What the Rise of Pricing Officers Says About Big Law’s FutureJuly 9, 2014
The headline on our latest ALM Legal Intelligence survey was striking: 76 percent of big firms now employ some sort of pricing officer. And these positions are in the midst of a remarkable growth spurt. Forty-four percent were created in the last two years. Clearly this is a response by firms that recognize that they need help dealing with clients, many of whom not only want discounts but also proposals for non-billable hour pricing arrangements. Rather than composing as detailed an estimate as will fit on the back of an envelope, firms have turned to a new group of analysts who can sort through their internal data and practices.
Unless clients change their habits of the last half-dozen years, these jobs appear to be a permanent part of law firm administrative structures. Thus far, pricing departments tend to be small: Only 31 percent have two or more direct reports. And while half say that they’re part of the firm’s “senior leadership team,” most still find themselves reporting to chief financial or chief operating officers. Just 9 percent say that their pricing officer reports directly to the managing partner or executive committee.
But the reporting lines can be deceiving. No matter to whom they report, 89 percent work directly with partners and 72 percent work with practice group leaders. Roughly half get involved with at least half the requests for proposals (RFPs) that firms bid on. More important, 41 percent report that they have one of the “final” says on how a matter is priced.
These results also tell a bigger story. They suggest cultural and procedural shifts for law firms that are far broader than the addition, however compelling, of another member to the burgeoning C-suites of The Am Law 100. There are at least five implications of these findings worth considering:
To get respected, the data needs to be clean. Once it’s clean, the data will lead to powerful new “metrics.”
“Pricing officer” is a misnomer. If it weren’t so awkward—in every sense—they should be called Cost and Profit Officers. Their tasks are really designed to determine the actual costs to firms of delivering a particular legal service and, with that knowledge in hand, calculating a price that will deliver to the client a sense of fairness and to the law firm a healthy margin.
Doing that work should not be as hard as it is now. The filing cabinets—real and electronic—of every law firm are crammed with data about their costs. Unfortunately that information is in the form of billing records whose aim was to collect money and not capture information. As a result, a diligent pricing officer might be able to gather numbers about what a firm charged to complete a particular deal or a dispute. But breaking down those matters into component parts has proven elusive. And partial or dirty data is an invitation to skeptical lawyers—which is to say, all of them—to ignore or challenge any policies that grow out of those numbers.
To use the technical term, in an era when knowing one’s costs is essential to running one’s business, this is nuts. Some firms and their pricing officers are trying to correct the problem. Some have engaged in retrospective analyses in searches that compare favorably to wandering through the warehouse featured in the final scene of “Raiders of the Lost Ark.” Others have cleaned up their policies going forward, seeking to collect contemporaneous time and task records so that they truly know how, where and when their time is getting spent. In fact, 36 percent of the firms that responded to our survey said they were “very confident” about the costs of their matters. Why? Because they “have metrics in place.”
We can’t overestimate the importance of that statement. Corporate America has been awash in metrics for decades and has embraced the simple-minded mantra that you can only manage what you can measure. (Let’s save for another day the question of whether everything worth doing can be measured.) By comparison, law firms have been slow to embrace the metrics mania. Of course, firms have counted hours billed and divided partner shares for generations. As they’ve grown and spread, they’ve labored to track the success of new offices and the flow of referrals through their networks. But as metrics go, those are blunt instruments. The new concerns with understanding costs require more subtle and precise measures. And once lawyers understand those, they can begin to adjust and respond to a market that has changed irrevocably.
The tyranny of the top line is ending
To the extent they pay attention to their commercial interests, lawyers have been concerned with how much new business they or their firms acquire or control. It’s a measure of a firm’s health, and in the words of Lennon and McCartney, it’s a ticket to ride: Partners with portable books of business make for attractive lateral candidates. Those measures only look at the top line, however.
When partners talk about books of business, they mean gross revenue. When compensation committees dole out origination credits, they measure gross hours. But in an era when profitability measures are becoming a standard feature of executive committee agendas, what should we call those attitudes?
Already, according to our survey, 47 percent of the responding firms consider “client or matter profitability in determining partner compensation.” What will slow that momentum? As law firms and their partners understand that the value of work can’t simply be measured by hourly rates, that profit margins are a function of costs and not tradition, lawyers will end (OK, diminish) their obsession with the top line. And that will change the power, pay and portability of partners.
