In any market, effectively pricing any goods or services requires an understanding of the buyer's perceived value. When the buyer has no idea of the value of a given task, and no idea how to measure the quality of service delivery, then the buyer and seller end up in an unproductive dance in which low cost providers, irrespective of quality or expertise, emerge victorious. An informed buyer knows what goods or services are needed, knows how they could and should be delivered, and knows the intrinsic value of these goods or services to his business. But that's not enough. That information must be conveyed to the potential sellers so the sellers best able to meet the quality standards at the desired price win. A buyer seeking simply to squeeze the supply chain will generate cost savings for a while, but will have no credible answer when the CEO or CFO asks for evidence of a continuous improvement culture that enhances business velocity. A potential seller must also know how to deliver the necessary goods and services at the desired price, within the required quality standards, while generating a profit. To do this well, the seller must know his internal cost to produce and deliver these goods and services, which is a clear advantage to more experience sellers. If this cost is below the target price, he can turn a profit. If this cost is above the target price, he must continually seek out unsophisticated, poorly-informed buyers, an increasingly challenging quest. Alternatively, he can try to demonstrate that the goods and services deliver greater value to the buyer, and therefore warrant a higher price. Or make no profit. Or do something else. Or get better at it. Sellers who ignore buyer feedback when setting prices, focusing instead on calculating the organization's overhead costs plus a desired profit margin, and then distributing the resulting target across the product lines, are playing recreational checkers in a high-stakes chess tournament.
We've been at this for years now, yet too many law firm sellers and too many law department buyers are still terrible at conducting commerce. Pricing legal work is a two-way street. It requires the law departments to do a better job of understanding what they're buying, and why, and from whom, and how to measure success. It requires the law firms to do a better job of understanding what they're selling, and why, and what the buyer's looking for, and how to measure success in more granular ways than "We got paid (most of what we billed)."
Law department leaders: You're no longer allowed to say to your law firms, "We don't know what this should cost, we're expecting you to tell us," unless this is literally the first time your business has encountered this issue. Otherwise, invest in analytics to learn what you've spent historically, identify which matter types have high value to the business and which have negligible value, and determine how to distinguish and measure a job well done from a job done poorly. Then take this information and embark upon a rigorous process to make better build (do the work in-house) vs. buy (hire outside counsel) decisions, and align the providers so those with the requisite skill to meet the quality standards at the right price do the work. Involve your outside counsel or other legal service providers every step of the way. And if you find yourself ignoring the analytics and reverting to hiring law firms based on some mystical notion of brand strength plus a willingness to offer hourly rate discounts, then update your LinkedIn profile because your contribution can be automated in a spreadsheet at a far lower cost.
Law firm leaders: You and your partners are no longer allowed to say to your clients, "We don't know what this might cost, because every matter is different," unless you've literally never done work like this previously. But then you should also scrub your website to remove all references to having any expertise in this area, so potential clients in the future can skip over you and find a more qualified practitioner. Otherwise, invest in professionals and training in project management, process improvement, pricing, and practice management to translate your firm's expertise into delivering quality legal services at market prices while also generating a profit. Do this collaboratively with your clients, or at least those clients you wish to keep. You're also going to need to tweak your compensation plan, because you're most likely rewarding behaviors that look an awful lot like being bad at practicing law. If all of this sounds challenging and disruptive, it is. If it sounds too hard to tackle, then step back and let the lawyers who will be around for a while run with it.
I elaborate more on this topic in my chapter in the recent book, "Practical Innovations in Legal Pricing."
From the publisher: The pricing of legal services is no longer simply about setting rates. Properly optimizing a firm’s pricing strategy is a critical source of competitive advantage and increased profitability, which now more than ever is crucial to staying relevant in the legal sector.
Firms must start looking to demonstrate their ability to provide clients with greater value through alternative fee arrangements, effectively controlled budgeting methods, and the integration of innovative firm management practices – whilst continuing to operate as a profitable business. Standard business principles have become the norm for firms – as clients become increasingly proficient in negotiating costs and defining the scope of engagement, service delivery must now be framed by value, expertise, and profitability rather than hours billed alone.
With contributions from pricing directors and expert consultants, Practical Innovations in Legal Pricing offers insight into newest effective approaches to pricing that top firms are undertaking. Taking an in-depth look at the role of shadow-billing and client collaboration in AFAs, integrating a firm’s legal project management and pricing functions for greater client benefits, and effectively executing a newly formed pricing strategy, this title will provide a comprehensive overview of the best practices in innovative pricing functions.
I think you'll find this book, with informative contributions from its many fine authors, to be an excellent addition to your must-read list. Yes, we're all busy. But consider this: your competitors may have already read it.