This is the third and final installment in my series on using Business Intelligence and Competitive Intelligence to optimally price legal services.
Pricing fundamentals and the considerations unique to law firms are discussed here.
The three types of pricing and their dependence on Competitive Intelligence and Business Intelligence are covered here.
Putting it all together
This calculation is based entirely on data from the firm’s financial systems [Business Intelligence] and therefore very accurate–at least once the politics around various allocation assumptions have been resolved. (This is represented by “Profitable Work” in the following graph.)
Historically, firms have often told their clients that they cannot offer fixed prices because they can’t anticipate how much work will eventually be entailed. This excuse is increasingly falling on deaf ears as clients respond that they are being held to budgets, and a firm claiming to have deep experience should be in a much better position than they are to anticipate costs, at least for each phase of a matter. So you’d better be able to forecast profit.
Sources of such data are readily available [Competitive Intelligence], and at the date they are published, generally accurate. Assumptions may be required to get to the specificity needed by market and practice, but the results should still be pretty accurate. (This is represented by “Competitor Rates” in the following graph.)
Customer value-based pricing
These crucial data [Competitive Intelligence] are much “softer,” relying on the interpretation and interpolation of survey data and/or the debriefing of attorneys with close relationships with their clients to determine how the firm is perceived, what the client values and to what degree in specific situations and for specific types of work. (This is represented by “Value to Client” in the following graph.)
Ideally, the following calculation will be made for each type of fee-earner being pitched for a particular matter. In the real world, you will not have the luxury of going through this entire exercise for every lawyer and every proposal. In many situations, your data may be somewhat dated and a bit imprecise because of interpolations required. Still, this basic model should be kept in mind throughout the pricing process.
This chart refers to hourly rates for an equity partner, but the same principle applies to the net cost of a matter, regardless of the fee arrangement.
The calculation is very straightforward. Your range of acceptable prices for the matter at hand meets the criteria that it is: 1) profitable, 2) within the range of client acceptability (considering that it is your firm doing the work), and 3) not higher than the firms realistically competing for this work. The optimal price will be around the high end of that range. To maximize the probability of being hired you should be careful about pushing too close to the high end.
In many situations, there will be no range of acceptable rates and the firm should probably not bid on the work. This can occur when your costs to achieve profitability are too high, when the competition’s rates are too low, or when the top end of the client’s range of acceptable value is too low.
With this model in mind, the firm’s base rate sheet should be adjusted at least annually. (And not just increased across the board by an arbitrary percentage!) If too much of the work available to the firm is deemed unprofitable, the firm will need to adjust its business model by reducing rates (through compensation and/or expenses cuts). In most cases, expense reduction should be accomplished by process reengineering, not arbitrary budget cuts. If it’s not possible to reduce expenses or compensation, the firm will have to seek new value propositions based on the attributes listed under Customer Value-Based Pricing above.
Law firms have a history of being managed by gut instinct. In today’s market environment, that won’t do. Business Intelligence and Competitive Intelligence, especially when used in concert, can substantially help manage the risk inherent in pricing decisions.
The correct price for any given situation will be profitable, acceptable to the client and competitive. If any one of those criteria cannot be met, the firm should not bid on the work.