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Interview with Thought Leader and expert on pricing Richard Burcher, Managing Director of Validatum (first published on Legal Business World)
Richard, can you tell us a little bit more about your background and how you became a specialist on pricing?
I am a Kiwi born and bred. I spent the whole of my 30-year legal career in private practice in law firms in New Zealand including seven years as a managing partner. I was appointed a cost assessor by the New Zealand Law Society in the mid-1980s after expressing an interest in the topic. That was the start of my journey into the world of pricing. When I look back, to appoint someone with only four years PQE as a cost assessor was crazy but I took it seriously and tried to learn quickly and ended up chairing the national committee.
I was also fascinated by a paradox that there appeared to be no correlation between technical ability as a lawyer and pricing ability. It was also obvious that there was a complete lack of transparency and engagement with clients over pricing and I had a hunch that this would eventually come back to bite us.
I spent the rest of my career and a period of university-level postgraduate study trying to figure out ways to reconcile two apparently diametrically opposed objectives; how to maximise law firm profitability through intelligent pricing but do so in a way that ensures that clients feel that they have had fair value and been treated appropriately.
I left legal practice in 2008 to set up Validatum which operated solely in the Australasian market. We relocated the business to London in 2012 which has provided a terrific platform to internationalise the business. As a result, we have now worked with over 300 law firms in 18 countries and are regarded by most legal commentators as the leading niche law firm pricing consultancy in the world. We put this down to our intentionally myopic focus. We only do pricing and we only work with law firms.
Looking at the legal market, are lawyers and law firms still insecure concerning AFA’s and the revitalization of their business models, and what is the underlying ‘fear’?
Law firm pricing sophistication sits on an extremely long continuum. At one end, there are firms doing some incredibly innovative and interesting stuff around pricing, not just in terms of pricing execution and pricing models but the whole relationship with clients around pricing, arrangements that are underpinned by historically unprecedented levels of mutual courtesy, empathy and trust as well as much greater maturity and engagement around legal project management and process improvement. At the other end of the continuum are what remain unfortunately the majority of firms that have done little if anything. Of those, only a small proportion could be characterised as still having their heads firmly stuck in the sand. Most that have done nothing know that they need to but are confounded as to where to start and how to go about it.
To be fair, their misgivings are well-founded. It isn’t easy. As many of the firms that we have worked with have found, they start the project with the idea that all they need to do is to get a little bit better at price negotiation. But they quickly realise that better pricing inevitably ends up lifting the lid on some quite difficult internal issues around the firm’s culture, individual performance and accountability.
The process also inevitably asks some hard questions about who and what the firm thinks it is and what it wants to be. Against that background, it is not difficult to see that the principal impediments to firms making progress in the pricing space are the usual suspects; fear of the unknown, reluctance to change, avoidance of difficult questions and internal discussions, fear of timely and frank pricing discussions with clients and in some cases still, the lack of a burning platform – for now! It’s hard to tell a room full of partners making over £1 million a year that they are on the wrong track.
How far, in your opinion, is the partnership structure blocking actual change in pricing?
There is a lot of very insightful commentary in circulation now about law firms’ ownership
structures. One of the many criticisms of the traditional partnership is the focus on short-term decision-making and as with many other aspects of the running of a law firm, this ‘short-termism’ can find its way into pricing attitudes and behaviours. However, a much larger problem in my view is firm’s meritocracy structures. On even a cursory examination, it should be self-evident that the way that most firms remunerate their people, report on them, appraise them, promote them and generally hold them accountable often drives suboptimal pricing behaviour.
For example, every law firm partner knows as a management truism that to optimise profitability, they should amongst other things, ensure that the work is delegated to the lowest level at which it can be undertaken competently, effectively and efficiently. This sits uncomfortably with the senior fee earner who has billable hours’ targets to meet but is relatively light on work. They will often hang onto stuff that they should get rid of to someone more junior and in so doing, destroy the profit margin on the job.
