We have been doing a lot of work with firms on pricing and scoping work. These are the issues:
Here’s a conundrum. Surveys show that price comes about seventh down a list of top ten criteria that in-house lawyers use when choosing external firms. Yet when we speak to law firms, they seem to consider that price is paramount to their clients and, certainly, in-house lawyers are always keen to know a firm’s hourly rates. So what’s going on?
Legal departments tell us that when they talk about price to their firms – to the extent that any firm seems able to have a grown-up discussion about it – these are the sort of things they are thinking about:
- Certainty and predictability – how sure can I be that the price quoted will be adhered to; and, if not, how quickly and frequently will the firm tell me?
- What is the market rate for this job – if I were to shop around, would other firms quote roughly the same (objective criterion)?
- What is this job worth to me – to what extent is it to me a “bet-the ranch” job at one extreme or pure commodity at the other (subjective criterion)?
- To what extent have you done this before? Here price is a proxy for experience: the more accurately a firm can price a job and the smaller the cushion for error, then the more convincing its assertion of track-record becomes
- To what extent will I be paying for your inefficiency? Here, price is a proxy for process – persuade me that your pricing reflects proper project management
- Finally, what sort of value for money can you offer (something a lot of firms talk about but few are able to demonstrate) and how much trust is there between us that you will go the extra mile for me (this is where a law firm that will go that extra mile can charge more)?
Of course, all clients care about price but even the most hard-nosed hate having to chop and change their external firms: there’s a transaction cost associated with the effort. So even if your particular client is tough on price (and in our experience far fewer clients are tough on cost than firms would have us believe and, if they are, you have to question whether you want to act for them in the long term), bear in mind that the client may simply need to look like a hero by being able to tell his board he’s gained some sort of reduction. If you talk to your client as much as you should, you will know this.
So the tips for law firms are these:
- Engage in serious discussions about price with your clients – don’t be embarrassed to raise it or look shifty when you do
- Don’t try to win work that you can’t do really well
- If you can do it really well, show the client how, and be confident of your worth
- Show your client where the contingencies are and how, in the past, you have steered round them
- Communicate as frequently and openly as possible during a job about the price consequences
- The better you are at scoping jobs (i.e. learning from previous deals) the more accurate your pricing will be
- The better the client relationship (i.e. the more the client values you and what you do for the client) the more you can charge
- If you are consistently losing out on price to other firms, either:
o They have better processes in place and are more efficient, in which case you need to improve yours or withdraw from that market; or
o They have taken a strategic decision to buy market share by low-balling, in which case you must brazen it out by doing the same until one or other withdraws from the market (stomach for that sort of a fight is indicative of the respective strengths of strategic intent) - Avoid offering an immediate discount without explanation (it looks weak) or “Flexibility over price” without explaining what that means (ditto)
- Hourly rates are poor at telling a client how much a job will actually cost (they don’t say how long a firm will take and they do reward the inefficient); and they put all of the risk on the client. So offer alternative pricing options that share risk
Given all of this, why is it, then, that in-house lawyers are so keen to know a firm’s hourly rates? It’s a good question and one we’ve asked a lot of in-house lawyers. The answer shows how far external firms have to go in the pricing discussion: legal departments want to know your hourly rate because it is the only comparator that firms offer them. Pathetic, really. It’s time for firms to sharpen up.
Contact: Des O’Connell or Sally Woodward
