In his 1776 book, 'The Wealth of Nations', Adam Smith demonstrated that the division and specialisation of labor was a central cause of the wealth of nations. It is also the central cause of the success of a professional firm. Not everyone can be good at everything. But, despite knowing this, many law firm partners behave as if the firm is a household, where all of the chores have to be divided equally. In a law firm, the prime example is pricing. In many examples, it seems that partners’ positions inherently make them responsible for pricing their own engagements.
But does the pilot of a commercial airliner also set the airfares? Do the plant managers in Toyota establish the sticker price of the cars they make? The answer, of course, is negative. Pricing is considered a function in the business world, delegated to a group within the company who are responsible, and have final authority, for it.
That said, I have yet to encounter a law firm where the partners do not all believe they are quite competent at pricing, even though the evidence is overwhelming contrary. Furthermore, everyone in the firm already knows who the best and worst pricers are.
In golf, the less skilled players receive a handicap; but with respect to poor performing pricers, the handicap is less profit in every partner’s pocket. And it’s even worse than this. Money left on the table due to poor pricing is not captured by any of the firm’s internal metrics, it’s simply lost forever.
Pricing is far too important to the viability of the firm to be left to mediocre pricers. If I were a lousy litigator, a firm wouldn’t let me near a courtroom. No other area - not cost-cutting, productivity increases, or rainmaking - can have as large an impact on profitability as does pricing. It is time for firms to recognise that if they are serious about pricing that is commensurate with value, they need to establish a core group of enthusiastic pricing professionals and make pricing a core competency within the firm.
Many partners will argue they already do this, for example by discussing pricing amongst each other and bouncing different pricing scenarios off of one another. That is not enough. It is too informal and ad hoc. Pricing needs to become a function within the firm, delegated to a cartel that will develop an intellectual capital base of skills in this vitally important area, and act in the interest of the entire firm, not just each partner’s individual book of business.
We have seen two reactions to this idea: relief and frustration.
First, those enlightened partners who recognise they are not the most aggressive and competent pricers feel better knowing that pricing professionals will now assist them in setting a more optimal price.
The other reaction is more difficult as some partners will inevitably believe they should be on the cartel but were passed over. We have witnessed the emotional reaction this creates, and it is not a pleasant spectacle. My response: Grow up. This is a business, not a household, and only those with demonstrable skills should be allowed to price, for the benefit of the entire partner group. This is a not a popularity contest, it is a skill set. Responsibility and final authority should be given to partners based on excellence, not status or seniority.
Competence in pricing will keep a firm obsessed with value and wealth creation for its clients - the main purpose of any effective business. Value pricing should be viewed as an enormous opportunity, not a limitation, since pricing is the single largest driver of profitability in a law firm. Like the division and specialisation of labor, it is an old idea whose time has come.
Ronald J. Baker is the best-selling author of books including: ‘The Firm of the Future: A Guide for Accountants, Lawyers, and Other Professional Services’; ‘Pricing on Purpose: Creating and Capturing Value’. He blogs at www.verasage.com and on Twitter @ronaldbaker.