Trends in legal spend and pricing management

In the latest issue of Managing Partner Magazine (July/August 2010, Volume 12 Issue 12, there are some interesting articles on the trends in legal spend and pricing management, which clearly points out the swung of balance of power towards the client and the gap between client expectations and law firms’ execution of legal services value and pricing.

Director Jo Summers at Acritas concludes in her article “Trends in Legal Spend” that  even though the market recovery finally seems to be here in some parts of the market, law firms still have major challenges to face. “Global buyers expect their legal needs to increase by more than a third this year. The biggest spenders (the top 15% by budget size) are very cost driven, so pricing strategies and efficiency will continue to be hot topics of conversation for some time. They are also significantly more focused on fees when asked about upcoming changes to the legal market, predicting changes to fee structures, greater flexibility on fees and increased usage of fixed fee arrangements. Firms relying on these clients should prepare for tough negotiations. Understanding clients’ businesses and their needs remains paramount in retaining and winning more work.”

Michael Roch, CEO of Kerma Partner, points out in his article “Pricing Management”that although law firms recognise the importance of pricing as part of their business model “there continues to be a significant execution gap when it comes to pricing of legal services. 96% of respondents say their firms set fees to cover costs and achieve an acceptable profit margin for partners, and 71% also say their firms set fees to capture the full value of their services. Both approaches are no longer with the times as they are inward looking and do not take the client side of the pricing equation into account.”

Michael Roch also points to the importance of strategic planning for law firms to face the demands from the clients. “Law firms rightfully consider pricing to be an essential part of strategy. Surprisingly, few seem to have clear policies and guidelines – or measurement processes – in place to help them manage this important profit driver. I do not declare the billable hour as dead, but alternative fee arrangements are here to stay. Successful pricing execution starts with a clear pricing strategy, solid internal communications, close management of pricing policy, and partner  performance pegged against measurable benchmarks.”

Apart from pricing, there is also client demands for more value, which is a topic that Lance Sapsford, Head of Business Development at Addleshaw Goddard, explores in the article “Adding real value”. “The balance of power has swung towards the client in procuring legal services. Panels, discounts, demands for secondees, value added services – these are all elements which corporate counsel will consider, and indeed demand, when choosing from a large number of undifferentiated firms in an unconsolidated marketplace.”

In the article Lance Sapsford provides some pointers to how law firms can ensure that their value-added services are competitive and support retention of key clients. One of the pointers is to “understand the impact on profitability that value-added services can have at an individual client level. You can’t begin to understand the value you place on your value-added services unless you know what they’re costing and the financial impact they have on your client profitability. If you can’t do this, you can’t prioritise what you provide, who you provide it for or even why you provide it.” Another pointer is that “applying strategic thought to using value-added services to your advantage is, of course, easier said than done. The cultural changes required to implement new ideas in law firms should not be underestimated. As with most good business development, beginning with the client in mind – whether from a profit, service level, relevance, or any other point of view – will lead towards getting it right.”

As simple and obvious it may be, it seems that law firms are still somewhat reluctant to put the client in centre and to adapt to client demands from a client point of view. All three articles referred to above show this point from different angles – when it comes to pricing management, providing the right kind of added value services and how “understanding clients’ businesses and their needs remains paramount in retaining and winning more work.” The balance of power has shifted towards the client and will remain there. The challenge is how firms react.