Pricing It Right: Restructuring Billing

As pressure on pricing continues, Big Law firms are buying (or building) analytics technology and hiring pricing specialists ' people who use market data, internal firm data and economics/pricing experience to ensure that firms are smart about bidding on work. The mission: Educate clients about the value the firm brings, while making sure to charge enough to make a profit.

Several trends are fueling the growth of both technology and the new job titles.

First, the ongoing pressure on billing rates and the move to alternative fee arrangements have made it difficult for firms to know whether they are making a profit on any particular deal.

Second, firms are realizing that third-party benchmarking data, which clients use to comparison shop, can be combined with the firm's own internal data to help them improve efficiency and profitability.

Third, firms are adopting business tools to help structure pricing, manage projects and track budgets ' but some pricing experts say the technology still falls short of what they need.

Billing Rates

Law firm billing rate increases have slowed since the recession, falling from 7% in 2007-08 to just 3.7% in 2012-13, according to the CEB (Corporate Executive Board) and Datacert | TyMetrix 2014 Real Rate Report. For partners, in particular, increases have leveled off at 2.4%, from 5.7% in 2007-08. (For more on the report and to obtain a copy, see, wvw.tymetrix.com/RRR2014.)

Clients, including many who already drive a hard bargain, are using increasingly available market data to negotiate fees down. For example, the Real Rate Report found big differences in hourly rates ' sometimes more than $240 ' in common practice areas, including mergers and acquisitions, regulatory and compliance matters. These differences represent “increased potential for negotiation of rates and suggest that there are material cost savings that can be achieved,” said the report. (See, “Big Law's Reality Check,” The American Lawyer, Nov. 2014.)

Firms can be caught flat-footed in negotiations if they don't have a good understanding of their own cost structure. Once they discard the traditional billable-hour model, firms can find themselves fumbling in the dark, economically speaking.

“When firms start doing these fixed-fee [deals], they aren't very profitable because either the firms don't know how to price them properly or they don't know how to manage them once they've priced and won the work,” says Tom Baldwin, CIO at Cadwalader, Wickersham & Taft. At his previous job, as chief knowledge officer at Reed Smith, Baldwin built a 15-person department that focused on pricing and knowledge management. At Cadwalader, he is responsible for pricing and knowledge management, including building a matter reporting system to help track budgets.

Meanwhile, firms are increasingly interested in gathering data ' from third parties and internally ' and figuring out their costs. Datacert | TyMetrix has seen more interest in its data from law firms in the last two to three years, says Dave Gorman, director of legal analytics. It's a sign that firms are running themselves more like businesses than ever before. “We're really starting to see the firms transform themselves,” he says. But firms need special expertise. They are hiring business professionals who can help the partnership focus on operational issues rather than just the law, according to Gorman.

These people include not only financial and operational executives, such as CFOs and COOs, but also people with titles like Pricing Analyst and Pricing Specialist. Three years ago, there were only about five people in Big Law firms who managed pricing, says Toby Brown, chief practice officer at Akin Gump Strauss Hauer & Feld.

Patrick Johansen, director of business development at Brinks Gilson & Lione, noticed the same thing. Out of curiosity, he started to monitor LinkedIn. Only 27 people at law firms had “pricing” in their title in 2010, but today it's 96. If you include those who cover pricing but don't have pricing in their title, the number expands to about 300, says Brown.

Even on Johansen's limited list, titles are all over the map ' from relatively low positions (Pricing Analyst or Manager), all the way up to the C-suite. Matthew Beekhuizen at Greenberg Traurig recently became the first to have the title of chief pricing officer, says Johansen.

Brown still deals with clients on pricing. “Just last week, a client told me they've been commanded to cut their budget ' both internal staff and outside legal [spending] ' by 10%,” he reports. “Lawyers are just not used to having those types of conversations with clients, so I get involved.”

But his role as CPO is broader, incorporating practice and project management, both important factors in overall costs. Brown works with practice groups to make sure they meet client needs “in a financially worthwhile way,” he says. “In the long run, that's where the real effort will occur, that's where we will be re-engineering the way we deliver our services.”

