FOLLOW THE MONEY. If anyone at your firm is still not feeling threatened by ALSPs (and the burgeoning strength of in-house legal departments, and AI), drop into your next conversation that the PE firm with controlling interest in LegalZoom (valuation = $2 billion), just obtained controlling interest in Axiom (or at least what is arguably
In just two weeks, Legalweek 2019 will kickoff in NYC with all-day workshops on Artificial Intelligence and Blockchain. I wish I could attend those, but I’ll be participating in the Competitive Intelligence Workshop down the hall.
- Check out this post by Mark Dibble of HighQ: How to Unlock a Firm’s Data Potential. Drawing on
This post got me thinking again about Net Promoter Score (NPS). It discusses in some depth several of the issues raised by reliance on NPS, but I have a more fundamental issue that usually receives short shrift: NPS is not actionable.
Digression: what is NPS? “The Net Promoter Score is calculated based on responses to…
In my series on using intel to optimally price legal matters (Part 1, Part 2, Part 3) I mentioned that the calculation of profitability requires that a firm have the discipline to promptly close matters. I have since been asked how to accomplish this feat, seemingly impossible in certain firm cultures.…
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
This is the second installment of my three-part Pricing series. The first is here.
This installment covers the three essential elements of pricing legal services.
Tomorrow, in the final installment, I will show how to use Competitive Intelligence and Business Intelligence to develop the optimal price.
The MIT Sloan Management Review7 identifies three factors to be considered in pricing (all apply to legal services):
- Cost-Based Pricing:relies on an analysis of the business’ operating costs to determine how to set the price to break even or achieve a certain return.
- Competition-Based Pricing: looks at data on competitors to determine appropriate pricing levels.
- Customer Value-Based Pricing: focuses on the customer’s perceived value to determine price.
Let’s consider each in some detail.
This is directly relevant to the profit discussion in Part One of this series. Cost-based pricing means calculating the total cost of the work, including all allocated direct and indirect expenses. If ALL firm expenses are allocated to matters, any work priced above its cost will be profitable. Firms should be very reluctant to approve any new work projected to be unprofitable. Some firms have pricing committees established for the purpose of acting as gatekeepers in this regard.
Remember, the total amount of any discount fully hits your bottom line profit. Many partners are quick to give in to clients’ requests for discounts, but these should be given only as a last resort after exhausting other methods of increasing the value of your services to this client. (See “Customer Value-Based Pricing” below.)
This may be hard to believe, but I have seen it happen several times. Some in-house counsel receive bonuses based, in part, on the discounts they manage to negotiate from outside counsel. (This seems to have been more common a few years ago than today.) So, law firms would increase the entries on their rate sheet a bit only so they could then give the client the desired discount.…
“(Pricing) can just destroy you if you don’t do it right. It doesn’t matter whether you’re putting out a novel you’ve written or providing a service through a pest control company or you’re a veterinarian. The bottom line is that pricing is extraordinarily important.”1
Until the past decade, most law firms simply billed clients according to their current rate sheet (with occasional discounts) and gave pricing scant thought. In today’s market, that won’t do. Pricing is much more important than in those good old days, not just in terms of the amount charged, but in terms of the billing structure (e.g., caps, collars, fixed fees, contingencies, hold-backs, success bonuses.)
With law firm margins thinner than before, it’s necessary to understand the profitability of each matter and client. Effective pricing means structuring fees so the firm wins the work and that the work is profitable. This is also a marketing opportunity in that optimal pricing helps clients meet their strategic goals (e.g., predictability, and “win at all costs” when needed); and it’s an opportunity to strengthen client relationships by increasing transparency.
Business Intelligence and Competitive Intelligence can substantially help manage the risk inherent in those pricing decisions. Optimal pricing requires three types of intelligence:
- Profitability of the matter and of the client under various fee models.
- Understanding of the fees being charged by competitors for similar services.
- Buyer price sensitivity.
At its core, the pricing of legal services is like pricing anything else, a matter of supply and demand, elasticity, competitive forces and buyer values.
The next part of my series on “Better Decisions with Business Intelligence and Competitive Intelligence” will be about using BI and CI when pricing legal services. (Part One is here.) As I draft that post it occurs to me that we need some more common vocabulary, specifically around Alternative Fee Arrangements (AFAs). We’ve been kicking this term around for several years now, but I rarely meet two people who have exactly the same things in mind when they talk about AFAs.
To each their own, but here are the forms of AFA with which I have worked and how I think of each:
Billing all attorneys and every attorney class (partner, associate, of counsel) at the same hourly rate
Traditional straight contingency for plaintiff cases
“Reverse” contingency for defense cases
Often gradated based on phase of the matter
Percentages increase as case nears trial…
(A version of this material originally appeared in the July 2017 issue of ALM’s “Marketing the Law Firm.”)
In this five-part series I will:
- explain and distinguish “Business Intelligence” (BI) and “Competitive Intelligence” (CI), and show how both should be employed in optimal:
- brand development,
- pricing of services,
- client feedback programs, and
- strategic planning.
This installment will set the stage with some background and definitions.…