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The Pricing PuzzleAuthor: Richard G. Stock
National - December 2003
With 2004 just ahead, law firms will commence their annual ritual of setting the rates for all fee earners. There'll be a modest amount of internal consultation, and a lot of fretting about what other firms are charging. What there won't be is much discussion with existing and prospective clients about the numbers. Perhaps that's the way these things will always be as long as 90% of legal work remains hourly-based.
This state of affairs does not provide much comfort to those who must plan global revenues for their firms. Do the following Question and Answer routines strike a chord?
Q. Fred, how much to you think you're going to bill next year? Q. What revenue will our clerks produce? Q. How do we get out senior partners to move their rates along? They're writing down too many of their bills [or recording fewer hours to hide it]. A. They're under-delegating about 30% of their hours -- they could be passing a lot of work to the associates or junior partners. [A corrected rate, pegged to the most challenging work in that partner's market, could help. This would push the less complex work down and encourage the partner to develop more buisness.] Basic profitability calculations typically involve five inter-locking variables – at least, when it comes to hourly-based work. They are volume (hours), rate (price), leverage, expenses and realization. There is a good body of trade literature available that helps most firms or practice groups calculate profitability per partner. At one level, this framework identifies potential for improvement. But at another level, it is of no assistance (and does purport to be) in selecting the right price for a specific legal matter. It offers no guidance in deciding if a partner with a standard rate of $275 should move to $290, $300 or $325. There are always other factors. A recent survey of 50 clients conducted for one firm asked:
The vast majority of the firm’s 50 best clients said they received excellent value for the price paid, that they rarely receive estimates before work is commenced, and that they would switch once the cost (not the rate) difference reached 20%. The most sophisticated consumers of legal services added that they were rarely asked such questions and expected that the answers would benefit the firm. The key to pricing professional services is found in the relationship that the partner has with a client. Why else would equally capable individuals in competing firms have billing rates that differ by 30%? Perhaps it's because some manage expectations and the relationship with clients. Others only manage the file and the work.
Some firms set rates based on what other partners or associates in the firm charge while others minimize the importance of this factor and price within a range, rather than use a fixed hourly rate for all work.
Lockstep increases and “charging what the market will bear” are simplistic approaches to setting base rates and prices. They rarely take into account special relationships which partners have. Too often, they tend to aim for an average increase that reflects “inflation.” Firms would do better financially if they customized their rates, their pricing for certain matters, and their engagement protocols with clients.
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