A corollary: Say goodbye to the buccaneers. Partners will continue to lose their rights to fashion their own deals.
It’s not just what partners can earn or take with them. The wielding of data will also change what they can do.
This is old news at many firms. We’ve lost count of the number of partners who have left their firms because their clients couldn’t keep pace with the firmwide billing rates. Many firms refer to this as imposing discipline on their partners. As an indication of how widespread this practice is, our survey found that at only about one-third of the responding firms—32 percent—did the lead attorneys on a matter have one of the “final says” on its pricing. These lawyers may be part-owners, but they didn’t get to price the merchandise. Admittedly, these responses came mostly from firms with pricing officers in place.
But why would we think that the trend away from individual partner control would stop or even slow down? Indeed, it may become a measure of a firm’s coherence and integration to ask about universal pricing policies. This is less about business and more about culture. Permitting widespread independent pricing behavior may—and I emphasize may—be a leading indicator of a firm that tolerates or encourages the partner-as-gang-leader approach to life.
Strict or even enforced billing policies will not suit many partners’ liking or their business plans. It’s easy to forecast departures as a result of conflicts over pricing, and a small but steady exodus of partners out of the largest firms. Another indicator: According to our survey results, the bigger the firm, the less likely the lead partner on the matter had a final say on pricing.
And it’s not just what partners charge, it’s also how they do their work. Three- quarters of the responding firms said that they are aligning their project management efforts with their new pricing policies. And another 16 percent said they plan to. Not surprising. But it means that partners will also feel the strictures of having to conform their work to firm-normed processes. We don’t have a position on whether that’s a good or bad development. But for a profession that once prided itself on independent action as well as thought, it’s different.
Not just lawyers will talk to clients.
Again, it’s old news that firms use non-partners to work with some of their best clients. From client interview programs to responses to RFPs, firms regularly rely on their civilian administrators or outside experts. Now that trend is beginning to extend to pricing. It’s off to a modest start. Only 6 percent of responding pricing officers reported spending even a quarter of their time on “client-facing” work. But having spoken with a few of those who do, I know that their work includes negotiating directly on price. Sometimes that comes as a defensive move in response to a client who has wheeled in some Procurement Department muscle. Just as often, though, these directors of pricing find themselves talking directly to senior legal department staff members or business heads, trying to shape a deal that both sides can live with.
Whether this trend picks up momentum will depend on the confidence that firms have in their pricing executives. These are still new roles, and the level of talent and experience of the people in them varies from well-trained veterans of the legal/corporate scene to junior accountants fresh out of Big Four training programs. As a result, we’re seeing a reprise of the chief marketing officer carousel of a decade ago, during which firms engaged in a war for limited talent. Firms are bidding for pricing talent. More than a quarter—28 percent—report compensation packages of $250,000 or more for their pricing officers. Those numbers will increase as firms decide that the staffers who are setting their price scales need to be paid as partners and not as senior associates. Now they just have to find enough experienced people to meet the need.
Seeking the Holy Grail: Moving from price to value.
The arrival of pricing executives and the new attention to data is a real accomplishment for law firms. While it’s an important step, it’s only the first of many that may, if we’re all lucky, lead us out of the desert of talking about price into the promised land of talking about value.
Clients and law firms talk about price today because they have a vocabulary and comfort with that concept. They can duel over hourly rates and discounts; it’s an extension of what they know, and for those who otherwise run deals or argue to juries, it comes almost naturally.
Value is harder. We don’t have a definition. We barely have a concept. And we surely don’t have the essential building block: trust. As part of the survey, we asked pricing officers whether clients insisted on “tracking shadow hours” performed by firms so they could be certain they weren’t getting the short end of the deal. Only 13 percent responded, “Not usually.” And none answered, “Never.”
More rational pricing may be the best firms and clients can hope for. It is of course an invitation to clients to muck about in the innards of their trusted advisers—why did you assign a third-year rather than a second-year? Why were four lawyers on that conference call? Law firms can handle that. But what more incentive do they need to find a way to talk about value?
A variety of working groups have begun to address the value question in the hopes that law firms and their clients can someday talk about what a matter is worth to them and not how much it costs. Should they reach a positive conclusion, the rise of the pricing executive will have helped them get there. For that, we all will be grateful.
Source: American Lawyer