Pricing models: A changing landscape for law firms

It is a tough market for the legal profession, with firms competing for work from clients that often have high expectations of value for money and effective service delivery. Caroline Poynton talks to Alan Whitfield, director at McGrigors London, about his views on the current landscape, how pricing models have been affected, and what his firm has done to compete effectively in the pricing game.

1. How is the general marketplace impacting the way law firms view their pricing models?

The thing that strikes me is just how cut-throat the business has become. People are really fighting for work and there’s a lot of tendering, with buyers driving down the prices. Nor is it just law firms competing with each other; they’re also competing with in-house lawyers for business. If you look at the vacancy pages in the legal press, there are a significant number of jobs for in-house lawyers who are now doing work in specialised areas such as employment and litigation. With more companies doing their own substantive legal work, law firms have to persuade clients that it is actually better value to use the external firm rather than recruit someone internally.

2. Are clients currently satisfied with the service they are getting from their law firms?

By and large, I would say they are satisfied. There isn’t a huge amount of churn – you don’t often come across companies that replace their entire or a substantial part of their panel with new firms and if it does happen, it’s considered to be big news. What I can’t be certain of is whether that’s because they’re genuinely satisfied with what they’re getting or whether it’s because there’s nothing better out there, so it’s not worth switching.

3. Where does a firm’s pricing model fit into a client’s view of service delivery?

I’ve never yet been in a situation where pricing is not considered relevant. There have been a couple of situations where a client has said we’re not the cheapest firm but we’re sufficiently better as to mean they’ll go with us. Price has always been a factor in that but you can’t always expect to be chosen if your value-for-money proposition isn’t good enough.

4. What are the pros and cons of the billable hour?

If you’re competing with another law firm, you’re probably going to be picked simply on your price per billable hour. Even if you are prepared to give a fixed price on a deal, you will still compute it by reference to your billable hours. It becomes more complicated if you’re competing with the client’s existing in-house legal department or with the possibility of the client employing a lawyer rather than engaging your firm, because of course they will not be paid by the hour. It’s ironic, however, because the clients who are tendering for business often ask for alternatives to the billable hour, for which you come up with some innovative charging arrangements, only to find that they choose the firm on the basis of the lowest hourly rate. I think that there is a bit of a paradox in that clients will always want the best value for money but they will also want the certainty of saying that they know that one firm is better value than another because their hourly rates are lower. You particularly notice that in central and local government, where there is a lot of tendering invariably focused on the hourly rate.

5. How have you addressed such issues with the pricing models in your own firm?

If the client insists on an hourly rate, then we offer what you might call tiered discounts. It’s very easy to say that this is our standard hourly rate and then offer a 20 per cent discount for everything; that may or may not work to everybody’s best interest. What we tend to do is say that the first bit of work we do for a client will be relatively expensive because we have to train people up in the way the client does things and ensure that they are familiar with the client’s business. As we get to higher billing levels, however, it becomes more economical for us to provide the next hour of work, so we can apply increasingly bigger discounts. We can also say that we’ll apply further discounts as we grow the amount of business we do with a client, year-on-year.

6. That sounds like an excellent plan for getting long-term business but could it impede getting new clients when your firm is compared to others that are cheaper from the start?

We’ve not as yet had sufficient feedback from the clients to know whether that is crucial for them. Certainly, our system is the kind of thing that some clients say they like if they intend to put lots of business in our direction.

However, the other thing that we are doing is trying to get away from hourly rates altogether to discuss fixed prices for projects for the client. Obviously, the problem with fixed pricing is that at the start, you never know how complex a deal is going to be. But once you get to know the client, you can have a sensible discussion with them about the size of the project, what looks like a reasonable fee and agree some assumptions. You never quite get away from the hourly rate because, by definition, the bigger the size and complexity of the transaction, the more time you’ll spend on it, but at least we’re moving away from a straight taxi-meter approach.

You can also give the client some certainty. For example, assumptions might include having four meetings with the other side, each taking a day to negotiate the agreement and each meeting needing a follow-up of about two days drafting and review. We can then add all these up to agree an approximate cost. If it turns out that the other side’s lawyers are really difficult, then we might have to revisit the pricing, but we’ll know that early on. We find clients very receptive to that, especially when they have an in-house legal department that operates on much the same basis.

7. What kind of client feedback have you had so far and how are you monitoring and maintaining that feedback?

Client management is one of the key things that I do. On our key PLC accounts, there’s myself and another member of our management team who spend a lot of time getting client feedback. It’s not formal as in sending a form out for clients to fill in. Rather, we sit down with the client to get their reaction on what we have done and how they want us to take things forward, both with specific projects and in their general flow of work. I closed off a deal with a client at the end of February and within two weeks of that, we had a review meeting with the client’s lay managers (not their internal legal department). We went through how they had managed the project, as well as our contributions, and the result of that was that they paid more than we had originally bargained for, not because we wasted time on it but because they were so impressed with what we had delivered.

8. It sounds like you’ve moved from a fairly simple billable-hours arrangement to a client-relationship-management culture demanding a lot of partner involvement and work. How did you get partners to buy into this more flexible approach?

One thing is to attract the good clients in the first place. If you can introduce partners to a top-50 client, they will bend over backwards to build the relationship into the future. You’re not asking them to do anything they wouldn’t do anyway. Another important thing has been to work closely with our finance director, to explain and agree with him that while moving away from the hourly rates on some projects, we’ll never do anything at a loss.

I think we’re very fortunate in that we have a very astute finance director who regularly points out to us that law firms are basically a fixed-costs business; it’s not like making baked beans where if your demand drops, then you buy in fewer beans and so reduce your input costs. Our principal costs are the people we employ and you can’t turn them off by the hour or by the day, you pay them essentially by the year. So our finance director regularly points out to the management team that the money that you bring in after you pay the fixed costs is pure profit. The challenge is to structure your charges so that you make enough money to cover the fixed costs while being attractive enough to win extra business to turn a decent profit.

9. What are your predictions for the future of pricing models in the legal market?

I think there’ll be a slow move from the billable hour, but a lot will depend on the economy. We have had times, such as during the dotcom/IPO boom, where law firms could charge whatever they felt like. On the other hand, during property recessions, people were doing real-estate work for almost nothing, simply to retain the relationship. I’ve got the feeling that we’re moving towards more of a mixed market, where some pieces of work will still be charged for by the hour, for example, litigation and big M&A transactions, while there’ll be more fixed-fee and innovative billing for real estate and commercial work.

Alan Whitfield is director at McGrigors. He can be contacted at: alan.whitfield@mcgrigors.com