Pricing professional services: A change in mind set is required
Richard Allen of Burcher Jennings Costs & Pricing Consultants, an authority on law firm pricing, led a session at the EMEA Regional Conference on why a lack of confidence is at the root of a problem that can have considerable impact on profitability and why professionals must learn to price more creatively.
"Lawyers will often be asked for a fixed fee for a piece of work that ends up being completely out of kilter with the amount of work that needs to be done. In reality, the reverse should be true of fixed fees. Pricing confidence requires a change in firm culture."
Richard Allen, Burcher Jennings Costs & Pricing Consultants
The problem, argued Allen, is that many professionals think they already know how to price their services or that the market sets the price.
Challenges to profitability
Allen drew attention to the 2015 PwC 2015 Law Firms Survey which highlights that “Pricing and profitability are seen as a top priority for Finance, particularly with the rising trend in contingent and fixed fee activity and the concerning increase in unplanned write offs”.
“When the pressure is on, firms will discount for existing and new clients for various reasons […] that shows a lack of imagination and is a recipe for disaster as firms compete in a race for the bottom.”
The most popular pricing strategies
Allen referenced the Altman Weil survey of 1100 U.S. lawyers to illustrate that transparent pricing tends to always be the most popular pricing strategy, with lowest pricing being the least popular, with guaranteed pricing and value pricing being the next most popular options.
What is worrying is that another 2016 Altman Weil survey shows that only 12% of lawyers have pricing conversations with their clients, with fees instead being imposed on clients.
Allen also gave his view that pricing is often “driven by fear” in many practices- the fear of losing the job/opportunity by not being competitive enough, or losing an existing client who may be unhappy with something and who wants to challenge a price. Other pressure can come from a fear of not hitting monthly targets, missing out on a bonus, trying to win promotion by bringing in new clients, all while not realizing that this approach is sacrificing future fees in the longer term.
The need for choice
Allen suggested firms should move away from a “cost-plus” mentality (overhead plus desired profit) and consider offering clients greater choice in terms of how services are priced and how and when they pay. He also suggested firms should involve clients in pricing decisions.
Ensure there are no nasty surprises for clients
To achieve better results, Allen suggested firms should offer greater pricing certainty and budgetary predictability. The client’s appetite for risk will need to be understood. Allen also offered that “there should be greater correlation between price and perceived value”.
Having some skin in the game is also an option with some clients, with risks around fees being shared with the client, particularly with transactional work.
Pricing best practice
Allen shared his views on what constitutes best practice, arguing that pricing starts in the Boardroom with pricing governance and controls: “Those at the top must lead by example on pricing by ensuring there is a pricing policy so that it filters through the workforce.”
The importance of pricing analytics and reporting was also stressed – Allen did question however whether work time should always be recorded and whether not doing this provides a certain amount of liberation from work in progress, while recognizing that some firms want to track hours worked against hours recovered.
And to complete best practice, Allen emphasized that there needs to be pricing execution among those on the front line.
Where are we going wrong?
In Allen’s view, pricing strategy can often be misaligned with business strategy and there can be a “preoccupation with turnover rather than profit”. Sometimes when new fee earners come on board, whatever their level, they are only told their hourly rate, so there is no scope for invention as there is no pricing policy: “A pricing induction has to take place and be led from the top.”
Some firms also fail to see pricing as a skill or, as there is no pricing policy, “everyone has too much autonomy and does their own thing when it comes to pricing their work”. Allen explained that this can result in money slipping through the fingers. According to Allen, this lack of uniformity will lead to pricing implosion without any real due diligence about what’s being priced, what’s being charged, written off or recovered.
Another problem is that engagement documentation is incomprehensible and far too complicated- as Allen commented: “The lawyers may not understand it, let alone the clients!”
“Pricing is more about confidence or a frame a mind, but in my experience, lawyers very often don’t like talking about money,” said Allen. In his view, even with the right skills and tools, if the confidence isn’t there, poor results will be achieved.
And when it comes to being good at pricing, it’s not about seniority or technical skill, argued Allen.
Are professionals undervaluing themselves?
Professionals regularly often undervalue their worth, particularly when it comes to fixed fees – Allen commented: “Lawyers will often be asked for a fixed fee for a piece of work that ends up being completely out of kilter with the amount of work that needs to be done. In reality, the reverse should be true of fixed fees. Pricing confidence requires a change in firm culture.”
Price reality check
Allen also suggested that firms often lose sight of the importance of profit per partner, focusing instead on turnover. Losing clients and rejecting pitch invitations can be very good for the bottom line – firms need to stick to their guns when it comes to pricing:
“Clients will often have done their due diligence and want to instruct you as they know your value to them. It’s important to know when to discount in a pitch and when doing so will be doing the firm a disservice.”
Firms mustn’t undervalue themselves – if they do this, Allen argues, “Clients will not see them as having any gravitas.”
Firms must have pricing intelligence – doing fewer jobs for more money leads to less stress and more capacity and therefore more fees.
