Pricing legal services: Is the tail wagging the dog?

Pricing legal services: Is the tail wagging the dog?
Our clients, just like clients of any other good or service, are purchasing results not processes, and to this Toby Brown in his July 7, 2013, posting to the 3 Geeks and a Law Blog, attributes some of the difficulty with pricing legal services. They want a dispute resolved or a sale of shares completed. They are not interested in paying for X number of depositions or X number of correspondences to opposing counsel.

Pricing legal work often reminds me of the last days of the Cold War during which the United States allegedly brought the then-Soviet Union to bankruptcy by forcing it to overspend on the arms race. Conscious of being in an over-lawyered and under-cliented market in which a consolidation is inevitable, it seems as if we price our work not to earn revenue or even cover costs, but rather to undercut our competitors. Those of us who do not have the processes in place to produce better work, faster and cheaper, will end up collapsing.

Some firms have begun to tackle the “hydra” that is pricing by trying to establish the resources required for a file through process mapping, task coding, and legal project management. While this is a start, the actual cost of a file, at this point in time, still remains largely unpredictable as a result of poor time keeping in the past and inadequate scope definition. In the many instances in which the clients themselves are not entirely clear on what they want or on how a given alternative fee could better meet their budget, it has been too easy to fall back on the billable hour and offer discounts.

Moreover, in the rare instances in which we are able to ascertain with some certainty the cost of a given legal service we often discover at the price we have established, we are “not market” and must cut our rates even more if we wish to win the file.

While reactive pricing in response to what the market will bear is a way of measuring how clients perceive value, in the long run it is probably not the best approach.

To begin with, clients are frequently unclear on the value their lawyers actually provide. So, unfortunately, are their lawyers. This stems from many things, be it poor training — junior lawyers don’t understand as clearly as they should what their seniors are asking them to do, frequently because the seniors don’t understand it themselves — or lack of metrics that would give us a clear idea of the tasks we perform and the resources required to perform them. The result, however, affects how our services are priced.

Unable to explain exactly what value we add to a client’s business, we are vulnerable to the kind of logic that “a lawyer is a lawyer is a lawyer so why pay more for one than for another?” This reasoning, of course, is as heretical as the belief all clients are the same.

Secondly, good legal services cost money to provide. While certain clients may be well served by a sole practitioner, others require a larger structure. It is not clear a client that requires the support of a competition lawyer, a tax lawyer, and a litigator will necessarily be better off consulting a sole practitioner in each of these areas. A one-stop shop where the client can receive all this advice from colleagues who have the client’s “bigger picture” in mind may indeed end up providing a more efficient solution to the client who does not have time to move from place to place searching for the missing pieces of its legal puzzle. Their time is also money. Cost of overhead in the larger structure, however, requires a certain fee structure.

In addition to what is market, a fundamental question to be considered when pricing legal work is: how does a lawyer wish to practise? As a sole practitioner or surrounded by partners whose legal skills can be drawn upon to assist his or her clients? If the answer to this is in a partnership, then the next question is what overhead can the partnership bear in terms of occupancy costs, employees, technology investment, and partner draws? Typically, a partnership with routine work can afford less overhead since margins are lower than a firm that does exclusively high-end work for which price is no object. Unfortunately, there is very little of the latter work on the market and frequently, even in eat-what-you-kill partnerships, some of the margins made on the high-end files are absorbed by the losses generated by the files that were underpriced simply to get the work.

It would be foolish in this environment to turn away work simply because it costs us too much to do it. Bidding reactively on files, however, with a view of landing the deal at any cost is also unwise. At a certain point revenue must cover expenses. A more pondered approach, albeit an approach with little short-term gain, would be to educate ourselves, so as to educate our clients, with respect to the value we add to files and the costs required to produce this work. In the meantime, an obvious short-term solution for a partnership that has both routine and high-end files — most of the partnerships out there — would be to introduce processes that enable a firm to handle a file at a price both the market and the firm’s overhead will bear.

Danielle Olofsson is a knowledge management lawyer at Dentons Canada LLP in charge of civil law. She has practised law in Montreal, Paris, and Stockholm and is a member of the Quebec and Paris bar associations. She can be reached at [email protected]

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