Pricing is a key lever influencing and driving financial performance as well as a pressure point for law firms as their clients demand more for less and a better balance between pricing and value. Toronto-based consultant Nancey Watson sat down recently with Stuart Dodds, director of Global Pricing and Legal Project Management for Baker McKenzie, and editor of Pricing on the Front Line, to discuss the current state of law firm pricing and the evolving role of the pricing professional.

Organisation

Nancey Watson: What was the initial catalyst for the role of pricing professionals in law firms?

Stuart Dodds: The initial catalyst for the growth in legal pricing (as a role/function) can be traced back to the fallout from the global financial crisis. Since 2008 there has been a much greater focus on the cost of legal services. In addition, declining or (at best) static demand for legal services has further increased competition/price pressure. However, although the financial crisis in 2008 may have dramatically accelerated the pace of what subsequently happened, change was always going to come. In 2017 there is a much greater need for law firms to be pragmatic and nimble when responding to clients’ collective requests, which does often challenge long-held traditions and models in firm profitability, the traditional partnership model, appropriate quality work product, hiring and retention, etc.

Watson: I have noticed that there are a variety of ways in which law firms structure the pricing function in the firm. Do you have a sense of which structure works best?

Dodds: This is very much driven by the size and practice-area scope of the organisation. We see legal pricing roles sit within finance, operations and marketing. My personal preference is for this type of role to sit within marketing, and indeed both my legal pricing roles have been within marketing. The rationale behind this is that firstly pricing is one of the 4Ps of marketing (the others being promotion, product and placement), but more importantly the fact that pricing really needs to clearly tie into a firm’s overall value proposition. However, as long as the pricing role is able to be client facing and engage with the firm’s partners and leadership teams regularly, it doesn’t really matter. The pricing role is very much one which acts as a conduit, bringing together various parts of a legal firm such as business development, knowledge management, finance and IT.

Watson: What are the most frequent challenges you and your peers typically face?

Dodds: The biggest challenge is around changing the behaviour within a law firm. When speaking with my peers, this is always the first theme mentioned. This is especially true when trying to convince someone to adopt a fee approach that they are less comfortable or familiar with. In addition, as law firm pricing roles begin to build greater traction within their respective organisations, there is the more positive challenge of managing capacity with increasing demand and increasing sophistication of pricing requests.

Watson: What qualifications would you recommend that a law firm look for when hiring a pricing professional?

Dodds: The pricing discipline has evolved significantly since I first started in this role in early 2008, and as such there is a much better understanding of what the role is within the marketplace and similarly a much broader range of skills which can now contribute to pricing. From a qualifications perspective, many in the field either have business-related or legal qualifications (or even sometimes both!).

However, there are a number of themes that ring true throughout. The key things I would look for are firstly the ability to engage and influence (much of the pricing role is about changing existing ways of working); followed by a good sense of commercial pragmatism. The ability to conduct financial analysis is a given but is probably less important than the previous two capabilities. Intellectual curiosity and comfort with technology would be my final two critical characteristics. Additionally, there are also now a number of existing pricing-specific courses and certifications which can add to the pricing professional’s toolbox.

Different types of fee approaches

Watson: Could you estimate the breakdown of which pricing methodologies are commonly used in law firms today within the parameters of market vs. value vs. cost plus?

Dodds: The most common approach within the legal sector when determining the price of a matter is to build it from the bottom up, i.e., a cost-based approach. Although this accurately reflects the costs incurred by the law firm themselves, this is often of little interest to the client as they are more focussed on the fee and the eventual outcome.

We are also beginning to see, due to competitive pressure, more market-based pricing occurring within the legal sector (i.e., when a certain matter type typically costs $10,000). Many of us in pricing roles have often heard the refrain from our colleagues of “the market price for this matter is $X. Our fee cannot be more than that or we won’t win the work.” This is a better measure in the sense that it is more market driven/less internally focused, but this too has some limitations in that there is no guarantee that the matters being priced this way are comparable. The best way, and one that is slowly beginning to build some traction within the legal community, is valued-based pricing. This is when the fee charged more accurately reflects the value of the work being conducted as jointly agreed by both client and law firm.

