm economics and the business of law, he says. As we started to see increasing requests for alternative fees during the beginning of the recession, I was asked to participate in the financial analysis for that work. As the number and variety of requests continued to increase, the firm felt it important to pull together a group of people to focus on appropriate pricing and project management. My background, in conjunction with the strengths of the rest of my team, was a natural fit for that role.
Emerson says that he spends a significant amount of time with his lawyers and firm clients, working to foster an understanding of the underlying factors that shape the economics of an engagement or relationship. The foundation to this is coaching all parties on the need to diligently capture key data elements that support pricing, and then helping them translate numbers to practical applications that allow them to establish fee structures that better align the firms and clients common interests.
Its critical to be able to see the patterns and themes in data and apply them to pricing; just as its critical to be able to discern precedent in legal practice in order to help a client predict the likeliest outcome in litigation or the safest path to compliance, Emerson says. For lawyers, all this new thinking may end up being easier than they thought because data, too, relies on past performance to predict future outcomes; lawyers just need help learning this new frame of reference, this new language: what data to collect, how to analyze it, and when its best applied to varied circumstances. Even though pricing strategies require many lawyers to engage in a mind-shift, they are really good at it once given the training, tools, and insights into how it works and how to apply it.
Okay, is that even a word? If not, were making it one since it helps define a top attribute of great pricing directors. Its not enough to be able to figure out how much a firm should charge for a certain kind of service, or how the process of service delivery could be improved to minimize cost and open up new, lower pricing options. You also have to know what drives the firms business, what its entrepreneurial appetite is, how proposed fee structures will motivate (or de-motivate) performance, what it is that clients come to the firm to purchase in terms of business value, and more. You have to understand not only cost and pricing options, but the firms distinguishing business proposition, how it profits, and its marginal returns, too.
Akin Gumps Brown explains: Just like anyone else in the firm whos part of the overhead cost of running the business, I need to make sure that every day and in every way, my lawyers see me as driving their ability to earn more money from more satisfied clients. Im part of the team that drives the firms business goals while my lawyers are out delivering the legal services that clients value. So its my job to not only develop pricing strategies, but to be commercially savvy in driving the firms business and profitability. Revenue from fees is great, but its not worth much at the end of the day unless it also helps generates profit and moves our client relationships forward.
4. Intellectual Curiosity
Dodds is clear that a strong element of what makes him tick and what drives his value to Baker & McKenzie is his intellectual curiosity about everything that the firm does, why it does it that way, and how it could be done better.
You cant just accept the status quo; you have to look at everything from as many perspectives as are relevant, he says. This is particularly true in a firm with over 3,000 fee earners. Youve got to want to know more about everything that all of those people do to make it in this job: why whats working in the U.K. or Asia may not be the right approach for U.S. lawyers or a U.S. client; why this practice group continues to work in this way, when another group works in an entirely different fashion and is pulling in two times better results.
For many pricing directors, intellectual curiosity is often propelled by their diverse (non-legal) backgrounds: they draw from their work with clients and industries outside the legal profession who think about solving problems differently, or value other kinds of outcomes; they have educational and cultural skill sets that deploy a wider variety of practice and analytical tools; they possess the ability to assess data in a fashion that combines rational number-crunching with legal relationship requirements in order to craft customized solutions that delight clients and liability risk advisers alike; and so on.
Brown is often quoted as saying that part of his job is to question everything: what lawyers do, why, how they could do it better, what are clients seeking, what motivates behaviors, what could drive a better result. He calls it the better faster cheaper challenge. Whatever it is, it requires a focus on both management and re-engineering, and if you arent jazzed by the intellectual process behind these chores, it will be impossible for you to convey the necessary enthusiasm to stimulate behavioral change in your lawyers, either.
5. Recognize the Value of Technology and How to Use it to Drive Your Goals
An affinity for and belief in both the power and necessity of technological systems is not a surprising consensus attribute for this lot, given how many of these leaders come from a tech backgroundeither in knowledge management or systems analysis, or even as CTOs or CIOs for firms or other businesses. The sentiment expressed repeatedly by pricing leaders I spoke to was not that every lawyer in the firm needed to be a technologist in order for them to succeed, but that neither lawyers nor pricing directors could afford to be tech illiterate or leery of the value of technologies in making their fee structures or pricing proposals work. All agreed that the pricing director had to be both an ambassador and a promoter of technological options to drive success. And that one of the pricing directors best friends in the firm needs to be the CTO and/or CIO.
Just as I dont demand that every lawyer I work with become an MBA, I dont demand that every lawyer should aspire to become a tech geek, says Emerson. But the attributes of a successful pricing director include the ability to embrace whatever tech tools are necessary to mine data, to analyze work patterns and pricing options, to help train lawyers to manage their work and costs, and to apply systems that drive better work product. If the tools do not exist, we still need to envision them and work with IT or vendors to get them built. The last mile is to transfer a belief in the value of all that tech goodness to the lawyers we work with.
Emerson continues: One approach that we find frequently aids pricing across practice areas and jurisdictions is an experience database. Of course, the database is only as good as the information it contains, but we have been working towards systematically capturing the types of granular information about each matter that are required for accurately pricing the next similar matter. Ultimately, a good experience database enables a pricing group to quickly find comparable matters. Frequently, the next step is to go through the narratives of the comparable matters and regroup the time entries based upon tasks and phases to support creation of a budget. This is a laborious task, and many of us are working on implementing better technology solutions to support the capture of time to tasks actually performed.
There wasnt a single leader with whom I spoke who felt that current commercially available technology options were up to the challenges of facilitating their roles . . . yet. Everyone felt that there were likely 10 or so good products out there that could each enhance an important piece of the work, but that part of the job of the pricing director is to work with the tech staff to figure out how to put the tech pieces together to better support the work. All liked the idea of customizing their own products from general products available in the market, since few were enamored with the idea that they would have the luxury of spending the time to build their own systems at this pointespecially since the game is still evolving.
So, as Brown says: Early adapters will just have to do pricing first, and build the infrastructure to validate and support it later. If youre waiting for the tech to come available that will make this a turnkey effort, youll be waiting a long time . . . because the train will have already left the station.
Susan Hackett is the CEO and CLO of Legal Executive Leadership, LLC, a consulting practice in the Washington D.C. metro area. She is the former senior vice president and general counsel of the Association of Corporate Counsel (ACC), where she served for more than two decades as the voice of the in-house bar and built a loyal network of thousands of in-house and outside legal executives, as well as a reputation for innovation, excellence, and success.
A note to CorpCounsel.com readers: Toby Brown (Akin Gump), Chris Emerson (Bryan Cave), Stuart Dodds (Baker & McKenzie), and several of their long-time colleagues, including a group of similarly interested in-house department executive leaders, are organizing a group of peers in big firms and large department practices so that they can develop resources, network, and collaborate as they tackle the challenges of their new rolesand help move the professional development of their emerging practice area forward. If you would like more information about the group, please email Brown at BrownT@AkinGump.com.