The price is right?

31 01 2011

For a number of reasons, I’ve been thinking about price a lot this week.

The head of the dispute resolution team was unconvinced his business development director had got the price right on this bid

Firstly, the Holden Group’s excellent newsletter plopped through my virtual letter box with a leader on righting the wrongs of panic pricing. Next the Harvard Business Review had a very thought provoking article on adaptive pricing strategies, and finally, I went to an internal workshop with one of our group pricing specialists (looking at the link between product strategy and pricing).

Much is written about the death of the hourly rate and the new pricing models emerging in the legal profession, but there seems to be less material about the “why”, which to my mind is an important step before the “how”.

In the past, much law firm pricing often didn’t go much beyond volume based discount: If you spend £X (thousand/million – delete depending on size of account) with the firm in a year, we will discount our hourly rates by Y%.

The rationale presumably included a desire to make the pricing appear more competitive, to encourage a higher spend by the client, and to make the client feel “valued” (in reality of course, this strategy doesn’t do much to connect the firm’s activity to value delivered to the client at all, but that’s a subject for another post).

With law firm clients becoming more savvy purchasers these days, this type of model is likely to be met with questions about additional discounts for single sourcing, requests for further discounts coming from efficiency gains, and discussion about how the firm will provide an optimal team structure and resourcing model.

Now while it easy to find fault with what is a fairly unsophisticated model of discounts on hourly rates, I spoke to a general counsel of a listed company last year, who proudly told me how with one of his regular advisors, he regularly negotiates 50% discounts on his bills.

The idea of a notional discount (whether volume based or otherwise) clearly appealed to him, and he seemed genuinely surprised when I suggested that the law firm might be anticipating this conversation and factoring this into their pricing. I also made the point that negotiating bills every month might not be the best use of either his time or the partner at the (very well known!) law firm, but I began to wonder if he secretly enjoyed the process and the little victories it brought (I know, I know, I’m no Sigmund Freud).

When it comes to pricing strategies, the other other “old favourite” of the law firm tender is the “we’ll buy the work” approach – the idea that the firm will price very low (often at or even below cost) to win a significant piece of work, and then develop a relationship with a client which will allow the firm to secure an ongoing stream of more profitable work.

While of course penetration pricing is a proven strategy in plenty of other markets, my concern here is that many law firms don’t back this approach with the rigor needed to execute it successfully. Firstly, the scope of the project is often underestimated leading to higher costs than anticipated. Secondly, the price is set by reference to a figure that the law firm believes is needed to win the work. Rather than being based on real competitive intelligence, or with reference to a database of market prices, it is often just “gut feel” or based on informal signals from the client as to what will be needed. I’m a big believer in intuition in the right context (Blink by Malcolm Gladwell is well worth a read) but with a pricing decision, it should be one of many factors taken into account, rather than the only factor.

The post has meandered a little this week, but the key takeaway is before you start to build a pricing model, spend a few minutes to work out what you are trying to achieve. With that in mind you can then build a model that works, hopefully for you and the client, meaning that, as the game show says, everyone’s a winner…..

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The value of discipline (sort of)

28 12 2010

With the New Year approaching, given the title of this post, you may be expecting a post on all he productivity benefits that can flow from self-discipline coupled with some suggestions for New Year’s resolutions. But no. I’m combining the D-word with one of my favourite words, “value”, to bring you a little morsel that I hope you can chew over until 2011.

Bertie was not impressed with his owner, the managing partner's, approach to discipline and didn't think the partners in the law firm would respond well to offers of dog treats

Value Disciplines is a model created by Treacy and Wiersema, and as well as being one of my favourites that I studied at B-school, it is one which I have found really resonates with lawyers and law firm management (their book is called “the discipline of market leaders” and is well worth a read).

In very simplistic terms, the theory asserts that an organisation can succeed in its market place by excelling in one of three “value disciplines” (ideally coupled with also practising the other two value disciplines to the market standard).

The first value discipline is operational excellence.  In their original Harvard Business Review article (available here), they define this as “reliable services at competitive prices delivered with minimal difficulty”. This is an interesting model for law firms, as in my experience few law firms really look to compete on this basis (operational excellence is not simply about having low prices) and indeed as I’ve discussed previously, hourly rate billing has often encouraged inefficiency – arguably the polar opposite of operational excellence.

However, with the emergence of LPOs and the increasing number of law firms hiring Lean Six Sigma specialists, plus of course the imminent entrance in the UK market of alternate business structures, I think operational excellence is a strategy that is going to have increasing relevance to the legal profession, and the bar that represents the market level of operational excellence, is definitely going to rise.

The second value discipline is “product leadership” which is all about getting the leading edge services in the market. Here speed to market is critical, and as we saw with a plethora of Bribery Act offerings in the UK market, both from law firms but also the larger consultancies, some firms do this better than others.

As with operational excellence, I believe the discipline of product leadership is of growing importance to law firms as the market increases in competitive intensity. The struggle to differentiate is recognised and discussed by many management teams in law firms, and having a kit bag full of unique products and services, each with a strong value proposition, is a real asset in this battle.

The third value discipline is “customer intimacy”. Organisations that excel here have strong client relationships and are able to customise products and services to meet their precise needs. Now while this blog has *occasionally* suggested law firms could do more to listen to their clients (hey, I’m only trying to help!), I actually think this is the value discipline that many law firms practice well.

What this means in practice however, is that the benchmark for the industry in this value discipline becomes higher, and the challenge for firms who want to dominate their industry, is how to raise the bar and really become the market leader in client intimacy. One way to think about this is to investigate how far the client intimacy ethos permeates the firm’s entire operating model – in my experience often there are pockets of excellence in a firm, but often other areas where the standards are not so high.

However, one thing to ponder, is that one of the firms that I think does this best of all (a smaller City firm) is also the firm that put together the highly tailored tender response I mentioned in my post a couple of weeks ago on excellent responses to RFPs (requests for proposal)  for legal services. This suggests to me that the firm starts REALLY thinking about the client’s needs before they are even a client of the firm, which I think is a pretty good demonstration of really living that value discipline and the benefit it can bring the firm and its clients.

 

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