Another example of this sort of aberrant behaviour is the direct conflict between billable hours’ targets and fixed fees. If you give the client a fixed fee, what you really want is for the work done to a good standard but for the accrued time to amount to less than the agreed fixed fee. However, what are associates meant to do when they receive two conflicting messages; fill your timesheets but don’t put down too much on this file because we are stuck with a fixed fee! It is very difficult to get people to behave the way you want them to when you incentivise them to do something else.
Clients also see it as a profound misalignment of interest. Little wonder that for the first time recently, we saw an RFP which specifically stated that firms must indicate in their response whether fee earners had billable hours’ targets. The inference was that if they did, the firm wouldn’t even make the first cut as they saw it as something that works against the clients’ best interests.
Looking at other markets, pricing is actively used as an instrument to increase growth in turnover and EBITA. How far is pricing as an instrument also an enabler for the Legal sector?
Globally, the legal profession has for decades operated on a cost-plus model. Pricing sophistication was both unnecessary and antithetical. Just work out what it costs to keep the lights on and add a margin. That just doesn’t work anymore and consequently, the legal profession has suddenly found itself having to acquire a whole new skill set that is foreign.
The bad news is that when compared with virtually every other sector of the economy such as retail, manufacturing, pharmaceutical, FMCG, hospitality, aviation and entertainment, the legal profession and in fact the professional services sector generally has been very unsophisticated. The good news is that because we are so comparatively unsophisticated, there is only one way to go and that is up. Even minor improvements can have a significantly beneficial effect on the bottom line.
I don’t want to sound completely negative and it’s worth reiterating that there are some firms that are doing some very cool stuff. Equally, I think it would be fair to say that there are also quite a few firms who think they have made considerable progress and have the pricing side of things under control but that confidence might be a little misplaced.
If partners can’t personally demonstrate an understanding of the basics such as yield management, price segmentation, waterfall pricing, price elasticity, deal effect, price anchoring and the like then perhaps it’s worth investing the time and effort to get to grips with these. Pricing has been the single most neglected skill and resource within law firms but happily that is beginning to change.
We hear people speak about two doctrines; pricing (price perception) and value (value perception). Is value a problem in the transparency, acceptance and use of new or renewed pricing models and AFAs?
One of my frustrations is that ‘value’ and ‘value pricing’ as concepts are so misused and abused. It is also a concept that tends to be over-engineered and overcomplicated when the key elements are quite simple.
Value is subjective, not objective. Value and in particular good value, are determined by the client and the client alone. The client will pay no more than what they consider to be good value or at the very least fair value Value pricing is therefore nothing more complicated than an exercise in delivering work profitably against the backdrop of these three points.
Many lawyers mistakenly believe that pricing is purely a quantum issue but nothing could be further from the truth. We know from research conducted by the likes of Altman Weil that price as a pure quantum issue it is only relevant in about 10% of purchasing decisions.
For 90%, the purchasing decision is dominated by a desire for price transparency, pricing certainty and fair value. In fact, I would go one step further and argue that the price is very rarely too high. Rather, it is the perceived value that is too low relative to the price and the alternatives. There is a very important distinction between the two.
Research into buyer behaviour shows that clients will consider price options within a ‘zone of tolerance’. This zone has a maximum price which clients are willing to pay, and a minimum below which they won’t go without risking quality. A firm’s positioning within the client’s zone of tolerance depends on the level of demonstrated value. A client will appoint a more expensive firm if and only if that firm differentiates itself on their key areas of value.
If you were responsible for a law firm, what would you do to create more transparency between value and pricing? Do you have some tips?
This is primarily a communication issue. Lawyers dislike intensely talking about fees with their clients. We will do anything we can to avoid it and for many years, until regulation intervened, we could get away without much of a pricing conversation at the outset or at worst, a very vague and abstruse one that kept all our options open. Some would argue that this remains the case.