Watson: How can law firms meet the client challenge of “more for less”?

Dodds: I think the first way that law firms can address this challenge is to really understand the value of the work that we carry out for our clients. There are a number of matters that most law firms do which help our clients conduct their day-to-day routine business, and consequently, clients are rightly looking for greater efficiency, cost control and appropriate value being delivered for these services. It is here primarily that I think we see the “more for less” challenge being articulated. Similarly, for the more complex or strategic initiatives, clients are looking for a fee that appropriately reflects the value of the work being conducted. It is incumbent upon law firms to work with their clients to develop fee approaches to address these concerns.

Watson: How would you describe various pricing approaches by practice area?

Dodds: Pricing approaches will vary by practice area by a number of key factors. The first of those is what is prevalent and acceptable within the jurisdiction itself (for example, some forms of success or contingent fee are not permitted in a number of European jurisdictions). The second is around the familiarity and experience of both the law firm and their client in adopting different fee approaches.

At a high level, we tend to find fixed fees being adopted for higher volume-type matters (for example, immigration and some types of employment, commercial contract review and IP trademark work). However, for those more complex matters (for example, M&A, litigation), we may find a variety of fee approaches being taken at different stages of the matter itself, ranging from fixed fees, discounted hourly rates and success fees.

The key to each approach is to ensure a transparent conversation between law firm and client to work out what approach best aligns cost to value.

Strategy

Watson: What will the impact of technology play in the area of pricing and legal project management?

Dodds: There are many good tools already available within the marketplace in the area of pricing and legal project management, with a number of others in development. The key functionality of these products generally focusses on and further supports how law firms can more effectively manage their matters, ensure pricing compliance and allow for sophisticated price modelling. In addition, there has been a growing number of practice-area specific tools in the market. It is clear that technology will have a transformative effect for many conducting these roles as information becomes much more easily available; the ability to model different pricing options becomes much more accessible; and client demands become more vocal for greater transparency and collaboration with key law firm providers. This, in part, is going to change the nature and skill set of those conducting pricing roles in the future.

Watson: How do you think Legal Project Management, Knowledge Management and Pricingshould work together?

Dodds: I view each of these key law firm functions as one mutually reinforcing “triangle.” The role of pricing is to determine how best to structure the fee to deliver best client value, for an appropriate level of profit for the law firm and using appropriate timekeepers and/or technology. The role of legal project management is then to deliver that work as effectively and efficiently as possible, at or below the cost quoted.

The role of knowledge management is seeking how to improve the underlying processes in the delivery of the matter, ensure the resources are appropriately skilled and adopt appropriate technology. Each clearly feeds back into how the matter should be priced and delivered in the future. In summary, Knowledge Management has an integral role to play and is one that I think we have not yet fully taken advantage of to date in the legal sector in this context.

The broader picture

Watson: How do you see the pricing role evolving within the legal industry?

Dodds: I think the first key theme will be the increasing professionalisation of the function now that the value of the function is being better established. As more and more people undertake these roles from a wide variety of backgrounds (e.g., marketing, finance, operations, legal), the barriers to entry have been raised, especially if looking to join one of the bigger firms domestically, regionally or internationally. There are not only the expectations around either legal or business acumen (ideally both), but increasingly previous pertinent legal experience and accommodation pricing, procurement and negotiation qualifications, as firms look to accelerate their own efforts by having those who’ve seen and done it before – for some, multiple times. This is also reflected in some of the titles now beginning to emerge within the industry, for example, Chief Pricing Officer and Director of Client Value.

I also think that the role will become much more comprehensive in scope. This will include elements of project management and practice innovation, many of which will involve a deeper understanding of technology (as I mentioned earlier). It will become much more client-centric than it is today, with the more senior resources regularly engaging at a peer-to-peer level with their client counterparts.