• This short piece by Bernard Marr (“Artificial Intelligence and Blockchain: 3 Major Benefits of Combining these Two Mega-Trends”) is worth reading but I disagree that blockchain is likely to “explain decisions made by AI.” If only!
  • Speaking of blockchain, in this post, Kevin Gidney, co-founder of Seal Software asks, “What do blockchain, artificial


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

Cost-based pricing

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.

Competition-based pricing

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


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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.


Pricing

The MIT Sloan Management Review7 identifies three factors to be considered in pricing (all apply to legal services):

  1. 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.
  2. Competition-Based Pricing: looks at data on competitors to determine appropriate pricing levels.
  3. Customer Value-Based Pricing: focuses on the customer’s perceived value to determine price.

Let’s consider each in some detail.

Cost-based pricing

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.
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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:

Blended Rate

Billing all attorneys and every attorney class (partner, associate, of counsel) at the same hourly rate

Contingency Fees

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
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