Pricing dissonance: Big law firms' international pricing strategy dilemma

A common characteristic of large law firms seems to be a dissonance between their organisational and operational structures and the way that they develop, deploy, execute and control pricing strategy across their offices.

It is helpful to frame the discussion with reference to the three main recognised operational paradigms
that underpin these firms.

 

1. Global/international. These firms centralise their management decisions and most of their assets at their head office. They treat the world market as an integrated whole and focus on the need for global efficiency. Although these firms may have considerable global holdings, management decisions with firmwide implications are made at the head office. This approach to globalisation reflects an ethnocentric attitude.

2. Transnational. These firms eliminate structural divisions that impose artificial geographical barriers. They expects overseas offices to contribute actively to the development of firmwide capabilities, to develop knowledge and share it with worldwide locations, and to use both centralised and decentralised methods of promoting interdependence and specialisation of units. The transnational approach may be the ideal way for a firm to ‘think globally’ and ‘act locally’. This type of firm reflects a geocentric attitude.

3. Multi-domestic. Multinational firms decentralise management and other decisions to the local country. They don’t attempt to replicate domestic successes by managing foreign operations from their home country. Instead, local partners manage the business and strategies are tailored to that country’s unique characteristics. This type of globalisation reflects a polycentric attitude.

Let’s consider the pricing issues for these types of organisations from the firm perspective and the client perspective.

Firm perspective

There are large law firms that operate predominantly along multi-domestic lines but try to exercise centralised control
over pricing functions. Conversely, some firms exhibit a multi-domestic approach
to pricing but, in all other respects, management, governance and policy is relatively centralised.

Whether this asymmetry is a good thing, a bad thing or makes no difference at all is probably worthy of research and analysis. But, it still begs the question: Whichever model a firm with a multi-office footprint – particularly international – chooses to adopt, how should the pricing function be treated?

At one end of the continuum, there is the potential for a substantially centralised pricing function, where the satellite offices are effectively told what they are going to charge and how that is to be implemented. At the other extreme, the satellite offices exercise almost complete autonomy around pricing levels and execution. As with most things, the better approach is one that avoids those two extremes. So, if both the head office and the satellite offices have a role to play, what is a logical demarcation of their roles?¹

Pricing best practice

There are three pillars of best practice in pricing legal services: governance, analytics and execution.

1. Pricing governance refers to decisions such as:

• how pricing is used to assist the firm to achieve its strategic objectives;
• what role pricing plays in the firm’s messaging;
• where the pricing function sits within the firm;
• where pricing authority and accountability resides;
• policy decisions about pricing mandates (write-off approvals and thresholds above which approvals are required); and
• policy decisions around the interplay between the pricing function and the marketing and business development function.

2. Pricing analytics refers to:

• the firm’s human and IT systems capability; and, in particular,
• the ability to collect, analyse and disseminate within the firm actionable data that is integrated with legal project management initiatives and that sheds light on profitability as measured by fee earner, practice team, sector, client, matter, office and region.

3. Pricing execution refers to:

• the skill set of individual partners and the resources available to assist them with the challenges associated with crafting, documenting, communicating, negotiating and, where necessary, defending sophisticated, innovative and imaginative pricing proposals on a client-by-client and matter-by-matter basis.

For most firms, the best outcomes will be achieved where pricing governance and analytics reside with the firm’s head
office, but pricing execution sits fairly and squarely within the remit of each individual office. Even if profitability objectives, margins, realisation rates and other key performance indicators are imposed on satellite offices, they should be left to their own devices as to how they achieve them, a major component of which will be
pricing execution.

Governance and policy require centrality and a cohesive approach. This certainly does not mean that partners in satellite offices should not have input into the development of pricing governance and policy; obviously they should. However, someone needs to exercise oversight in relation to those issues; the head office is probably best placed and best resourced to do this through clear articulation and enforcement.

Similarly, centralisation at the firm’s head office of the pricing analytics function makes sense, not only from a resourcing point of view but also because analytics fulfil an important role in providing an early warning of departures from agreed pricing governance and policies.

However, pricing execution has to be deployed by the partners on the ground. These partners understand better then anyone the subtleties and nuances of the market in which they operate, the vagaries of their client base, the prevailing macro and micro economic conditions, the cultural and socioeconomic factors
and ‘what works’.

Too frequently, however, these same factors are advanced as excuses for suboptimal pricing behaviour. Partners regularly say that their market/region/practice area is more challenging than most and that their clients are particularly demanding and difficult. This is often followed by a comment in hushed tones to the effect that “the guys in [head office] have got it easy, they just don’t understand what we have to deal with out here!”

