Best practice pricing

By Michael Roch

CLIENTS HAVE grumbled for a long time about how expensive their lawyers are, and how their lawyers’ pricing paradigm of charging by the hour has caused their costs to spiral out of control. Indeed, as recently as April 2008, the way in which firms price their services has come under scrutiny, with the issue commanding more of the front pages of the financial press. Take, for example, an article in the Financial Times (19 April 2008), in which London’s "battle scarred executives were stunned” by the £5.2m (US$10.4m) in fees racked up by a magic-circle law firm on a five-day trial regarding Blackberry patents.

At the same time, general counsel increasingly believe that hourly-rate fees provide very little incentive for solicitors to rein in costs or to consider alternative fee structures. Addressing utilisation, a recent PricewaterhouseCoopers survey shows that the targets for most associates at the ten largest UK firms increased by 4.3 per cent in the past two years, while amounts billed increased by almost 11 per cent.

Law firms have clung to the billable hour like billing by the hour was the only way to honestly practise law as a profession. Meanwhile, however, some of the largest clients have pushed for reform and, in some cases, have successfully managed to change how their legal service providers charge – or they have taken their business elsewhere. Some have beaten their legal service providers at their own game by implementing sophisticated legal bill auditing, taking apart one by one the invoices provided electronically by the law firm.

I do not advocate the idea that law firms should immediately abolish time-recording or hourly-rate fees; nor am I advocating fixed-price or value-based billing. It is a fact, however, that pricing remains the most ignored profit driver in most law firms, and one around which management has not yet developed sufficient methodologies or willpower to align partners, teams, practice areas and the firm to the overall strategic objectives of the law firm. Firms should be thinking about how they can employ strategies to manage pricing as a profit driver in the same holistic way as most firms have successfully managed utilisation, realisation, leverage and margin for some time.

Michael Roch is a partner at Kerma Partners, a professional-services consultancy firm. This is an extract from his report, Pricing and Profitability for Law Firms, which is to be published by Ark Group in June 2008. For further details on the report, or to order a copy, please contact Robin Mace at rmace@ark-group.com.