Minimum mandatory policies
- A clear pricing policy integrated throughout the business
- Pricing should be collaborative, rather than a silo – get a second pair of eyes on the scope before giving a price to get a different perspective
- Ensure there is not too much autonomy around write-offs in the firm so that fees don’t get written off that shouldn’t be.
In Allen’s opinion, practice management should provide insights into pricing and profitability that inform actions: “Firms need the intelligence so they understand how much time is being spent on different types of work.
“We should understand profit, measured by practice area, practice team, fee earner, client and file/matter, so that we are informed about how we charge our work and how we can make more profit.”
Price the client
Allen suggested that first and foremost, the client needs to understood before he/she can be priced: “It’s not about pricing the job – it’s behavioural economics in essence – you need to understand the context of the work and the client’s appetite for certain aspects which then informs you how to price the work. You also need to understand the client’s sophistication as that will help to price the work. You also need to know if the client is going to want to negotiate fees with you or simply accept what you tell them you will charge.”
Price the job
In Allen’s view, professionals must understand not only the client, but also the work involved: “If it’s transactional work, ask yourself: is the transaction going to complete, what are the risks involved? If it’s contentious litigation, what are the chances of victory and the adverse costs? Scope the work correctly so details are not missed and you understand where exactly a piece of work starts and where it ends. The scope, assumptions and exclusions are very important to remove any ambiguity in the eyes of the client.”
Another tip offered by Allen was to keep client care and engagement documentation as simple and straightforward as possible.
Client pricing priorities
Allen emphasized that choice is paramount and that clients must be given pricing options: “Some clients may want pricing certainty whereas others have a greater appetite for risk on fees. In the latter case, they may be happier to link their fees to results.”
Allen also suggested that clients should be offered payment choices: “Some may prefer to pay upfront in return for a discount which will help the firm’s cash flow. Giving options puts power in the client’s hands and makes them feel good and empowered. While the client may think it’s their selection, it is actually acquiescence, but you need to do your homework to understand the client and then you should really be able to predict which option they will choose.”
According to Allen, there should be fewer complaints after the event, and the profits should go up “because the client chose the pricing model, they are less likely to complain afterwards.” Allen emphasized the need for bespoke pricing for the client on their matter.
What are we actually selling?
Rather than selling time, Allen suggested that professionals should change their mindset to selling:
- Peace of mind/reassurance
- Responsiveness/communication (“SLA”) – a SLA can be a useful bolt-on if the firm is certain it can keep to it and offer a 5-10% discount if it is not kept to
- Empathy and understanding
- Expertise, knowledge, skill and urgency
- Assumption of risk: “some clients do like having some skin in the game and like professionals sharing the risk with them on fees.”
Allen explained that while pricing by the hour is simple, useful when value is hard to calculate, and pushes price risk onto the client, he drew attention to Lord Justice Jackson’s view that the hourly rate rewards inefficiency. He also commented that some also feel that it discourages project management and case planning, delegation efficiencies and client communication: “Anytime you call, the client will think it’s going on the clock.”
According to Allen, the other cons of hourly rates are that they discourage pro bono work, there is no cost predictability or manageability for clients and “they may not reflect the client’s perception of value.
"In firms where fee earners are under pressure to record a certain number of hours per day, the hourly rate encourages excessive time being spent on a matter (padding of time sheets). Furthermore, it doesn’t encourage a risk/benefit analysis and it creates a conflict of interest between you and the client because there is a vested interest to do as much work on the case as possible so that you can charge maximum fees. It also encourages client scrutiny if they don’t see value given the time spent and the fees charged."
Hourly rate differentiation
Allen suggested that each fee earner actually has a blended rate: “He or she will have more than one hourly rate that will be charged to a particular client or for a particular piece of work, so it’s a blended rate and across the practice this provides a huge differential in terms of the profitability you can make on that hourly rate basis.”
In Allen’s view, certain hourly rates can be charged for premium work – these can be differentiated by project or by phase, depending on the complexity.
Alternative fee arrangements
“Changing pricing models represents a major shift in cost risk – data mining and analytics become critical to understanding the potential impact, as is project management and planning.”
The pricing menu
Allen offered a number of different pricing options for firms to consider:
- Fixed fees
- Hourly rates
- Flat/portfolio fee
- Fee range
- Conditional fees
- Contingent fees
- First mover pricing
- Fee cap
- Fee cap & collar
- Abort/success fees
- Service Level Guarantee
- Bundling & unbundling
- Volume pricing
- Peak load pricing
- Premium for urgency
- Inter-service pricing
- Combining pricing strategies.
Is it worth the effort?
Allen quoted David Lancefield, a PwC partner who comments: “A 1% price increase typically delivers and 11% impact on profit.”
He also explained that a multi-office UK regional law firm that has embraced pricing has seen a 26% increase in profit per case, with 10% fewer cases opened.
When can we expect results?
Allen suggested that introducing a pricing policy and different options can achieve dramatic results quickly (% change in Average Revenue per File) - within a month in some cases, but certainly within 3-6 months!