Pricing Legal Services in Uncertain Times

How are law firms handling pricing as the economic downturn forces clients to do more with less? “Three Vignettes on Pricing of Professional Services,” a Harvard Law School case study by George Triantis, Kevin Doolan, and Nicholas Haas, explores the thorny world of pricing in three contexts of increasing complexity.

In the first vignette, a couple planning a home renovation is faced with deciding between contractors who propose several price structures. Should the couple pay more money for a fixed-fee contract with restrictive provisions? Or should they use a smaller contractor offering more favorable pricing, but more onerous payment terms? This vignette explores the risks and benefits of using hourly, hourly with a cap, or fixed payment schemes.

Lawyers have long been able to set pricing structures with take-it-or-leave-it terms, but clients feeling the effects of the lagging economy may increasingly look for other options. A second vignette puts the reader in the shoes of a law firm partner whose long-term client has just asked for a steep discount on hourly rates. How should the partner respond, particularly when he is under pressure from the managing partner to grow the client’s work and improve profitability? This vignette looks at the options available to firms as they negotiate with valuable clients who demand a move away from hourly fees.

In the third vignette, a newly minted law firm partner has been asked to look for ways the firm can adapt to requests for alternative fee arrangements. As she interviews senior partners and clients, she must reconcile very different approaches: one division won’t budge on fees, another is being forced to offer rampant discounts, while others have further diverging opinions.

Individual firms will approach pricing arrangements in unique ways, but firms can gain insight by examining client requests, says co-author Doolan, the former head of client relations at Eversheds and a visiting professor at Harvard Law School who teaches the case study for Harvard’s Executive Education program. Three primary types of legal work have differing pricing expectations:

• Rocket science. At the top end, where legal work is complex and highly tailored to individual clients, cost is rarely a factor and shouldn’t be a major issue in negotiation. “You can’t win on price for rocket science,” Doolan notes. “It would worry people to hear about price when you’re saving their life.”
• Relationship-driven. Long-term relationships may also trump pricing, since the relationship has primary importance. “The relationship leads,” Doolan says. Clients may be happy to argue about price after striking a deal, but it’s not their primary concern. In fact, he says, these terms are “not about price unless they call you to talk about it”—that is, unless a client brings up pricing on their own.
• Routine work. Flat-fee, commoditized work contends with many competitors, both legal and nonlegal, and is highly price-sensitive. Firms in this segment can compete on pricing by optimizing efficient processes.

Taken together, the vignettes bring up issues of risk-sharing and partnership between firms and their clients, encouraging firms to consider options beyond traditional models of pricing professional work.