There are a great many things that I would do differently around pricing if involved with starting a law firm from scratch but top of the list would be giving all fee earners the confidence, tools, training, encouragement and accountability to ensure that high-quality, honest, frank and constructive pricing conversations took place throughout the life of the job. The reason? To better understand what value looks like to that client on that matter. To price a job, whether before, during or after the work without that insight is tantamount to flying a plane in cloud without instruments.
In a recent blog post I posed the rhetorical question, ‘why we are so bad at this?’. We can wrap it up in all manner of packaging and justification but I am sorry to have to report that it is by and large nothing more than unmitigated cowardice. If we are brutally honest with ourselves and we ask why we are not having the conversation when we know we need to, the answer is simple and primal. Fear.
Fear of not getting the job, fear of upsetting the client, fear of losing the client, fear that the client will say uncomplimentary things about us, fear that the client will no longer like and respect us, fear of how things will look internally, fear borne of our own lack of confidence and self-belief, fear borne of our suspicion that we may just not handle the conversation particularly well.
And how about the client side; e.g. the General and Corporate Counsel. It looks like there is a ‘demand’ for a new pricing approach. But are they themselves not part of the problem, or maybe better, responsible for the slow turn around of pricing in the legal market?
Ah, now you have hit a bit of a raw nerve with that. The key to new, successful, sustainable and mutually beneficial pricing relationships is much better collaboration and communication between the law firm and the client. Neither should underestimate the investment of time and effort required to make that work.
We certainly appreciate that in-house legal teams are under time pressure and juggling priorities but if they are not prepared to invest a reciprocal amount of time and effort as the law firm, then they should stop wasting everyone’s time by asking for innovative pricing proposals. It is infuriating for a law firm to devote considerable time and effort to come up with something interesting and innovative only to be greeted with “I haven’t got time to look at all of that, can you just knock another 10% off your headline rates?” Or the equally anodyne propensity for some procurement people to cut and paste something at the end of the RFP’s pricing section along the lines of, “and AFAs or anything else you think we might be interested in”. If they don’t have the training or intellectual skill-set or the time and inclination to seriously consider such proposals, they should also stop wasting everyone’s time.
We have been involved in crafting some fantastic arrangements that are highly customised and bespoke to the parties but what they all have in common is trust, great communication, flexibility, a shared desire to do something different, an articulated commitment not to ‘screw’ the other side if the opportunity presents itself and a recognition that for the arrangement to stand the test of time, compromise, reciprocity and taking the long view is critical.
Budgets are under pressure. The primary counteraction to solve budget issues is to discuss a lower price. Price reduction is not always the best solution as it results in a short-term growth thru the increase in quantity. If we look at both sides client and lawyer, how can they both benefit in a more sustainable way?
This issue about budget pressures and reduction in legal spend is not as clear-cut as many make out. In the 2016 Altman Weil US Chief Legal Officer survey, participants were asked what they expected their external legal spend to do over the following 12 months. The results were a mixed bag with the following results (figures rounded); Don’t know – 5%, Decrease – 35%, Stay the Same – 38%, and Increase – 22%.
But spend levels per se are in a sense meaningless. What is more important for most clients is to have firms that demonstrate ‘cost consciousness’. The characteristics of a cost-conscious firm include accurate and rigorous scoping, a collaborative approach to pricing methodology, a willingness to share the upside and the downside of price risk, communication about cost increases before they occur and what one survey response described as “they [the law firm] treat my money as if it were their own”. If we don’t do deliver on these, then we encourage clients to seek out alternatives which is exactly what is happening.
The other challenge for law firms is to shift their focus from revenue to profit. This forces a reimagining of revenue as a zero-sum game ie. a reduction in client spend is a bad thing. Not necessarily. We were involved in a large law firm/large corporate relationship where the firm was proactive in showing the client how to reduce (yes that’s right, ‘reduce’) their total legal spend but the quid pro quo was that the firm always secured solid rate increases against the trend.
