How your firm can win back pricing power

In the latest of a series of articles on the recent World Masters of Law Firm Management conference in Sydney, ALMJ reports on the key messages from Colin Jasper and Pier D’Angelo on pricing strategies for law firms.

“Perhaps the reason price is all your clients care about is because you haven’t given them anything else to care about.”

– Seth Godin, American author and entrepreneur

In an era when many law firms are coming to terms with clients who want ‘more for less’, there is a risk of getting caught in a race to the bottom when determining their fees.

Colin Jasper, a director of Jasper Consulting who has advised major law firms in the United States, the United Kingdom, Asia and Australia on pricing strategies, says it is a mistake that threatens the sustainability of any business. He adds that Godin’s insightful quote is a reminder that partners need to make a case with clients for charging a fair price that ultimately benefits both parties. “Let’s put responsibility back where it belongs,” Jasper told attendees at the recent World Masters of Law Firm Management conference in Sydney. “It’s not the client’s responsibility to work out why they should pay more for you. That’s our responsibility.”

Co-presenter Pier D’Angelo, chief pricing and practice officer at Allens, agrees that it is time to stop maligning clients who press hard for a good price. “It’s actually their role to press firms for the best price they can get and to optimise the value they get for that price,” he says. D’Angelo believes the nature of the lawyer-client relationship creates reluctance in some partners to engage in price discussions that may be regarded as “too vigorous”.

Of course, there needs to be subtlety in such discussions, but bringing greater rigour to the pricing process and encouraging more financial literacy within the firm is at the heart of ensuring better pricing decisions. Partners need to understand the value they deliver to clients, D’Angelo says, and they must know what their competitors are doing. “A lot of information needs to be brought to bear in the context of the pricing decision in order to arrive at what is the right price for a piece of work (and which) appropriately reflects the value of that work.”

Characteristics of the right price

The ‘right price’ for legal services work, Jasper contends, involves meeting two criteria: it should create value for clients, and it must also allow the firm to capture a fair share of the value created. He says most firms put an enormous amount of effort into their work, and then simply cross their fingers with revenue outcomes. “When it comes to pricing, we hope the client treats us okay,” he says.

Such reactions highlight the difference between the ‘practice of law’ and the ‘business of law’. “We cannot capture value unless we are creating value, but creating value is insufficient,” Jasper says. “You also have to put in place measures to capture it.”

The key questions

1. What is pricing power?

The first factor law firms must come to grips with is pricing power – and how they can get it. “You have pricing power if you’re able to justify why you should be chosen even if you are more expensive,” Jasper explains.

Sure, clients may want more for less, but it is not always the case that a firm has to compete on price. Other factors such as reputation, experience, knowledge of the client or specific insights on a matter come into play. Given that there will always be firms that offer cheaper fees, partners must be able to present a value proposition for charging more. 

2. What do clients want?

In essence, many clients want it all from a law firm. Expertise, relationships, strategy, reputation, low prices, price certainty, trust, brand, innovation, service, you name it. “The expectations from clients on firms are enormous,” Jasper says. “It’s not as if some of this is optional.” That makes it crucial for partners and firms to understand their value proposition and to be able to present it appropriately to clients. That can help ensure that negotiations are not based solely on price.

3. How do we increase price-setting discretion?

In the Australian legal market, Jasper says partners can typically charge anywhere from $900 an hour to less than $300. So how do some firms justify those premiums? Pricing strategies should aim to build pricing discretion, which in turn involves addressing two key questions: where should you compete (which clients and which services) and how should you compete (what is your point of differentiation)?

Where to compete will usually depend on how potential clients value three key elements:

• Expertise – some clients want firms that have been there, done that on a particular legal matter or area of law and which have case studies to prove their results;
• Relationships – some clients want firms they know and trust and which have delivered results for them in the past and understand their business, culture and processes;
• Price – some clients will make a choice based predominantly on fees.

Of course, most clients will try to strike a balance between those three factors, while others may place a heavy weighting on one factor or the other. For law firms, it is crucial to identify attractive clients that fit into their strengths within those parameters. Jasper says the key is to build knowledge of clients so that you can serve them better than anyone else in the market. Understand their issues and what they are trying to achieve, and appreciate which clients you want to serve and how you can do so for a fair price.

Two things drive price-setting discretion, according to Jasper. The first is market position – is your firm an acknowledged leader in an area of law that creates a situation whereby clients call you? The second is the role of price – while some services may be commoditised and attract a lower fee, others will be less price sensitive.

Jasper tells the story of a New York law firm to which he was a consultant. Despite some partners having a charge-out rate of US$1295, he advised them to increase it to US$1395. They did so and did not get significant pushback. Why? Because they were advising clients on crucial tax matters that were strategically important to the business. “In that case, money is not the driving factor,” Jasper says. “You don’t see too many people in New York saying ‘get me the second-best tax lawyer’.”

If a client is not buying on price, it makes no sense to sell based on price. There are two principle paths to differentiation for a firm:

• Be a visible expert

– Select an attractive target market (e.g. sizeable and growing)

– Actively build a profile in your chosen target market

– Progressively develop your reputation as a leader in your chosen field.

• Be a trusted adviser

– Establish strong, loyal client relationships

– Build your knowledge of key clients (understand their competitive environment, strategy and business drivers)

– Strengthen relationships with key contacts (know their challenges, issues and key performance indicators).

4. How do we improve pricing outcomes on our next competitive bid?

D’Angelo says there are a range of tactics which create value for clients that firms can use to improve their pricing outcomes. As a starting point, they must demonstrate value to their clients – a task that partners should be able to play and which entails understanding the potential return on investment for clients. “Unless you know your value, you are going to under-price your services more likely than not,” he says.

