Pricing Legal Services

Legal marketing executives recognize their responsibility to demonstrate a strong connection between revenue and productivity. Beyond the “value-added” components of their efforts, expectations have risen in law firms for the marketing team to contribute directly to top-line growth. While their roles typically fall short of direct selling to new clients, in recent years marketing executives have been integrally involved in ongoing account management, prospecting, and expansion. They are juxtaposed with the rainmakers ' practically joined at the hip in supporting partners as they embark into the legal market battlefield.

With the onset of new approaches to pricing legal services, the sliver of light between law firm marketing executives and partners has narrowed even further. Alternative Fee Arrangements (“AFAs”) have dominated the headlines of legal press and have crept into the mainstream media as well. How firms have approached this industry zeitgeist varies greatly. As in the steps of bereavement, the first hurdle for some has been to accept that this trend is here to stay. Slowly, firms have made it over that psychological threshold and are embracing the new model.

Value-Based Pricing Is on a Fast Track

While a few prestigious firms have been partially inoculated from the trend, many AmLaw 100 and 200 firms are now knee-deep in rethinking how to address and capitalize on these new client expectations. While clients have always pushed back on fees, historically, corporate legal departments ' whose leadership teams are often comprised of Big Law alumni ' have lacked the tools and, for that matter, the mandate to rethink the model of procuring legal services. In 2008, the Association of Corporate Counsel published its ACC Value Challenge manifesto, which called for a collaborative approach to providing more value-based pricing and delivery models that transcend the traditional billable hour arrangement. In a few short years, conventional structures have been supplanted by innovative solutions. Today, AFAs can represent as much as 20% of a firm's revenue, if not higher.

How legal marketing executives have dealt with this trend has varied greatly. While AFAs have forced a fundamental rethinking of how law firms operate, grow and compete, some marketing organizations have missed the chance to seize on this opportunity. In fact, this is the “power of the purse” that legal marketing has been waiting for. They should grab hold of it. From a career standpoint, marketing executives who cannot show they have their hands in the pricing function run the risk of falling behind their contemporaries in skills and experiences. This is true both in terms of the value they show to their current firms as well as prospective employers.

The Art and Science of Pricing

Knowing how to price starts with the fundamental application of financial analysis to determine how best to charge for service to be rendered. It is scientific and formulaic. As such, many firms have housed the pricing function initially within their finance departments where computational tools exist to scrub the numbers. Finance teams have tapped their FP&A experts to review data and construct appropriate algorithms to determine price. In fact, finance departments have had this information for years, but have done little with it to change firms' operating models. The information was primarily used for profitability analysis and compensation distribution and adjustments, not creating new pricing models. As long as the billable hour model dominated (admittedly, it still does) the industry, the efficient delivery of legal services was not paramount and finance departments were not expected to reinvent that wheel.

Further, no mandate existed to drive changes in how attorneys practiced law, dealt with clients, and billed their time. The only client fiat was to ensure top-notch legal services were delivered, followed by a little price negotiation at the end of the matter. Today, clients demand more. While finance departments have done yeoman's work in terms of vetting appropriate billing rates, pricing is fundamentally an account management function. Clearly, account management should be within the purview of marketing executives' job responsibilities. Therefore, raising pricing to an art form is their duty.

Crunching numbers is not necessarily the forte of most marketing executives, but one in which they need to become well-versed. Knowing what things cost and managing to an effective bottom line is critical to making sure revenue growth is not squandered. Undoubtedly, growth for growth's sake can be one of the most disruptive forces in any partnership. Once those ground rules are understood, marketing executives must offer perspective beyond the numbers. If a marketing organization is aligned in a business partner model with resources deployed by practice, then practice group management and legal project management is already something they are exposed to.

In many instances, properly marketing a firm's approach to AFAs can create a competitive advantage. Some firms have gone so far as to address AFAs on their website and related collateral material. That can create a near-term competitive advantage in the market but also could have some drawbacks. As we know, not all matters are necessarily subject to alternative pricing structures. Certainly, there are times, for example, in a “bet-the-house” deal or highly litigious matter where clients are more than willing to pay by the hour. It is important that proper internal and external messaging around AFAs is incorporated into the models used. There is no “one-size-fits-all” model, and arrangements can still be fairly complex with many variables built into the proposal.

Pricing is essentially proprietary, but positioned correctly, it can be used externally. There are no better resources within a firm's cadre of leadership to take on this balancing act than marketing executives. Many partners are loath to focus on price, as they perceive it as weakening the relationship-driven aspects of the practice of law. Similarly, finance executives seldom have access to the nuances of client relationships and can easily default to a binary interpretation of right and wrong pricing. Both sides need to be reconciled into a cohesive strategy. Marketing should be that glue.

Creating a 'Value' Proposition

The reality is that the ACC Value Challenge is a call to law firms to work in a more collaborative manner with corporate legal departments to better serve the needs of their shared customer base. Marketing executives are invaluable resources to bring into those discussions, as they offer a healthy perspective on market conditions, competitive intelligence, and residual value (beyond revenue) of certain client relations.

In many respects, AFAs provide the first pecuniary tools for marketing executives to truly impact potential revenue. Their insights will provide effective color commentary beyond what the numbers might initially indicate. Enhanced financial prowess is yet another skill senior marketing executives must possess to remain substantive contributors to their firms' success. From a career perspective, suffice to say, this must be part of the marketing executive's repertoire, and a core component of his or her professional resume.

This article first appeared in Marketing the Law Firm, a sister publication of this newsletter.

Michael DeCosta is a partner with the international executive search firm, Caldwell Partners. DeCosta is a member of the firm's Professional Services and Legal practices. He can be reached at 203-348-9581 or via e-mail at [email protected].

