3 trends in pricing and pitching new legal work
In this second post from business and client development and service strategist, Julie Savarino, we discuss the trends firms should consider when pricing and pitching new legal work. While firms want to ensure efficiency and profitability, client transparency and clear expectations also play a major role. You can connect with Julie on LinkedIn, and please look out for her next post on how data analytics are transforming law firms.
In this hyper-competitive market for outside legal services, it is no longer enough to price and pitch new work in the same old manner.
According to the renowned law firm strategy and practice management consultant, Patrick J. McKenna, “robust pricing is a key to matter profitability yet most attorneys invest little time in seriously exploring how to price their services or to price them effectively. Worse yet, they chronically over-react to perceived client pressures to reduce fees, afraid they will lose the engagement.”
A new way to price and pitch legal work
In order to ensure legal services are proposed, pitched and then delivered profitably, lawyers and firms must use the right inputs from their proprietary and confidential internal data along with experienced pricing assistance before pitching. Firms without modern, up-to-date technologies in place to pitch new work efficiently will face increasing competition. In fact, most law firms still spend considerable internal lawyer and staff time trying to assemble the appropriate internal data and information.
3 pricing trends occurring in profitable law firms:
1. Budgets are out, not-to-exceeds are in
“Budget” is a word commonly used by both clients and lawyers, especially during pricing and pitching. But what the word budget means to lawyers versus what it means to clients varies. This different concept of budget causes a major discrepancy in the important “setting expectations” phase. What happens next is a major misunderstanding regarding the answer to one of the most common questions all clients ask, “how much will this cost me/us?” In fact, several major buyers of outside legal services who use many law firms have recently told me, “outside lawyers define the word budget to mean an estimate of fees. But to us, the client, the word budget means the total maximum fee the lawyer/firm will charge us. So we often receive bills in excess of what we were expecting, which are not well received.”
This critical difference in the meaning and understanding of the word budget causes internal issues and problems for both law firm clients and lawyers/firms. It leads to expensive law firm write-offs and write-downs and can decrease client satisfaction.
To avoid this from happening, sophisticated firms have deployed systems which automatically track professional time and costs against as-agreed-to budgets and not-to-exceeds, and also flag non-client-compliant billing entries. For example, if a client’s outside counsel guidelines (OCGs) prohibit the law firm from billing the client for first-class travel or first-year associate time, these systems prohibit these entries when time is entered by the firm’s lawyers. This avoids time leakage and saves law firms considerable time and expense spent making adjustments to invoices and bills.
2. Involvement of procurement and pricing professionals
Large-scale law firm clients now have procurement professionals who are increasingly involved in the selection and hiring of outside legal counsel and law firms. To stay apace, many major law firms have hired full-time, experienced pricing professionals to oversee and manage pricing and profitability, and as a result are getting much more sophisticated at effectively pricing and pitching new legal work. According to Silvia Hodges Silverstein, executive director of the international trade organization Buying Legal Council, almost all AmLaw100 firms have a pricing professional, a team, or at least a manager that also deals with pricing. Of the Fortune 500, about two thirds involve procurement, particularly in the pharmaceutical, financial services and insurance industries. Patrick Johansen, a pioneer and leading authority on law firm pricing maintains a list of law firm pricing professionals.
The fact is, the greater the firm’s ability to efficiently
1) scope new work
2) use actual data to calculate realistic rates, fees and pricing options for clients
3) create and offer budgets and not-to-exceed fees, along with describing what makes you different or better
4) deliver as promised
5) report those results in a measurable manner to clients
the greater the number of wins and profitability.
As Chad Cook, who serves as director of strategic analysis and pricing for Faegre Baker Daniels says “many of our clients operate in highly competitive markets where legal issues can have a material impact on performance. Our team’s goal is to leverage experience, data analysis and technology, to provide creative pricing solutions to our clients.”
Patrick J. McKenna also suggests, “One of the critical considerations in pitching any new work is to ask yourself: how effective are you at estimating value, measuring value, communicating value and enhancing your client’s understanding and perception of your value? In other words, do you negotiate price or value in your discussions? Value can come from: offering a service that is highly tailored to the client; having a better understanding of your client’s needs than your competitors; creating the perception of being a “category of one” and/or offering the client a “guarantee” or other arrangement, which will reduce their risk in making the final selection.”
3. The move toward predictive pricing
What is predictive pricing (PP) and how can it be used by law firms? PP systems use artificial intelligence and machine learning to produce pricing options based on internal firm data. PP systems analyze a number of internal and external variables and parameters, including (but not limited to) rate differentials based on years of experience or geography, past case or matter hours, average fees or costs, competitors’ rates, capacity and other factors.
PP models should begin with leveraging historical disparate data sets, followed by data cleansing and normalization. According to Jennifer Roberts, manager of strategic research at Intapp, “these initial steps are vital to create and implement relevant AI-based predictive pricing metrics necessary for models, such as calculating how much exertion is required for a matter or auto-assigning phase and task codes.” Once implemented, these PP systems capture and analyze all incoming and historical data to create budgets based on actual lessons learned. Jennifer continues, “because AI supports a constant data feedback loop, it brings to life the ability of firms to more accurately estimate, predict and plan pricing, staffing, utilization, capacity and realization, all of which drive profitability.”
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