Optimal pricing to benefit firms and clients

“The two primary objectives of all pricing decisions by law firms should be to maximise profitability while at the same time ensuring that the pricing structure leaves the client feeling that they have had fair value for money. And yet opportunities to do so continue to be squandered.”

Global legal pricing guru Richard Burcher, Managing Director of Validatum (UK) Limited, is a former practicing lawyer and managing partner with over 30 years experience, who focuses on the most challenging and rapidly evolving aspect of the lawyer/client relationship – legal services pricing. One of Richard Burcher’s core tenets is that production costs have absolutely nothing to do with pricing.

In the blog post “What Is the Optimal Hourly Rate? One That Doesn’t Produce Any Profit” he elaborates this tenet further by the notion that clients see value in what lawyers do for them and that value has nothing to do with production costs.

“Clients never have and never will be happy paying for inputs. They want results, outcomes, reassurance, peace of mind, support, guidance, mentoring – anything but inputs.” As Warren Buffet has noted, “price is what you pay, value is what you get” To the extent that such an approach compels a rethink about the difference between price and value, it is worthy of consideration.”

In the LexisNexis article “How fair pricing can really pay out” Richard Burcher points out that “Modern legal services pricing should be about the optimal alignment of the fee, the clients’ perception that they have been paid properly (which, to state the obvious, has absolutely nothing to do with arbitrary and homogenous hourly rates).”

Finding a fair fee requires collaboration, open discussions and client involvement, trying to determine what value the service offers and achieving a measure of alignment between the result and the fee, and not just the effort and the fee. In order to replace the hourly rate-based pricing, he also points to a number of pricing factors that are available for lawyers to use in the post “How To Leave Fees on the Table: 21 Things I Must Ignore”. These factors have been available for lawyers in many countries for decades, but few seems aware of them. What they have in common is an articulation of the need to take a nuanced approach to pricing legal work and not simply rely on time billing. In the post Richard Burcher has pulled together the 21 factors which he believes are the most useful and provide the greatest guidance, such as the results achieved, the importance of the matter to the client, the skill, the degree of risk assumed by the lawyer in undertaking the service and the complexity of the matter. Please read the post for all factors here »

Richard Burcher has posited an alternative to the hourly rate-based pricing, which is to have all fee earners on a rate that does nothing more than recover the actual production costs of the piece of work, i.e. without any profit element. There are a number of ways to calculate this, but the simplest method suggested is to divide the total expected recorded billable time into the firm’s total expected operational costs to find the break-even figure. The pricing however should be based on a fair fee based on its own merits. For further details please read the post here »

Another interesting aspect discussed by Richard Burcher in the Global Legal Post article “Accreditations, awards, directories and pricing” is the fact that lawyers miss out on opportunities to increase pricing and to use competence factors as a pricing differentiator. As regards industry awards and rankings, there seems to be no attempts to leverage these from a pricing perspective.

“Regrettably, it is this mindset that has contributed to the homogeneity and perceived commoditization of the market. Here you have a partner who is at the very top of their game (according to their clients, not their peers) and they still don’t believe that they can justify a premium over their competitors. The reasons have more to do with a lack of pricing self-confidence than any rational economic explanation.”

When using the standard hourly billing without closely analyzing all relevant considerations will result not only in some clients being overcharged, but also, many clients will be under-charged on individual matters. Legal pricing strategies are therefore not about clients putting pressure on law firms to cut prices or provide alternative fee arrangements, or for law firms to find ways to increase their pricing, it is about finding fair fees that reflects the value for the client, and therefore helps law firm stay in business and prosper and clients to receive better value and better results when turning to a law firm.

“It is this “custom-fit” value and value-driven, reciprocal fairness approach to pricing that will in future best position law firms to achieve two apparently diametrically opposed outcomes: improved profitability, and more satisfied clients.”