Strategic Pricing: Creating Conditions to Succeed
The difference between pricing legal work the way law firms have always done it and strategic pricing is simple: The former looks at the price tag from the law firm’s point of view, focusing on revenue and profitability. The latter focuses not on how much clients can be convinced to pay, but on perceived bang for the buck – that is, how the client defines and measures value in the context of its overall business.
The Plan, Boss, The Plan!
Every year, most law firms undertake a strategic planning process, and every year their top three goals are the same:
- Generate more revenue
- Become more profitable
- Make certain we have (or go get) the right talent to achieve items 1, and 2.
If you read further into the strategic plan summary that every partner parks in a bottom desk drawer, somewhere waaaaay down the list of firm objectives you may find some vague reference to measuring client satisfaction or client performance management.
These plans – wish lists, really – tend to be perennial exercises in futility: they neither serve as practical roadmaps for lawyer behavior nor provide practical steps for revenue-enhancement, increased profitability and sophisticated talent management. As a result, they serve as poor foundations for internal pricing practices.
The Tendency Toward Navel Staring
Unfortunately, all too often law firms treat pricing as an inwardly-oriented activity that generates a price-point that then is imposed on the client. This fosters a mindset that asks only, what will the traffic bear? Today this mindset is not working.
Every law firm managing partner will tell you that it is becoming progressively harder to land work – new work or repeat business – in today’s competitive marketplace. Fierce competition for a piece of an essentially fixed pie has triggered an all-hands-on-deck approach to business development. No more trichotomy between finders, minders and grinders. Today, every partner must go beyond being a profitable individual contributor. To avoid being marginalized or “made available to the market,” he or she must also be a successful rainmaker and a mini-P&L center.
And even putting all the troops on the front line is not maintaining – much less growing – the revenue stream. Despite their yearly plan to make more money, today many law firms are struggling to stay even: 35% of large law firms’ revenues are declining.
It’s surprising that more firms don’t consider an obvious truism: if clients are not satisfied – if they don’t think their interests are being given top priority by outside counsel – goals 1 and 2, above, are unattainable; clients will take their work and money elsewhere. As for goal 3, merely having a lot of skilled bodies on the bus will not automatically realize the firm’s financial goals – not unless the clients feel they have received fair value for the cost of services and continue to engage that talent.
This intense emphasis on business development means that most law firms’ strategic plans look through the wrong end of the telescope, concentrating on sending more feet out on the street to beat more bucks out of the bushes. What should be happening is that pricing, revenue and profitability should be looked at through a broader lens: a shift in focus toward a client-centric view of the legal world in which alignment with client goals is Priority One, Job One, and Metric One.
Client-Centric Thinking
In an era where law firms no longer call all the shots in the law firm-client relationship and where bargaining leverage has shifted to the client, law firms’ cards-held-close-to-the-vest orientation does not foster client satisfaction or trust. In negotiations, an adversarial backbeat persists – the client constantly worrying, Are we going to be paying too much for this outcome?
On the other hand, strategic pricing, which is built on a detailed inquiry into how the client defines value, can become the keystone for a relationship where the client feels that the costs relate fairly and efficiently to his needs.
Instead of asking, “How much money do we want to take in this year?” and “What rates and pricing structures are necessary to hit our numbers?” law firms should be asking, “What can we do to more fully understand not just our clients’ legal needs, but also their business needs?” That question answered, firms should then ask themselves, “How can we meet those needs more consistently, efficiently, and predictably?”
Framing the Strategic Context
Before the firm fires off a pricing proposal, its lawyers need to find out what the client really wants and expects from the work they are considering sending to the firm. Unless a lawyer is performing true commodity work, where each matter is exactly like the next and the desired outcomes are identical, the firm’s pricing experts must first ask the client some key questions to create a strategic context for the legal work:
- What are the client’s primary goals – the key deliverables – for this matter? What constitutes a win from the client’s point of view? What are the stakes?
- If these goals are achieved, what benefit will that provide the client?
- What budget do they have in mind? (And be clear: clients always have a budget number in mind.)
- What criteria do they use to evaluate outside counsel?
- As members of the in-house legal team, how are they evaluated for how well they manage outside counsel and outside legal spend?
These framing questions are entry-points for further nuts-and-bolts pricing discussions. The client’s answers to these threshold inquiries will, in turn, shape and direct further questions that lead to accurate and comprehensive understanding of the engagement.
Now It’s Numbers Time
It is only when a lawyer fully understands the full sweep of client goals and priorities that strategic pricing can begin. That is one reason why simply pulling a budget from a prior matter off the shelf so often leads to disaster.
For example, if an earlier budget was formulated around the goal of resolving a dispute as rapidly as possible, that budget might be heavily front-end loaded with partner time to bring an early-stage full-court-press to bear. If, on the other hand, the goal of a new matter is to put the brakes on a matter, drag it out, and wear the other side down, the budget naturally will look substantially different. Bear in mind too that there may be many client voices and interests to be considered: Lawyers may want to make law and establish precedents, whereas business unit heads who are footing the tab may want to minimize outside legal spend at all costs. Different goals have markedly different budgetary implications. If the lawyer doing the pricing has no idea what the client’s goals are, the budget is likely to be an unrealistic estimate, bad fit, or recipe for overruns down the road.
It is no accident that the Association of Corporate Counsel, in creating their suggested Outside Counsel Scorecard, listed the following service quality criteria for outside counsel (listed in order of importance):
- Understood Client Goals
- Legal Expertise
- Efficiency
- Responsiveness
- Predictive Accuracy
- Effectiveness
Note that understanding the client’s goals is listed first. That understanding is the starting point for having firm lawyers select the right team, craft the right budget, and achieve an effective (for the client!) resolution of a matter. All other desiderata flow from there.
If firms want to achieve their financial goals, they must support true strategic pricing by incentivizing lawyers to focus on the value they can provide to clients –not just the hourly rates du jour. That does not mean tickets to ball games or fancy dinners or sending newsletters. It means talking with clients in meaningful ways – day in and day out, not just when a fee estimate is being prepared – about their business contexts and their goals for the work they are outsourcing to firms. When clients are truly the first priority, the conditions for law firm financial success fall right into line.