6 Critical Strategies Used By Law Firm Pricing Directors
This is the second of a two-part series examining the emerging role of pricing directors in law firms. In part one, five critical attributes that define a great pricing director were discussed, and top leaders in the movement were interviewed for their perspectives. In this segment, Susan Hackett talks to pricing directors about practical implementation of a law firm pricing strategy: professional skill building, collaborative leadership teams, promoting behavioral change, client involvement, and more.
Id like to tell you that Ive got it all down, but every day, Im making it up as I go. For larger law firms and their executive leadership, this is new territory. So says Toby Brown, director of strategic pricing and analytics at Akin Gump, and the designated leader of an emerging group of law firm professional staff whose practices focus on creating pricing strategies that drive greater (and more businesslike) alignment between firm profitability and client value.
Getting It Done
So how do you get it done? Lacking turn-key tech applications and facing a bunch of smart lawyers whove always done things differently, just where do you begin as a pricing director to garner some important first successes and then build steam? The pricing directors with whom I spoke offered these six strategies for those who are working their way through the maze of moving from pricing based on revenues generated through rates and hours toward pricing based on client value and firm profitability.
1. One Size Fits One
Doug Woods is a former forensic accountant who is now the pricing and data analysis manager for Ogletree Deakins.
Woods was fresh to law firms and legal pricing about a year agohis background is as a CPA and an accounting-firm marketing director. To prepare for the challenges facing him with his shift to law firms, hes been reading as much and as fast as he can to garner new ideas and perspectives. Woods says the core of his focus is on helping lawyers understand that non-hourly pricing isnt evilin fact, it can be a competitive advantage. Value-based pricing is what he wants his lawyers to think about, since it requires up-front analysis, and advance conversations with clients that focus both the client and the firm on defining value and setting expectations before work begins.
Woods believes that in setting a strategy and course, its important to remember that firms considering pricing strategies in todays market may see different approaches and set different goals based on their brand, niche practices, and position in the national legal market: firms with a national or international practice may wish to drive different practices than firms with a strong regional presence; firms offering a wide array of services may wish to distinguish themselves differently than firms with a strong reputation in only one practice specialty. Woods focus is on helping his firm consider how to price and structure fees and service that will attract clients shopping for services in his firms leading practice specialtyemployment law.
As Woods puts it:
We work in a crowded field of employment lawyers and competition for clients and work is tight. We didnt want to become the How low can we go? lawyers, so we began looking at alternate pricing structures so that we could offer clients more value. We believe that clients arent necessarily looking for cheap: they just want value for their spendefficiency, results, and predictable costs. Thats what Im here to help drive.
When Chris Emerson of Bryan Cave describes his early efforts as a pricing director, he notes that there was no model to follow and a strong need to customize whatever approach he took to his firms lawyers, their brand, and a variety of practice needs. When we were asked to create and institutionalize an approach to pricing and project management in the firm, we regarded it in many ways as a startup. I think many of the same skills and understandings apply. It is important to look for opportunities wherever they present themselvesrather than wait for lawyers to beat a path to you (hopefully, that will come later!).
Emerson continues: It is also important to anticipate and embrace the fact that there will be a great deal of work to handle as the demand for the groups service goes up and the group is increasingly successful. But no matter how busy we got, we kept it a priority to be constantly vigilant about improving our own capabilities within our group. His approach was to customize everything he did: from building the firms own technical applications, to working face to face with lawyers and practice group leaders to determine how he could best serve each.
2. Before You Can Advance, You Have to Retreat
Akin Gumps Brown suggests that for many pricing directors, a first step forward is to look back or look around the current environment: find out what kind of non-hourly billing structures are already in play and how theyre working. The director has to analyze and model their profitability data so that they can be compared to hourly billing proposals and returns, as well as for projects going forward.
The pricing director thus becomes the central source for trapping information and standardizing non-hourly models (for study, improvement and replication) with the knowledge he gleans. Emerson adds that this means that a related first step is assessing what data the firm has, how and where its collected, and what its purporting to measure. Sometimes that data needs to be redirected and its capture re-engineered to support pricing purposes. There are also some sources of data outside the firm that could be considered and mined: data from vendors and data that clients keep.
[Note from the author: as a person whos worked with in-house law departments for decades, let me assure those of you out there new to this conversation that while some departments do not focus on or maintain a treasure trove of data, youd be surprisedperhaps amazedby what many departments know about their law firms performance that even the firms dont know (in part because they never bothered to look). It can be an unsettling experience for a firm to realize that clients have better analytics about them than the firm has about itself, but not asking about it doesnt change what they know, does it? And for a short while longer, while were all experimenting with re-engineering the relationship, asking these questions is okay. In a few years, asking these questions for the first time will be a sign of unutterable cluelessness. If youre a firm, lean into the dataafter all, its just the facts, right?]