Legal marketing executives recognize their responsibility to demonstrate a strong connection between revenue and productivity. Beyond the “value-added” components of their efforts, expectations have risen in law firms for the marketing team to contribute directly to top-line growth. While their roles typically fall short of direct selling to new clients, in recent years marketing executives have been integrally involved in ongoing account management, prospecting, and expansion. They are juxtaposed with the rainmakers ' practically joined at the hip in supporting partners as they embark into the legal market battlefield.

With the onset of new approaches to pricing legal services, the sliver of light between law firm marketing executives and partners has narrowed even further. Alternative Fee Arrangements (“AFAs”) have dominated the headlines of legal press and have crept into the mainstream media as well. How firms have approached this industry zeitgeist varies greatly. As in the steps of bereavement, the first hurdle for some has been to accept that this trend is here to stay. Slowly, firms have made it over that psychological threshold and are embracing the new model.

Value-Based Pricing Is on a Fast Track

While a few prestigious firms have been partially inoculated from the trend, many AmLaw 100 and 200 firms are now knee-deep in rethinking how to address and capitalize on these new client expectations. While clients have always pushed back on fees, historically, corporate legal departments ' whose leadership teams are often comprised of Big Law alumni ' have lacked the tools and, for that matter, the mandate to rethink the model of procuring legal services. In 2008, the Association of Corporate Counsel published its ACC Value Challenge manifesto, which called for a collaborative approach to providing more value-based pricing and delivery models that transcend the traditional billable hour arrangement. In a few short years, conventional structures have been supplanted by innovative solutions. Today, AFAs can represent as much as 20% of a firm's revenue, if not higher.

How legal marketing executives have dealt with this trend has varied greatly. While AFAs have forced a fundamental rethinking of how law firms operate, grow and compete, some marketing organizations have missed the chance to seize on this opportunity. In fact, this is the “power of the purse” that legal marketing has been waiting for. They should grab hold of it. From a career standpoint, marketing executives who cannot show they have their hands in the pricing function run the risk of falling behind their contemporaries in skills and experiences. This is true both in terms of the value they show to their current firms as well as prospective employers.

The Art and Science of Pricing

Knowing how to price starts with the fundamental application of financial analysis to determine how best to charge for service to be rendered. It is scientific and formulaic. As such, many firms have housed the pricing function initially within their finance departments where computational tools exist to scrub the numbers. Finance teams have tapped their FP&A experts to review data and construct appropriate algorithms to determine price. In fact, finance departments have had this information for years, but have done little with it to change firms' operating models. The information was primarily used for profitability analysis and compensation distribution and adjustments, not creating new pricing models. As long as the billable hour model dominated (admittedly, it still does) the industry, the efficient delivery of legal services was not paramount and finance departments were not expected to reinvent that wheel.

Further, no mandate existed to drive changes in how attorneys practiced law, dealt with clients, and billed their time. The only client fiat was to ensure top-notch legal services were delivered, followed by a little price negotiation at the end of the matter. Today, clients demand more. While finance departments have done yeoman's work in terms of vetting appropriate billing rates, pricing is fundamentally an account management function. Clearly, account management should be within the purview of marketing executives' job responsibilities. Therefore, raising pricing to an art form is their duty.

Crunching numbers is not necessarily the forte of most marketing executives, but one in which they need to become well-versed. Knowing what things cost and managing to an effective bottom line is critical to making sure revenue growth is not squandered. Undoubtedly, growth for growth's sake can be one of the most disruptive forces in any partnership. Once those ground rules are understood, marketing executives must offer perspective beyond the numbers. If a marketing organization is aligned in a business partner model with resources deployed by practice, then practice group management and legal project management is already something they are exposed to.

In many instances, properly marketing a firm's approach to AFAs can create a competitive advantage. Some firms have gone so far as to address AFAs on their website and related collateral material. That can create a near-term competitive advantage in the market but also could have some drawbacks. As we know, not all matters are necessarily subject to alternative pricing structures. Certainly, there are times, for example, in a “bet-the-house” deal or highly litigious matter where clients are more than willing to pay by the hour. It is important that proper internal and external messaging around AFAs is incorporated into the models used. There is no “one-size-fits-all” model, and arrangements can still be fairly complex with many variables built into the proposal.

Pricing is essentially proprietary, but positioned correctly, it can be used externally. There are no better resources within a firm's cadre of leadership to take on this balancing act than marketing executives. Many partners are loath to focus on price, as they perceive it as weakening the relationship-driven aspects of the practice of law. Similarly, finance executives seldom have access to the nuances of client relationships and can easily default to a binary interpretation of right and wrong pricing. Both sides need to be reconciled into a cohesive strategy. Marketing should be that glue.

Creating a 'Value' Proposition

The reality is that the ACC Value Challenge is a call to law firms to work in a more collaborative manner with corporate legal departments to better serve the needs of their shared customer base. Marketing executives are invaluable resources to bring into those discussions, as they offer a healthy perspective on market conditions, competitive intelligence, and residual value (beyond revenue) of certain client relations.

In many respects, AFAs provide the first pecuniary tools for marketing executives to truly impact potential revenue. Their insights will provide effective color commentary beyond what the numbers might initially indicate. Enhanced financial prowess is yet another skill senior marketing executives must possess to remain substantive contributors to their firms' success. From a career perspective, suffice to say, this must be part of the marketing executive's repertoire, and a core component of his or her professional resume.

This article first appeared in Marketing the Law Firm, a sister publication of this newsletter.

Michael DeCosta is a partner with the international executive search firm, Caldwell Partners. DeCosta is a member of the firm's Professional Services and Legal practices. He can be reached at 203-348-9581 or via e-mail at [email protected].