The result was that the clients’ total legal spend reduced but for the firm, what they did charge was very profitable and in fact profitability in terms of margins went up as the overall spend reduced. The additional capacity created on the firm side by the reduction in work volume was redeployed finding and engaging with more like-minded clients. Counter-intuitive but smart, very smart!
The other way that clients are seeking to control legal spend is through greater use of procurement people and processes. Most firms have greeted this development with consternation, particularly as the procurement function becomes more professional and organized. For example, you now have the Buying Legal Council headquartered in New York representing the interests of legal procurement professionals. It is also why we recruited Steph Hogg 18 months ago. Steph is the former head of legal procurement at a FTSE 100 company and one of the most qualified and experienced legal procurement professionals around. Her insights have been extraordinarily valuable in our work with firms to help them deal more effectively and fruitfully with procurement.
Looking at billable hours as a pricing model, do you think there a possibility to renew this model and make it more accepted by clients?
There is a school of thought that advocates the total abolition of both time recording and hourly billing. Credit where credit is due, there are examples of firms that have made that transition and I commend that. They do tend to be smaller firms though and I don’t see that becoming mainstream anytime soon. So, the question is, can the current approach be improved? The answer is a definite ‘yes’ and there are at least two things that firms can and should do.
First, they should move to a menu approach to pricing. We teach partners close to 20 different pricing strategies, methodologies and tactics. Once they have a working confidence around at least 5 of them, they can then present pricing choice to clients through the contemporaneous offering of multiple pricing options, each of which holds differing levels of attraction to clients depending on their priorities. We enjoy and expect choice in just about every aspect of our personal consumption. Why would we not extend that to pricing our legal work and why would we arbitrarily remove hourly billing from the menu when that is one option that clients still want and expect?
Second, firms should introduce a system whereby all fee earners have two or even three rates and a decision is made near the outset of the matter as to which one will apply. Which rate is applied will depend on a variety of factors such as the amount of money or value of property involved, the complexity and novelty of the matter, the skill and experience of the lawyer and any urgency required. Most western legal jurisdictions provide guidance that is helpful to achieve this such as the American Bar Association Model Rule 1.5, the UK Solicitors (Non-Contentious Business) Remuneration Order 2009 and the best example we are aware of, the New Zealand Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (regulation 9.1). Tragically, most lawyers are not even aware of their existence. The objective is to achieve greater proportionality for both the client and the firm.
Pricing is a dynamic instrument that is influenced by the state of the economy, the business cycle, interest rates, inflation etc. Should law firms and legal departments be more aware of these dynamics and what would you suggest they do to become more flexible and able to react at an earlier stage?
Forbes magazine recently ran an article entitled, ’10 Jobs That Didn’t Exist 10 Years Ago’. The article cited as examples; app developer, market research data miner, educational admissions consultant, millennial generational expert, chief listening officer (I kid you not!), cloud computing consultant, elder care consultant, sustainability expert, user experience designer and social media manager.what they what they For the legal profession, a new breed has been slowly emerging over the last 10 years, the last 5 in particular – the Pricing Manager/Pricing Director/Chief Value Officer. As pricing analysis, policy and strategy become increasingly important for firms’ competitiveness and profitability, they are looking for increased expertise in the area.
This is proving to be a huge challenge because the skill-set for the role is a rather unique one, falling as it does in a sort of no-man’s land between finance, business analytics, business development, marketing, sales and delivery/performance of the legal service. There is no shortage of financial and analytical skills in well-resourced firms but what is often missing is the ‘bridge’ between this analytical approach and the subtleties of the client relationship and the mechanics of delivering of the work.
Whilst a pricing manager can be a very valuable resource available to partners, they can never be a substitute for partners having a sound working knowledge of pricing disciplines. At the end of the day, they are the ones who need to be able to have those critical conversations with the client.