3. Staffing and Leadership
Another common practice as pricing directors are starting out is to assess and assemble the teams necessary to getting the work done: both on staff and within the firms leadership. While many agree that the best approach is not to committee pricing practices or try to apply hard infrastructure to the process, firm leadership involvement and staff ownership is critical.
Asked to describe their approach to staffing, most of the pricing directors with whom I spoke responded somewhere on the spectrum between never enough and a highly diverse and nimble team. Pricing directors tend to have multiple people they supervise and a number of leaders (some on staff, some in executive partnership roles) to whom they report. Their teams define collaboration in a law firm context, since none of their functions would be possible without the input of others, and increasingly, everything that the firm does (or does not do) seems related to something that comes out of a pricing conversation.
A good pricing staff will drive a lot of two-way engagement. Emerson discussed his experiential database in the first installment of this article: it doesnt work if no one contributes to it. And while Browns been doing pricing work for several years with several firms, hes only recently joined Akin Gumpone of his first formal outreach efforts will be to his new firms tech and information services team to engage in conversations about what hes trying to do, get a better understanding of what they are already providing and planning, understand what they see as challenges and opportunities in working to develop the pricing function, and decide how he can pull from their expertise and ability to execute throughout the firm. Stuart Dodds, the director of global pricing and legal project management at Baker & McKenzie, relates that as his function is housed within the firms marketing/business development/client relationship team, he sees his role as inextricably linked to the development and delivery of winning proposals and business relationships with firm clients. Woods is working closely with Ogletrees professional development staff on training and educational initiatives that will help develop skills and appetite for the pricing framework hes pushing forward. Everyone values the input and engagement of other experts on the firms business and legal teams, because all of their work either rises or sinks based on their ability to tie their functions together in an effective manner.
But everyone also agreed that there is one group that is the fairest of them all: pricing directors first and last stop will always be with the firms executive financial and lawyer management teams, including relevant practice group leadersand it is with these leaders that their work is joined. They are the institutionalized advisory working groups who help the pricing director get his or her daily work done by lending that work the necessary authority, credence, validation, and drive.
Brown relays that one of the most successful leadership groups he ever had included a small and perfectly positioned team of four partners from different offices and groups: corporate, tax, regulatory, and complex litigation. He also notes that the composition can be effective with any mix of participants so long as the group creates a sense of centralized leadership, which he views as critical to assuring consistency, access to data and knowledge across the firm, and accountability. The group must also facilitate tracking and evaluation of pricing efforts in follow up and deliver their work in a timely fashion.
The role of such a group is not to opine in general on policy, but to help make fast, reliable, executive-level decisions, delivered in a timely fashion as lawyers and clients are in the process of proposal negotiation.
4. Moving from Leadership Concept to Operation
None of the pricing directors I talked to were in favor of creating a singular, overarching pricing policy. Most prefer to avoid proclaiming pricing rules or requirements that are one-size-fits-all. Doddss work at Baker & McKenzie makes him perhaps the most experienced in this: as a director working in a firm with thousands of lawyers in hundreds of jurisdictions and pretty much every known form of legal practice, he notes:
My focus is to push forward ideas like connecting pricing to project management training, rather than suggesting that a certain form of pricing must be used in certain defined matters. With so much variation in skill, law, culture, and client base in our offices and amongst our lawyers, Id have to be crazy to mandate preset fee rules, although we have found implementing guidelines extremely helpful.
Most of the directors would rather have lawyers bring their requests for variations from regular rates/hours to the pricing committee. Woods committee at Ogletree, for instance, has a policy of requiring lawyers to bring their proposals forward any time they include an offer of something greater than a 10 percent discount from regular hourly rates or any non-hourly arrangement. Lawyers have to bring more than innovative fee proposals to the committee; by requiring them to include large discounts on hourly rates, too, they are requiring lawyers to demonstrate that they have thought through service delivery from a profitability standpoint, regardless of fee structure. This reminds his lawyers that its not so much the mode of fee, but the decision to vary pricing from norms that requires the committees attention.
He often encourages his lawyers to put skin the game by offering clients holdback arrangements in lieu of straight discounts. Under such an arrangement, the client holds back a percentage of each invoice (typically 10 to 20 percent). At the end of the matter or term, the client pays all, some, or none of the held-back fees based on overall satisfaction and/or the achievement of agreed-upon success factors.
Using the holdback approach, the firm is able to set pricing consistent with their regular fees, but also has the opportunity to generate more revenue than would be possible under a straight discountso long as they are creating value for the client. From the clients perspective, they feel better knowing the lawyers are incented to perform to the clients fullest satisfaction, rather than to a perverse goal of accumulating a larger stack of billable hours. Accordingly, they are willing to pay a little extra because their overall value has been increased.