The World Masters presenters cited a scenario in which a client gets three quotes from three different firms, with one setting a fee of $35,000, another $40,000 and the other $45,000. If the client had no additional information other than the proposed price, then it would logically go with the cheapest deal. However, if one firm could point to its particular track record in similar matters and point to, for example, a $1 million ROI difference that could occur depending on the outcome of the case, then the picture changes. “If that’s the case, then suddenly the $10,000 difference between the top and bottom prices becomes relatively less important,” Jasper says.

Other immediate options to improve pricing outcomes include bundling or unbundling. The former could involve a scenario whereby a firm with a higher bid wins work on the promise of getting an early resolution to a project that results in quicker access to revenue for a client. The latter could entail a scenario whereby a firm submits a lower price but at the same time advises the client that its strategy is not right and that following the firm’s advice could result in a more cost-effective outcome. It is all about thinking outside the square to assist the client.

Then there are strategies such as choosing an appealing fee structure (in recent years buyers have welcomed innovative fee structures that have suited their particular circumstances), controlling uncertainty (even if a fixed price cannot be offered, the firm may be able todemonstrate that it operates in a cost-conscious way), showing a cost-conscious attitude (“Clients want to hear that you are spending their money wisely,” Jasper says), providing transparency (being upfront with clients about each component of the work and its cost), offering guarantees (which demonstrate that a firm backs its ability to deliver services and outcomes), providing options (via the presentation of a couple of different pricing alternatives for the same job) and actively engaging with the client (whichunderpins the ability to carry out many of the above-mentioned strategies).

While law firms are often nervous about offering guarantees, Jasper and D’Angelo say they have the capacity to be a game-changer. Suppose you promise to finish a job by a certain date, or present a fee for a project and give the client the ability to adjust it after the work is finished if it does not think the fee reflects the value the work has delivered. In truth, clients rarely take up lawyers on such guarantees because firms usually deliver what they promise, but the offer enhances engagement and trust nevertheless.

Providing pricing options is one of D’Angelo’sfavourite strategies. He says that sometimes there is insufficient time to discuss preferences with clients. Presenting a number of options increases the chances of offering an option that meets the client’s needs. This approach also empowers the client by giving the choice. His other preferred pricing tactic is simple, but some do not do it: “Talk to your client before you put the price in.”

5. How do we drive change within our firm?

The challenge for many firms seeking to improve their pricing outcomes, according to D’Angelo, is their structure. To succeed, partners are encouraged to build their practices, which are often measured on the basis of the revenue they generate, rather than their profitability. “This approach can drive partners to chase revenue by unnecessarily reducing price.” Long-term structural change requires a focus on mindset, skills and embedding.

Mindset

D’Angelo says partners should be able to articulate the value that a firm delivers and, in so doing, maximise the chances of capturing a fair price for the business. However, many partners may not see that as their role – a mindset that needs to change. He says confidence is a really important factor with pricing, too, as partners need confidence to put their justifications for a fair price, and unless they understand the value that they can bring, they may see their work as a commodity.  “You need to price fairly for that value and be prepared to have that conversation with clients,” D’Angelo says.

A summary of factors to consider when shaping mindsets includes:

• focusing on profit rather than revenue
• understanding the importance of pricing
• striving for fairness, for the client and the firm
• influencing clients’ perception of value and fairness
• appreciating that when clients complain about price, it does not necessarily mean your price is too high
• understanding that price is rarely the only issue
• focusing on value and differentiation.

Skills

At World Masters, Jasper and D’Angelo highlighted a range of skills that contribute to good pricing negotiation, covering areas such as learning pricing basics; providing clarity around the firm’s pricing strategies; understanding the value of pricing; acknowledging the importance of pricing communication; acquiring knowledge of pricing financials; and improving scoping and project management to prepare accurate pricing estimates.

A standout point for D’Angelo is providing the training to ensure that partners understand the firm’s financials. Why is it so critical? Well, if a business operates on a margin of 30 per cent and the partner gives a 10 per cent discount as a matter of course, they are “knocking 33 per cent off their margin just like that”. He adds: “The partners are often just thinking of the 90 per cent because they want to secure the revenue. They may not be focused on the profit outcome that flows from those decisions. So financial literacy is incredibly important to underpin the skills base of people and to ensure that pricing decisions appropriately weigh up all factors, including impact on profit.”

Embedding

After getting the firm’s pricing mindset right and investing in skills, the next challenge is to embed such disciplines in the firm. Setting policies and guidelines is the first step on this journey as it provides a reference point for all partners and a framework for possible discounting discretion.

The leadership team must also champion such pricing strategies to ensure they permeate through the firm. And there must be ongoing oversight to ensure that pricing decisions continue to be made in the best interests of clients and the firm. Jasper says there will always be cases where it is appropriate to compete on price, but the balance must be right. “If you always fill the plane with discount economy tickets, you go out of business,” he says.

Other ways to embed pricing strategies include implementing measuring and reporting mechanisms, providing rewards and recognition for people who get it right, and using appropriate software tools that aid the process. D’Angelo also believes it is crucial to have a pricing leader in the firm. For bigger firms, that could mean having a dedicated pricing specialist; for smaller firms, that role could fall to a chief executive, managing partner or partner. “Someone has to play the role of the pricing person,” he says. “They are the people who bring the nuance into the pricing strategy.”

The World Masters of Law Firm Management series showcases the knowledge and expertise of world-acclaimed law firm management experts. The list of keynote presenters at World Masters has included David Maister, Thomas DeLong, Ron Baker, Ed Weissman, Stephen Mayson, Gerry Riskin, Ashish Nanda and Richard Susskind, all of whom are highly regarded international leaders in their fields.