Top pricing managers have a unique and very valuable skillset. Demonstrably, the right combination will without any doubt at all, generate more profit for the firm than most of the firms’ partners. This is a role that will grow in stature and importance within firms over the next few years. Expect therefore to have to pay commensurately.
Blockchain, AI and other LegalTech solutions are entering the legal ecosystem at the speed of sound. Everybody talks about it. What do you think about these tech solutions if you look at pricing?
As with most such developments, there is an upside and a downside.It will necessitate systemic change to the way that some services are currently provided. Clients do not mind paying and even paying solidly for the cerebral, tactical, strategic and experience-driven advice capable of being provided by experienced and seasoned partners. We coined the phrase ‘the stuff you can’t Google’. They are considerably less willing to pay for things that they regard as procedural and generally ‘low-rent’.
Without very careful thought around pricing strategy, firms that rush headlong into new technologies run the risk of a double whammy – the cost associated with investing in the technology and some fee earners finding that their bread-and-butter work (rudimentary document review and the like) being done in a fraction of the time that they would normally devote to cranking out billable hours. It will play havoc with the traditional leverage model.
There is an important distinction between doing the same thing more efficiently versus using the technology to do new stuff. The technology will have to be reimagined so that old work is done faster and new tech-driven revenue streams are opened.
On the upside, we also see real opportunity to take a more tech-driven approach to pricing, particularly when combined with vastly improved analytics capability.
You’re also the managing director of Validatum, experts in legal pricing. What do you and the other specialists do to stay up to date and be able to innovate in your field of expertise?
That’s a good question and one we are constantly asking ourselves. Given our position in the international market, it is not sufficient for us to simply curate and regurgitate existing received wisdom although there is plenty of it which we distil and share.
It is an awful cliché but thought and practice leadership around pricing is vitally important to us. I made the observation that the legal profession is very unsophisticated compared to other sectors of the economy. Many pricing strategies and tactics that we would regard as radical and innovative are just business-as-usual in other sectors. Amongst other things, we spend a lot of time studying pricing strategies in other sectors and then working out how to re-purpose than for the legal sector.
We are constantly investing in new materials and publications as well as attending cross-sector pricing conferences and professional/academic development opportunities.
Thank you for this interesting interview. Is there something we forgot or is there something else that you would share with our readers?
Getting better at pricing and figuring out how to deliver legal work profitably is critical to the survival of firms. Revenue/price and cost are like the jaws of a vice. Many find that the top line is under pressure and the costs are rising – the jaws are getting closer and margin is being squeezed.
Firms need a two-pronged strategy which simultaneously looks to strip cost out of the delivery model through process improvement and project management whilst at the same time figuring out to optimize the revenue side through smarter pricing.
It isn’t easy and it doesn’t happen quickly but the rewards are tangible and significant. Equally the consequences of doing little or nothing are very unattractive.
LBW Reading Tip: ‘Pretium facere’ The Romans Understood Pricing Better Than We Do, by Richard Burger
Richard Burcher is a former New Zealand practicing lawyer and managing partner with over 35 years experience. Following post-‐graduate study in pricing-‐related disciplines, Richard has been based in London since 2012 as the Managing Director of Validatum (UK) Limited. Legal commentators regularly describe him as the leading law firm pricing consultant in the world.
His pricing consultancy services and speaking engagements take him throughout the UK, Asia, India, Europe, Australasia and North America.
A regular speaker at national and international conferences his legal services pricing research and commentary have been widely published or cited in Commonwealth Law Journal, Global Legal Post, Managing Partner, Harvard Business Review and the Pricing Journal amongst others.
Richard is a member of the Brussels-based European Pricing Platform and a member of the Professional Pricing Society (USA). He is also an Advisory Panel member of the United States True Value Partnership Institute and a consultant in India’s foremost legal profession consultancy, Legal League Consulting.
He has worked with a broad cross-section of law firms in 13 countries with turnovers of £10 million ($US15m) to £900 million ($US1.5b).