Firms Begin to Eye Pricing Analysis
First Published May 7, 2013
After a few years of collecting financial data and applying project management techniques to the legal process, law firms are beginning to dedicate resources to pricing analysis.
Firms are analyzing and strategizing on pricing in order to properly staff matters handled on alternative fee arrangements, provide a client with more cost certainty and, perhaps just as important, ensure the firm is not losing money on a fee arrangement.
"The data tells the story better than people can sometimes," said Reed Smith Chief Knowledge Officer Thomas Baldwin.
His firm and others across the Am Law 100 are hiring more people to analyze that data and link it to their project management initiatives and client pitches.
"The market pressures will require more firms to do it because clients are pushing so hard for predictability," said Edge International consultant Pam Woldow regarding the creation of strategic pricing analysts.
Woldow said she sees several job postings a week in this space as firms formalize the role. Firms are either dedicating a specific person to oversee pricing analysis or they are including the function within their legal project management departments. She said it's not about a competitive advantage, but rather competitive survival.
"It's a much more formalized role that is dedicated to do this," Woldow said. "It's a good thing. Now lawyers know there is a specific go-to person, and sometimes required-to, for alternative fee arrangements."
A group of pricing specialists from across the country have formed a group on LinkedIn and Woldow and several other sources have said the Legal Marketing Association will soon house a section dedicated to pricing analysis.
Pepper Hamilton became the latest Pennsylvania firm to delve into pricing analysis with the creation of the director of strategic pricing and project management.
For Peter Lane Secor, the first person to hold the new director position, project management and pricing analysis go hand in hand. A firm can't staff a matter without knowing how much aspects of it cost and can't price a matter without knowing how best to staff it. Luckily for Secor, Pepper Hamilton had been tracking pricing data for the past two years, giving him plenty to work with in analyzing Pepper Hamilton's pricing models and creating budgets and forecasts for firm clients.
When looking at the cost of different Pepper Hamilton services, Secor said he will determine whether the cost and pricing model fit within the firm's current portfolio. For example, Pepper Hamilton may have too many ongoing matters at one time that are done on a capped-fee basis, so a new matter should be priced in a different way. And sometimes firms will take on work at a loss in order to get future, more lucrative business. Secor's group will be tasked with tracking all of that to ensure the firm's overall portfolio is profitable.
Reed Smith has had a pricing department for nearly three years and a legal project management group for about a year-and-a-half. The firm is expanding the staffing of both and is about to join the two under one umbrella that will report to a newly created position of global director of client value. That position will report to Baldwin.
The pricing team currently has three analysts with another on the way. The group will also soon get a manager of strategic pricing. Baldwin said the firm has been calculated in its hiring, bringing on seasoned financial analysts as well as investing in building technology to mine the data it tracks.
"It takes time to build up enough matters across a wide swath of practice areas to be able to use it consistently," Baldwin said of tracking pricing data.
Along with helping partners firm up their fee arrangements, Baldwin said his team has become increasingly involved with assisting partners on large RFPs and in reverse online auctions in which decisions on pricing cuts must be made in seconds.
Reed Smith doesn't have a policy on what matters must go through a pricing or project management analysis. Baldwin said seven-figure matters or matters in which the firm is pricing out a portfolio of work are those his group most typically handles.
The portfolio deals are where necessity of the marriage of pricing and project management is most prevalent, Baldwin said. Firms can have the best pricing in the world, but if they don't monitor and manage how that plays out over a matter, the firm or the client could run into trouble, he said.
Baldwin said Reed Smith put the pricing and project management functions under the firm's knowledge management department because that department can bring added value such as analyzing project process maps to determine where process automation or legal technology could be inserted to make the matter run more smoothly.
At Dechert, the first pitch on pricing is focused internally. A senior director runs a three-person team of pricing analysts who work with the firm's attorneys on crafting alternative fee arrangements. Those arrangements then go to Chief Financial Officer Anthony Licata who either approves them or decides to kick them up to a partner committee for approval. The matters have to meet the firm's profitability models or there needs to be a reason for taking a matter on a basis that doesn't meet those models.
"If we're going to do 20 to 25 percent of our business on something other than the billable hour, it's no longer responsible to guess," Licata said. "There needs to be sophisticated financial modeling."
By tracking this data, the firm has something to look back on, not to slap a partner's wrist for making a bad deal, but to learn from, Licata said. Dechert now has about 40 to 45 different pricing models that an analyst can show a partner. If a client wants certainty of cost, there are models for that. If the client wants a hybrid rate, there are models for that, he said.
Licata has gone on between 30 to 40 client pitches with attorneys to help educate the client's procurement department on the fee deals the firm can create. The deal is then formalized in writing with specifics as to what the pricing arrangement will entail. That has reduced disputes with clients over alternative fee arrangements, Licata said.
When the firm's pricing analysts aren't creating pricing strategies, they are mining the data to come up with new pricing options, Licata said. Their work doesn't stop with pricing, however. Licata said the team sees the project through to the end of the matter, tracking things such as whether a fixed fee is nearly met on a case. Licata said firms have to track their data for about two years to have enough to predict trends and price effectively. And they should always revisit a pricing strategy at the end of each matter, he said.
Pricing and project management aren't options for Dechert attorneys. All attorneys go through a pricing process at the matter intake stage. If it meets the profitability standards, a more formal process isn't necessary. But the pricing will still be checked at the end of the matter to ensure it worked or find out where it failed. All alternative fee arrangements go through the firm's pricing department.
If a partner has too many instances in which a pricing structure didn't make profitability metrics, then all of that partner's matters will have to go through the pricing team, Licata said. Dechert also does what Licata described as a partner scorecard.
"Not every partner gets treated the same," he said.
Partners with a great history on pricing will more easily clear the process for a pricing model that brings with it some risk of not meeting a profitability index, he said.
Beatrice Seravello, Blank Rome's chief strategy officer, has been working with her practice management team for the past year on building pricing templates, analyzing data and creating alternative fee models. That work has been successful in a few practice groups and the goal in 2013 is to expand it firmwide.
Seravello said it became clear there needs to be a person dedicated solely to pricing analysis. To that end, the firm plans to transfer an existing staffer who has been involved from the start on analysis and alternative fee models to head up a new role handling pricing strategy. This person has a business analyst background and would move into the new role by June. Seravello said the position will most likely be titled director of pricing strategy because she views the role as a strategic function of the firm rather than simply project management.
For Drinker Biddle & Reath, the concept of legal project management has been part of Kristin Sudholz's role since she took over as the firm's chief value officer in 2010. Pricing and budgeting have always been a function of that role, but now Sudholz will team up with longtime litigation partner Wilson M. Brown III to work on strategic pricing initiatives on a more formal basis.
Brown, Drinker Biddle executive partner Andrew C. Kassner, the firm's chief financial officer and a partner on the transactional side have historically made up the firm's team for approving alternative fee arrangements. While the transactional side of the firm has had plenty of experience with alternative fee arrangements, Kassner said litigation has been slower to adopt it. But because there is an increasing demand for fixed-fee or portfolio fee arrangements on the litigation side, Kassner said Brown was the perfect person to partner with Sudholz on those efforts.
While Drinker Biddle has been tracking data for specific lines of litigation, Kassner said the focus is increasingly on tracking the cost of certain tasks within litigation.