Law Firm Pricing: Strategies, Roles, and Responsibilities

Co-authored by Jim Hassett and Jonathan Groner

In the current competitive environment, many law firms are struggling with three key questions:

  1. Pricing: How do I bid high enough to make an acceptable profit, but low enough to get new work? 
  2. Alternative Fee Arrangements (AFAs): When are non-hourly alternative fees best?
  3. Managing: After I set a price, whether AFA or hourly, how do I manage the work to make a profit?

The new book Law Firm Pricing: Strategies, Roles, and Responsibilities provides a guide to progress on the first two questions.  It was written by two of the leading pioneers in this new field – Toby Brown of Akin Gump and Vincent Cordo of Reed Smith – and provides an excellent overview of the current state of this rapidly evolving area.  This book should be required reading not just for pricing directors and their staffs but also for managing partners, executive committee members, and pretty much anyone who wants to understand how large law firms are changing the way they price both hourly and AFA work.

This book is quite well written, with a notable absence of legal and business jargon. Brown and Cordo discuss, clearly and thoughtfully, the responsibilities of the pricing director; the director’s multiple roles, both internal and client-facing; the crucial importance of pricing strategy to long-term profitability; the need for data-based solutions in all contexts; and the frequent resistance of law firm partners to many of these developments.

The authors are especially incisive in their analysis of the behavioral incentives and factors that affect law firms, which are after all made up of human beings:

Lawyers live in a reputation world, and [financial] monitoring exposes that reputation to risk. Once lawyers realize that others in their firm can see their financial performance on matters, their behavior often changes. In one example, a lawyer was losing money on the first phase of a fixed fee arrangement. Once a monitoring program was put in place, performance on the second phase dramatically changed – leading to a reasonably profitable result. (p. 39)

They are also extremely thoughtful about the role of technology in today’s law firm and about its limitations:

The core systems of a law firm – the client database, document database, financial database, and people database – all stand alone. Getting data from one to another is very difficult. Therefore, understanding which clients are buying specific types of services, the staff resources committed to resolving the legal challenges, as well as the profitability of the effort, is a significant challenge. (p. 50)

This wouldn’t be much of a review if we didn’t find something to criticize, and there are a number of places where we wished the discussion went deeper.  For example, Chapter 3 – Pricing and Profitability – begins with a two page introduction to how profits are defined differently by different firms, a topic that we think requires far more detail, including the implications of different definitions of realization (which many lawyers confuse with profit) versus cost accounting and other models.  Lawyers will never agree on how to become more profitable if they don’t first agree what the word means.

The practical experience of these two industry leaders places them in the forefront of critical changes in the legal industry, and they have written an extraordinarily valuable book.

As they summed it up: “From the authors’ experiences, the pricing director role has been very challenging, but quite rewarding. It exists at the vanguard of change for an industry in desperate need of it. . . . The last word on legal pricing is that it is a roller coaster ride and nobody is sure yet exactly how it will end.” (p. 2)

By Jim Hassett, Founder, LegalBizDev and Jonathan Groner, PR consultant and freelance writer for the 2014 March/April Capital Ideas Newsletter

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