Fair deal – how to create and capture value with pricing

Law firms need to create pricing strategies that demonstrate fee fairness and which minimise client shock when they see a final fee for a matter, writes Colin Jasper.

For any firm to ensure sustainable success it must:

1. Create value for its clients.
2. Capture a fair share of the value created (using strategic pricing to ensure an adequate return on investment for the value the firm has delivered).

The first task is always to create value. You have no right to capture value if you are not creating it. However, the job does not stop when you create value. We also must capture a fair share of that value.  If we fail to do that, we will not be as profitable as our peers and we will not be competitive in the marketplace for talent. 

While most lawyers believe they do a great job at creating value for their clients, fewer believe they effectively capture a fair share of the value. 

In this article, I break down the key elements of the value creation and capture process; to encourage practitioners to identify ways they can deliver greater value to clients while simultaneously improving profitability. 

1A – Fully understand value

The nature of legal services delivery tends to be reactive. Clients approach firms with a problem to be resolved – an activity they want undertaken. Poor lawyers respond to this brief by telling clients the work that needs to done, and providing an estimate for that work. This is a lazy approach and, if we are genuine in trying to create value for our clients, we should do better.

While clients may understand their problem, the brief they provide is rarely comprehensive. Good lawyers spend more time understanding the context behind the brief; exploring with the client what a successful outcome looks like.  Spend time exploring trade-offs between speed of completion, the outcome achieved, the client’s risk appetite and the resulting costs involved. 

It is in this deeper exploration with the client about what they are trying to achieve, and building an understanding of competing priorities – for example, maximising the outcome achieved versus containing the costs of the matter – that genuine value can be created in a collaborative way with the client.

1B – Determine delivery process

There is a second step in the value-creation process that is often overlooked and which is becoming more important. Having developed a deep understanding of what value means to the client, the second step is to determine the best way to deliver this value.

Historically, law firms sold expertise by the hour. Now, law firms are providing legal solutions. These solutions may include legal tech (such as contract-management systems and document review systems), contract lawyers, low-cost service centres, paralegals, project managers, precedent documents and – coming soon – AI. 

Clients want law firms that are genuinely looking for ways to deliver the agreed outcomes in the most cost-effective manner. This may include an exploration of the role to be played by the client. For example, with some inhouse legal departments being highly resourced, many General Counsel are keen to ensure these inhouse resources are undertaking the parts of the matter that they are capable of handling.

Take the case of one estate lawyer, who recognised that different clients prioritised different issues when assessing the value of offers. Some wanted significant advice, and were willing to pay a premium to obtain that advice. Other clients were more price sensitive.

Armed with this information, the firm developed alternative offerings. As a starting point, it developed a checklist of information required from its clients. At the first meeting, the lawyers walked the client through the checklist. They indicated that the client should gather what information they had, and that then over a course of some meetings they would jointly develop an estate plan. The firm was then able to provide an estimate based on this high-touch, collaborative approach. 

Alternatively, the client could gather all the information required, provide answers to the questions independently and – when ready – return this information to the office. The lawyers would then take this information and have just one meeting with the client to sign the estate plan. 

While this alternative approach required more work by the client, and meant it obtained less guidance from the lawyers, the client was able to obtain a lower fixed fee. In short, clients self-selected the delivery option that maximised value.

2A – Price the matter

Having maximised the value created for clients through understanding what value means to them – and then agreeing on the delivery process – we then move on to value capture. The first step is to determine the pricing. It must be understood that there is more to pricing than quoting a rate or providing an estimate. 

The first step in pricing is determining the appropriate fee structure. Increasingly, clients are preferring fixed or capped fees, but some clients like the comfort of hourly rates (particularly discounted hourly rates). We are also seeing greater use of fixed monthly retainers and bonuses for certain types of legal work. 

Fee structures largely determine who carries the risk associated with any uncertainty around costs. While fee levels split the value, a well-chosen fee structure can increase the value to both parties. 

Once the fee structure is chosen, the fee level should be determined. This is not simply a matter of costing the matter.  Effective pricing should consider the costs, the market price, your objectives, and the value of the work being completed. Effective pricing should be fair, reasonable and proportionate. Where discounts are offered, a bonus might also be sought if certain agreed outcomes are achieved.

2B – Demonstrate the price is fair

The final step in capturing value is helping the client see that the price is fair. In a rational world, this would simply be about demonstrating that the price represents value. 

However, as many behavioural science studies highlight, collectively we are not rational buyers. More important to clients than value is fairness. They want to know they are not being ripped off. They want to be sure the price you are asking is a fair price. 

A recent matter in the United States highlighted this point. A consortium of insurance firms was suing the US Government over Obamacare. Los Angeles-headquartered firm Quinn Emanuel agreed to undertake the consortium’s work on a full contingency basis, taking an agreed proportion of the outcome. While the case was expected to take many years to resolve, Quinn Emanuel was able to negotiate a successful outcome within months. The consortium received more money than expected, faster than expected. 

Clearly, the value the client had obtained had increased. It may, therefore, come as a surprise that the client made an application to the court to challenge Quinn Emanuel’s fee. The consortium argued that the case did not take as long as expected, so it should not cost as much. Discovery highlighted that the fee represented US$10,500 an hour for every partner, associate, lawyer and paralegal who had worked on the case. The fee did not feel fair.

There are a range of strategies we can adopt to help the client see that the price is fair. First, the price should be heard before it is seen. The proposal should confirm what we have already agreed, rather that the final page coming as an unwelcome surprise? In addition, we could provide the clients with choice – that is, a range of options based on differing scope, roles, resourcing or fee structures that enable clients to choose the price or offer that represents best value to them. In this way they assess how to use you, rather than whether they should use you or not.

Opportunities

While most lawyers believe they focus on creating value for clients – and recognise the need to capture a fair share of that value – for most of us, there are opportunities to improve. This could be through:

• deeper engagement with clients to fully understand what value means to them.
• putting more effort into alternative delivery processes (including the client’s role) to enable clients to choose.
• being more thoughtful in pricing – rather than simply costing – matters.
• putting greater focus on demonstrating to clients that the price is fair.

Where are your opportunities to improve?

Colin Jasper is a founder and principal of Positive Pricing, which helps professional services firms win more work at higher prices.

www.positivepricing.com