But as pricing pressure on firms increases, the conversation is no longer simply one they need to have, but one they need to start.
Here’s why pricing is a topic the legal industry can’t afford to ignore.
Price vs Value
According to ALPMA/InfoTrack’s 2016 online survey, ‘Adapting to the Changing Legal Landscape’, the greatest negative pressure on Australian law firms comes from increasing pricing pressure and client demands for better value.
At the core of the issue? Firms’ failure to operate on a cost conscious basis.
As defined by pre-eminent professional services consultant Dr George Beaton, cost consciousness is “the ability to be continually mindful of the fees incurred on a given matter, or in the client’s own words ‘spending our money as carefully as if it were their own”.
And its importance to clients can’t be underrated, with Thompson Reuters’ 2016 white paper, ‘The Alphabet Soup of Law Firm Pricing’, finding that along with predictability, efficiency, transparency and targeted legal advice, value for money is a key client driver.
But despite having the potential to transform how clients perceive the performance and value of their legal providers, too many firms continue to resist the cost consciousness call.
In ALPMA’s 2014 survey, 80% of firms surveyed said both positive and negative change was being driven by client demand for better value, yet only 18% were focused on changing their pricing strategy.
Fast forward to 2016 and it seems not much has changed, with 65% of respondents believing the Australian legal industry is reactive, changing slowly and only when necessary.
Surveys in the US report similar findings, with 95% of law firm leaders viewing price competition as a permanent trend for the future (Altman Weil’s 2016 Law Firms in Transition Survey), yet only 28% are proactively initiating pricing structure change, compared to the 72% making changes only in response to client request.
All of which begs the question – why the resistance to change?
Two standard arguments often emerge in response to the question, one being firms’ lack of awareness of client needs and expectations, the other being resistance among the leaders responsible for leading change.
Either way, it seems a communication breakdown is responsible – either between firms and clients, or law firm leaders and their lawyers.
Seeing as change is often most effective when led from the top, we’d argue it’s incumbent on partners and other law firm leaders to embrace the opportunity to explore alternative methods of pricing. However, such change shouldn’t be attempted without first exploring how client and law firm needs can combine for the economic benefit of both.
Firms should begin by considering the type of clients they’re dealing with.
Are they interested in exploring Alternative Fee Arrangements (AFAs)? Would moving from the standard hourly-pricing module satisfy their need for predictability, efficiency and transparency, as well as commerciality of advice? Which of these factors do they value above others, and how can AFAs satisfy those needs?
Consideration should also be given to the type of matters clients need advice on. Certain projects will more easily lend themselves to a specific fee structure, but time must be taken to determine which fee structure is best suited to which matter.
Clear and direct communication is a key component in the process, and the more proactive, the better. Clients’ perception of the value offered by firms is far more likely to rise when law firms not only demonstrate a willingness to change, but actively seek clients’ assistance in doing so.
But it’s only part of the puzzle.
Setting a clear scope also plays an important part.
By breaking each matter into key steps, stages or components and specifying the inclusions and exclusions at each stage, assumptions can be made about the resources and time required to complete the matter. This information can then be used to estimate the value of the matter (to both the client and law firm) and determine which fee structure is most appropriate under the circumstances.
If this information is collected and collated over time, firms will build a clear picture of their client needs, expectations and behaviour, and will be able to develop tailored pricing structures that align with both client and law firm needs. This baseline can then be used to track and assess performance, ensuring services aren’t just being delivered on time and on budget, but represent the value the client is seeking.
What suits one client or one matter won’t suit another, so firms need to be flexible in their approach, while maintaining a firm focus on cost consciousness.
As Beaton says, “There is no evidence that all clients want a fixed fee or a hybrid fee, it’s horses for courses, just as it is in all walks of life and legal services is no different. What we need are lawyers who are much, much more skilled at listening to clients and understanding what is driving their perception of value and respond accordingly.”
It all starts with a conversation.
Want to get involved?
Join us at the Asia- Pacific Legal Procurement Forum in Sydney on the 23rd of August. Global experts and local opinion leaders will lead law firms, in-house counsel and legal procurement professionals in an open, honest and interactive conversation about pricing and change management. You can learn more about the event here.
Register now for the upcoming Legal Procurement Conference with exceptional local and international speakers and thought leaders across the industry.