Many pricing directors create standardized forms for lawyers to complete as they bring forward a request. This can both smooth the process of consideration and make sure that the lawyers have engaged in some disciplined and demonstrated thinking in bringing a proposal forward. As Akin Gumps Brown suggests, requiring lawyers to propose pricing structures before they talk to clients requires enough background thinking that lawyers often correct their proposals own shortcomings before submission or engaging in client conversations they cant later retract.
Lawyers should see the pricing directors process as rational, quick, and fair once the standardized request form is completed (the committee shouldnt require perfection); further, it should be geared to produce a high pass rate. When that happens, lawyers see the ease and logic of the system and will voluntarily involve the pricing expert to help fill in any holes, assist them with harder assignments, and assure that requests will not only be timely completed but accepted quickly.
Akin Gumps standardized form requires lawyers to describe the outcome the retention is driving toward, and to estimate what the staffing of the successful outcome would cost the firm to provide (along with out-of-pocket expenses). This allows the pricing director and lawyers proposing the fee structure have a sense of whether the predicted outcome in the matter would lead to a profitable return for the firm. While most initial pricing proposals will be for arrangements that fall outside of normal billable hours practices, the long-term goal is for all work to be priced based on cost of service, the worth of the work in a competitive market, and the firms necessary profit margins.
Brown says its also important for new pricing directors to understand that their work only really begins once the proposal is approvedthen its their continuing mission to check in and see that lawyers are following the plan, to assure the setup of the teams and processes necessary to success, and to deliver to the client the pricing they promised (while holding to the costs that the matter must not exceed if its to remain profitable).
5. Pricing as a Part of Professional Development
At Baker & McKenzie, Dodds is engaged in a significant program of educating lawyers in the fundamentals of both value-based pricing and value-based service delivery. Working with the marketing and professional development staff, Dodds and his team are hosting conversations at the partnership, office, and practice group levels; providing access to online resources that can help train and deliver concepts and practical guidance, as well as best practice examples; and conducting webinars and events at which training is offered. What our tools demonstrate is that we have a common framework, many tools to work with, and a flexible approach that can be customized by anyone in the firm to meet their or their clients needs, he says.
A successful pricing initiative also requires mechanisms for making the firms lawyers accountable for pricing decisions: it must incent and reward lawyers for working with the firms leadership to price work in a more businesslike fashion (rather than just slapping on discounts) and to analyze their own process for delivering service and the cost of their service.
While all of the pricing directors I spoke with agreed that pricing strategies and process should be connected to most every aspect of the firms business operations, it is especially important to consider the connection between pricing policies and compensationlawyers must begin to understand that what theyre being paid more dollars to provide is not a larger stack of hours, but a larger profit margin or a more cost-effective service delivery mechanism, or improved client satisfaction and repeating business.
Firms will continue to move along whatever path clients wish them to walkas more and more clients wish to push their firms to bill based on value, rather than hours, it will become critical for firms to have the flexibility to offer them pricing and staffing arrangements that meet their expectations and still deliver strong profitability to the firm. Thus, the change in focus from rates to costs, and from costs to profits.
6. Evolving From Firm-Facing to Client-Facing Pricing
The pricing directors consulting role for lawyers in the firm should grow over time into to a consulting role that directly involves clients, as well.
Dodds, for instance, has a huge constituency of lawyers to work with before he can join his lawyers in more client pitches and relationship meetings, but he and his leadership see that thats the direction that he will go as his work continues to unfold.
The movement from serving only partners to serving partners with their clients more directly (and transparently) is likely over time to be the pricing directors ultimate and highest use. The director will be helping clients define what they wish to pay for and whats required; then demonstrating the firms knowledge of its own costs, capacities, and processes in meeting those defined needs; and finally, helping clients to fully understand the value of what the firms proposing to provide and assuring that the firm delivers what it promises.
And so we go back to the beginning: while the firm may have the right idea for the best service and may have the right calculations to support the best fee to provide it, none of that matters if the client hasnt yet defined what value is to them in any particular matter, what the result should be, and what success should look like. And as always, the firm theyre talking to needs to instill in the client the confidence that they are the right provider to deliver all that.
For firms representing clients who have thought through what the value of service is to them, the rewards will be great. And the folks who make that all possible are the new standard-bearers of aligned value in law firm service models: the guys and gals who can help their partners and firm clients know that The Price Is Right.
All of this is perhaps best summed up in Browns parting advice: Change your firms conversation from hours and revenue, to revenue and profit. If you succeed in doing that, then everything else follows.
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.
See also: "Reconnecting Law Firm Pricing to Cost, Profit, and Value," CorpCounsel, September 2012.