In addition, Brown and his director of innovation and legal project management, Tim Curren, are evaluating new technology and figuring out how to incorporate project management methods and principles into the firm.

Indeed, it's just as important to manage projects and monitor matter budgets after you've won the deal, to make sure things stay on track, says Baldwin.

Vincent Cordo, global director of client value at Reed Smith, takes it further. “It's a matter of moving away from just cost savings and becoming more strategic,” he says. His goal is to strengthen relationships with clients, making it “a good relationship for years to come, not just a quick win for this month.” Cordo's goal is to convince clients to stop focusing on a firm's rate structure and instead focus on value. He and his team help clients hone in on the metrics that matter most to them, and develop scorecards so the client can track those metrics. He even sends staff members to the client for free, to help them manage projects. “The ROI is huge,” he says. “We see better pricing, better profitability on matters just because we stay on top of the economics on a real-time basis.” (Note: Cordo and Brown co-authored a book, “Law Firm Pricing: Stategies, Roles, and Responsibilities,” published in 2013 by Ark Group Publishing USA, available at .)

Too often, law firms focus only on the financial components, which are only part of the pricing framework, according to Johansen. Pricing is not about figuring out how to lower your price in order to win the work, he says. “Pricing is exactly the opposite: it's helping your company raise your prices, helping to sell your 'value proposition' to clients, convincing them that what you're offering is worth more than [the price] you're asking.”

It's also about making sure the firm attains profitability from those sales. And that's another area where many firms fall down. “Most firms don't know if a 15% discount will still enable them to do that work profitably,” says Johansen. “Too often law firms have not crunched the numbers enough to know where their break-even point is.”

Tech Challenges

To evaluate effectively, firms must have numbers to crunch ' and the right technology. While third-party data is available, it's not as detailed as pricing professionals would like. Most firms don't yet have a good handle on their own internal data.

“We struggle to make sense of our data,” says Brown, who has analyzed thousands of past matters “by hand.” Meanwhile, he's working with third parties to try to use predictive coding technology to pull and categorize data from time entries, e-mails and documents.

There are technologies in isolated areas, such as project management, Johansen says, but no third-party offerings that integrate all components needed in professional pricing ' including cost structure and data, matter mapping, purchase modeling (to put together realistic bids), project management and budget tracking.

He would like to see “enterprise” technology that can extract a firm's cost data, put it into models, allow changes in parameters such as number of hours worked by senior partners versus associates, and then produce a price estimate. Or, even better, a product that would help a firm work backwards from a bid. If a client wants a price of $1.5 million for a given matter or portfolio, could the firm do the work well and still make a profit?

Some of the most sophisticated firms have built their own technology. While at Reed Smith, Baldwin and his team created their own pricing, reporting and project management systems.

Seyfarth Shaw's Lean Six Sigma discipline has served the firm well. The firm mapped 400 different legal processes which, when combined with internal data, “gives us the ability to price when asked to bid on similar matters,” says Chairman Stephen Poor. “We know what the variables are that drive costs, and we can tailor the pricing structure based on that.”

But there is yet to be an ideal system. “Today the Holy Grail is to have all your matters properly profiled [so that] with a push of a button you can price out a particular matter,” says Baldwin. Firms want a system that will “show me all the matters in the firm that are just like this one and that will give me a bell curve on what the costs are, so I can see where the price points should be.” It would also track the work as it's performed, to show clients how the work (and costs) are progressing, Baldwin says.

Promising tools are starting to come to market ' Umbria from Prosperoware was mentioned by several people interviewed for this article ' but it's still early. Meanwhile, pricing pressure continues, especially for commodity work. “Certainly not every matter is routine, but I think the days are gone of being able to charge variable rates for more common types of services,” says Andrew Jurczyk, CIO of Seyfarth Shaw.

Firms that can find the right pricing expertise and tools to maintain profits will survive, maybe even thrive.

Tam Harbert is a freelance reporter based in Washington, DC, and is a frequent contributor to this newsletter's ALM sibling, Law Technology News, in which this article originally appeared.

