Pricing management

By Michael Roch, CEO, KermaPartners

There continues to be a significant execution gap when it comes to pricing of legal services. Law firms recognise the importance of pricing as part of their business model, but too much lip service is paid to pricing management, according to our latest survey of UK, US and European law firms with 25-300 partners. 

Communicating strategy

More than 75% of respondents consider pricing a strategic priority, but only 61% have a clearly defined pricing strategy that is aligned with their firms’ strategic objectives. At the same time, 54% of respondents are either neutral or disagree that they effectively communicate their pricing strategy throughout the firm.

This communication Achilles’ heel may be down to a lack of clarity in the firm’s pricing strategy itself. On specific pricing strategies, 96% of respondents say their firms set fees to cover costs and achieve an acceptable profit margin for partners, and 71% also say their firms set fees to capture the full value of their services.

Both approaches are no longer with the times as they are inward looking and do not take the client side of the pricing equation into account. Reconciling these two approaches day-to-day between finance directors, business development managers and the partnership is one of the most difficult issues to get right when firms seek to improve their pricing.  

Clarifying policy

Many firms do not seem to have a clear approach to their pricing policies and compliance with them. Less than half of the respondents have written pricing policies/guidelines in place. This in part explains firms’ apparent difficulties in measuring their partners’ compliance with pricing policies/guidelines – as many as 77% of firms do not seem to be measuring or reporting on partners’ compliance with their pricing guidelines. However, nearly half of the respondents claim to include pricing compliance as part of their partner remuneration criteria.

Good intentions simply have not been translated into good governance. While 68% of respondents have in place clear decision rights for setting rates/alternative fee arrangements, very few have a single partner responsible for delivering pricing strategy beyond the practice head, managing partner or CEO. The majority agree that each partner negotiates his/her arrangements and then asks for sign-off by the responsible person.

This relatively limited supervision may work well for charging by the hour, where guidelines are straightforward and well understood by partners. However, a hands-off approach does not work effectively when work is increasingly being done on an alternative fee arrangement (AFA) basis. Firms will want to manage their AFA-based pricing strategy and related pricing risks more actively than leaving (often under-trained and ill-equipped) partners to attempt to negotiate the new landscape themselves. 

Tackling AFAs

A third of respondents estimate that 26-50% of their work is now on an AFA basis, while another third estimate this to be 11-25%. Unsurprisingly, 87% of respondents expect to see a moderate or substantial increase in the 18 months ahead.

More significant, though, is the perceived impact of AFAs on law firm profitability. The majority of firms view AFAs as being just about as profitable (within a 10% variance in either direction) than hourly fee arrangements. One-third deem AFAs to be less profitable by between 10% and 25%, and only 8% deem AFAs as being at least 10% more profitable than hourly fees.

This pessimism relates back to the pricing-management issues touched upon above: almost two-thirds of respondents are neutral or disagree that their partners are proactive about offering AFAs, and three-quarters think their partners are reactive to clients’ requests for AFAs.

It is hardly surprising, therefore, that almost 90% of respondents think that fee negotiation skills would support higher rates for AFAs and ultimately create more profitable AFAs. About two-thirds also think that clearer pricing policies and guidelines would help, as would a clearly articulated pricing strategy.  

Strategic planning

Law firms rightfully consider pricing to be an essential part of strategy. Surprisingly, few seem to have clear policies and guidelines – or measurement processes – in place to help them manage this important profit driver.  Including price performance as part of partner remuneration is positive, but without measurement tools it is difficult to execute.

I do not declare the billable hour as dead, but alternative fee arrangements are here to stay. Most partners are reactive to AFA requests by their clients, instead of proactively putting together service, value and pricing propositions to beat the competition. AFAs will only become profitable propositions if law firm management can get partners to take the initiative in offering them.

Successful pricing execution starts with a clear pricing strategy, solid internal communications, close management of pricing policy, and partner performance pegged against measurable benchmarks. Appropriate tools are as important as is their reinforcement in development programmes for partners, too many of whom are still embedded in an hourly-billing-only mentality (the latter of which is all too often reinforced by the firm’s own finance directors).

– michael.roch@kermapartners.com