'Creative Pricing' is Key to Avoiding the Race to the Bottom

The pricing approach that law firms followed not so long ago is changing as the balance of power shifts. So law firms win and retain business?

The increasing number of ‘Bid Manager’ and ‘Pricing Manager’ positions is a clear indication that the pricing approach that law firms followed not so long ago is changing. The balance of power has shifted and clients hold the purse strings. Many companies are overhauling their relationships with legal services providers as they exercise their right to derive the most value from their budgets and the organisations they work with. Insurance company AIG is one such company – earlier this year it announced that the company was considering reverse auction for its non-disease personal injury work – a procurement form that requires law firms on its panel to bid for every piece of work, in turn encouraging undercutting between legal advisors to win AIG’s business and consequently decreasing fees for AIG.

This universal change in approach to business is putting law firms under tremendous pressure. Recently announced, there are 1200 firms on the Solicitors Regulation Authority’s watch list as those facing financial difficulty.  Regulatory changes such as the Jackson Reforms are affecting profitability of volume legal services providers – the ban on referral fees in personal injury is set to cost Admiral Insurance approximately £15 million this year. 

Analytics can help law firms to devise creative pricing to win and retain business.

Industrialise service production

An intricate understanding of the cost of producing legal work in order to have the capability to develop creative pricing and ensure profitability is vital. Anecdotal evidence though suggests that while some forward-thinking law firms are actively exploring new pricing proposals (away from hourly billing), for the majority, the importance of developing value-based pricing models has yet to sink in.  

Steeped in the cultural mindset of many law firms is the view that law is an art form, a creative process that cannot be industrialised. The reality is proving to the contrary – the majority of the work is repetitive and automating those processes can help reduce the cost of service production.

Utilise legal process management

Clients are demanding all manner of alternative fee arrangements and deep discounts including conditional fees, fixed fees, capped fees and blended/combination rates. Law firms therefore must charge fees that is accurately based on expected duration of tasks, level of personnel best suited to matters (i.e partner, associate, para-legal, etc.), combination of fee models to maximise budgets, discounts offered, outsourcing costs;  and so on. This requires developing a pricing structure that meets the needs of customers and optimises the organisation’s resources to deliver services profitably.

Legal process management (LPM), a discipline that applies project management skills to legal matters, offers such a best-practice framework encompassing scoping, planning, devising profitable permutations and combinations of varied pricing schemes – in addition to supporting execution, monitoring, management and completion of legal matters. Interestingly, if one looks at the job descriptions of pricing professionals in the industry, they include things like excellent project management skills, change management experience, expertise in financial modelling and analytical skills, to name a few. Many, if not most of the characteristics are reflected within LPM.

Exploit business intelligence

Over time, such an approach provides visibility of the type of pricing that is more profitable than others, which areas of organisational processes need to be fine-tuned, and where new methods need to be devised. Using such information, firms can conduct forward-looking price analysis and stay-ahead of the curve of evolving pricing models, identify new types of costs and upcoming business trends to stay competitive.  To customers, it offers the much-desired transparency on pricing.

Creative pricing will become the norm

With discerning clients actively questioning law firms’ fees in the face of tight budgets,  elementary to developing innovative and yet profitable pricing is the complete understanding of service delivery processes and the cost of service production.  Only then can firms make informed critical decisions on whether to undercut in ‘auction’ situations or let go of truly unprofitable business deals. In addition, firms must have processes in place to ensure that the work secured is delivered to plan and within budget, making modifications and improvements along the way to meet the service and profitability goals. LPM and business intelligence strategies facilitate this. They are no longer ‘nice to adopt’ approaches, they are an absolute must for survival and financial stability. Without these tools in the armour, firms might find that where pricing is concerned, given the intense competition, it could well become a race to the bottom, which will not be sustainable.


Stu Gooderham is Business Development Manager at LexisNexis Enterprise Solutions