As pressure on pricing continues, Big Law firms are buying (or building) analytics technology and hiring pricing specialists ' people who use market data, internal firm data and economics/pricing experience to ensure that firms are smart about bidding on work. The mission: Educate clients about the value the firm brings, while making sure to charge enough to make a profit.

Several trends are fueling the growth of both technology and the new job titles.

First, the ongoing pressure on billing rates and the move to alternative fee arrangements have made it difficult for firms to know whether they are making a profit on any particular deal.

Second, firms are realizing that third-party benchmarking data, which clients use to comparison shop, can be combined with the firm's own internal data to help them improve efficiency and profitability.

Third, firms are adopting business tools to help structure pricing, manage projects and track budgets ' but some pricing experts say the technology still falls short of what they need.

Billing Rates

Law firm billing rate increases have slowed since the recession, falling from 7% in 2007-08 to just 3.7% in 2012-13, according to the CEB (Corporate Executive Board) and Datacert | TyMetrix 2014 Real Rate Report. For partners, in particular, increases have leveled off at 2.4%, from 5.7% in 2007-08. (For more on the report and to obtain a copy, see, wvw.tymetrix.com/RRR2014.)

Clients, including many who already drive a hard bargain, are using increasingly available market data to negotiate fees down. For example, the Real Rate Report found big differences in hourly rates ' sometimes more than $240 ' in common practice areas, including mergers and acquisitions, regulatory and compliance matters. These differences represent “increased potential for negotiation of rates and suggest that there are material cost savings that can be achieved,” said the report. (See, “Big Law's Reality Check,” The American Lawyer, Nov. 2014.)

Firms can be caught flat-footed in negotiations if they don't have a good understanding of their own cost structure. Once they discard the traditional billable-hour model, firms can find themselves fumbling in the dark, economically speaking.

“When firms start doing these fixed-fee [deals], they aren't very profitable because either the firms don't know how to price them properly or they don't know how to manage them once they've priced and won the work,” says Tom Baldwin, CIO at Cadwalader, Wickersham & Taft. At his previous job, as chief knowledge officer at Reed Smith, Baldwin built a 15-person department that focused on pricing and knowledge management. At Cadwalader, he is responsible for pricing and knowledge management, including building a matter reporting system to help track budgets.

Meanwhile, firms are increasingly interested in gathering data ' from third parties and internally ' and figuring out their costs. Datacert | TyMetrix has seen more interest in its data from law firms in the last two to three years, says Dave Gorman, director of legal analytics. It's a sign that firms are running themselves more like businesses than ever before. “We're really starting to see the firms transform themselves,” he says. But firms need special expertise. They are hiring business professionals who can help the partnership focus on operational issues rather than just the law, according to Gorman.

These people include not only financial and operational executives, such as CFOs and COOs, but also people with titles like Pricing Analyst and Pricing Specialist. Three years ago, there were only about five people in Big Law firms who managed pricing, says Toby Brown, chief practice officer at Akin Gump Strauss Hauer & Feld.

Patrick Johansen, director of business development at Brinks Gilson & Lione, noticed the same thing. Out of curiosity, he started to monitor LinkedIn. Only 27 people at law firms had “pricing” in their title in 2010, but today it's 96. If you include those who cover pricing but don't have pricing in their title, the number expands to about 300, says Brown.

Even on Johansen's limited list, titles are all over the map ' from relatively low positions (Pricing Analyst or Manager), all the way up to the C-suite. Matthew Beekhuizen at Greenberg Traurig recently became the first to have the title of chief pricing officer, says Johansen.

Brown still deals with clients on pricing. “Just last week, a client told me they've been commanded to cut their budget ' both internal staff and outside legal [spending] ' by 10%,” he reports. “Lawyers are just not used to having those types of conversations with clients, so I get involved.”

But his role as CPO is broader, incorporating practice and project management, both important factors in overall costs. Brown works with practice groups to make sure they meet client needs “in a financially worthwhile way,” he says. “In the long run, that's where the real effort will occur, that's where we will be re-engineering the way we deliver our services.”