The differences between markets
must be acknowledged and recognised,
but it requires strong pricing leadership within each of those satellite offices to prevent the making of excuses from becoming the default justification for poor
pricing behaviour.

The critical role of head office is to ensure that partners operating at the far-flung reaches of the firm are imbued with the necessary skills, pricing confidence, capability, resources and support, thereby equipping them to craft their own pricing solutions for their own markets, rather than prescribing solutions from afar. As Winston Churchill said in 1941, “give us the tools and we will finish the job!”

Striking a balance

From the firm’s perspective, too much decentralisation and autonomy results in a fragmented pricing free-for-all that can only ever be a shambles, compromising revenues and profitability. ‘Vive là difference’ is a useful motto, but a
steady hand on the till from head office
is essential.

Conversely, a centralised approach to pricing necessitating the micro-management of partners at satellite offices not only creates a great deal of resentment but also does nothing to assist those satellite offices in achieving their financial and related objectives. In fact, it will often serve to stymie pricing creativity and ingenuity and compel partners to force a pricing ‘round peg’ into a ‘square hole’.

Client perspective

The above commentary provides a very inward-looking view and is completely irrelevant to clients. Clients are simply looking for best value and they very often don’t care too much where they get it.

As globalisation or at least internationalisation has simultaneously impacted law firms and their clients, it has dawned on many companies with an international footprint that their similarly-expanded law firms have the capability to deliver what the company requires from more than one location.

This in turn has given rise to comments such as: “Yes, I know that we have always dealt with you in New York for much of our North American operation and that you, as our relationship partner, are based in New York, where I am used to paying $700 an hour, but it has just occurred to us that you have quite a significant operation in Sydney, Australia, so why can’t we get much of the work done there at $400
an hour?”

To be clear, this is not about the trend towards third-party legal process outsourcing, on-shoring or consignment
of back-office functions to a relatively low-cost location. This is about the migration of work between major offices of the firm that, like the laws of physics concerning water and gravity, always wants to find its lowest level.

Protestations to the effect of “sorry, it doesn’t work like that, you are a client of the New York office and so you have to pay the New York rates” are not well received by clients. They do not care that your ambitious international expansion plans might actually backfire and result in cannibalism of your existing revenue streams. In fact, your firm’s affliction with a sort of pricing necrotising fasciitis is something they will happily exploit.

Many international firms have found themselves increasingly caught out by this conversation, with little to offer by way of justification or viable alternative. And there is a good reason for that; there isn’t really
a justification that makes any sense to
the client.

Firms are however on much more solid ground when pushing back against an even more opportunistic and aggressive request from clients, which is: “We want this work done by the people at your London office because that suits us, but we want it done at the same headline rates that apply at your Kuala Lumpur office”.

That is about as rational and reasonable as booking a holiday in
a standard hotel room and expecting
to occupy the presidential suite. The answer must be: “No, we can offer it to you at two different prices; you choose where you want it done! The work undertaken in our London office by
our London people at KL rates is not
one of the options”.

Unfortunately, the free flow of work between offices is often impeded by issues that have nothing to do with what is in the best interests of the client. These impediments include the firm’s own internal meritocracy, reporting and remuneration structures and (please don’t shoot the messenger) partners’ egos. Again, these
are of absolutely no interest to clients.

Need to adapt

Large law firms’ whole approach to pricing needs to change rapidly. When clients become aware of imaginative, innovative and client-centric pricing and payment alternatives being provided by viable competitors, maintenance of the pricing status quo will become virtually impossible, as some have already discovered.

The challenges are systemic and
the solutions are complex; they include
the following:

• law firms can learn a lot from large organisations in other global industries/professions that have had to deal with similar issues;

• the solutions must be built from the client perspective, not the firm’s;

• most of the solutions are not popular with law firms because they require them to approach the allocation of resources and the way that they construct their internal meritocracies very differently from the way that they do at present; and

• part of the answer is the firm constructing proposals that compel

• the client to make trade-offs.

Large law firms have the capacity
and willingness to adapt. But, such
adaptation does not have to be synonymous with declining profitability. Even the most profitable firms are still leaving money on the table because
they are not using the power of pricing
to its full potential. A follow-on article
will discuss the solutions to the international pricing strategy dilemma
in further detail.

Richard Burcher is managing director
of Validatum (www.validatum.com)

Endnote

1.  In this article, the term ‘head office’ is used to signify the office in which the preponderance of the firm’s people involved in management and governance, as well as the bulk of
the management infrastructure, are located. Not always, but invariably,
this will be where the firm has its origins. By definition, ‘satellite office’ means
the firm’s other offices, but the term
is not used in any nugatory or
pejorative sense.