In addition, Brown and his director of innovation and legal project management, Tim Curren, are evaluating new technology and figuring out how to incorporate project management methods and principles into the firm.

Indeed, it's just as important to manage projects and monitor matter budgets after you've won the deal, to make sure things stay on track, says Baldwin.

Vincent Cordo, global director of client value at Reed Smith, takes it further. “It's a matter of moving away from just cost savings and becoming more strategic,” he says. His goal is to strengthen relationships with clients, making it “a good relationship for years to come, not just a quick win for this month.” Cordo's goal is to convince clients to stop focusing on a firm's rate structure and instead focus on value. He and his team help clients hone in on the metrics that matter most to them, and develop scorecards so the client can track those metrics. He even sends staff members to the client for free, to help them manage projects. “The ROI is huge,” he says. “We see better pricing, better profitability on matters just because we stay on top of the economics on a real-time basis.” (Note: Cordo and Brown co-authored a book, “Law Firm Pricing: Stategies, Roles, and Responsibilities,” published in 2013 by Ark Group Publishing USA, available at .)

Too often, law firms focus only on the financial components, which are only part of the pricing framework, according to Johansen. Pricing is not about figuring out how to lower your price in order to win the work, he says. “Pricing is exactly the opposite: it's helping your company raise your prices, helping to sell your 'value proposition' to clients, convincing them that what you're offering is worth more than [the price] you're asking.”

It's also about making sure the firm attains profitability from those sales. And that's another area where many firms fall down. “Most firms don't know if a 15% discount will still enable them to do that work profitably,” says Johansen. “Too often law firms have not crunched the numbers enough to know where their break-even point is.”

Tech Challenges

To evaluate effectively, firms must have numbers to crunch ' and the right technology. While third-party data is available, it's not as detailed as pricing professionals would like. Most firms don't yet have a good handle on their own internal data.

“We struggle to make sense of our data,” says Brown, who has analyzed thousands of past matters “by hand.” Meanwhile, he's working with third parties to try to use predictive coding technology to pull and categorize data from time entries, e-mails and documents.

There are technologies in isolated areas, such as project management, Johansen says, but no third-party offerings that integrate all components needed in professional pricing ' including cost structure and data, matter mapping, purchase modeling (to put together realistic bids), project management and budget tracking.

He would like to see “enterprise” technology that can extract a firm's cost data, put it into models, allow changes in parameters such as number of hours worked by senior partners versus associates, and then produce a price estimate. Or, even better, a product that would help a firm work backwards from a bid. If a client wants a price of $1.5 million for a given matter or portfolio, could the firm do the work well and still make a profit?

Some of the most sophisticated firms have built their own technology. While at Reed Smith, Baldwin and his team created their own pricing, reporting and project management systems.

Seyfarth Shaw's Lean Six Sigma discipline has served the firm well. The firm mapped 400 different legal processes which, when combined with internal data, “gives us the ability to price when asked to bid on similar matters,” says Chairman Stephen Poor. “We know what the variables are that drive costs, and we can tailor the pricing structure based on that.”

But there is yet to be an ideal system. “Today the Holy Grail is to have all your matters properly profiled [so that] with a push of a button you can price out a particular matter,” says Baldwin. Firms want a system that will “show me all the matters in the firm that are just like this one and that will give me a bell curve on what the costs are, so I can see where the price points should be.” It would also track the work as it's performed, to show clients how the work (and costs) are progressing, Baldwin says.

Promising tools are starting to come to market ' Umbria from Prosperoware was mentioned by several people interviewed for this article ' but it's still early. Meanwhile, pricing pressure continues, especially for commodity work. “Certainly not every matter is routine, but I think the days are gone of being able to charge variable rates for more common types of services,” says Andrew Jurczyk, CIO of Seyfarth Shaw.

Firms that can find the right pricing expertise and tools to maintain profits will survive, maybe even thrive.

Tam Harbert is a freelance reporter based in Washington, DC, and is a frequent contributor to this newsletter's ALM sibling, Law Technology News, in which this article originally appeared.