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Practice Innovations — Managing in a changing legal environment
Gray Rule
January 2015 | VOLUME 16, NUMBER 1
Gray Rule
Legal Pricing Technologies
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IN THIS ISSUE:
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»Deconstructing the Myth of Low Technology Adoption in Law Firms
»Safe Travels in the Age of Digital Espionage: Protecting Your Assets on the Road
»Legal Pricing Technologies
»Client Data Security Audits—A Preemptive Checklist
»Smartphones as the New "Swiss Army Knife"
»Portable to Wearable to Embedded—How Technology is Literally Becoming Part of Us
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Legal Pricing TechnologiesToby Brown, Chief Practice Officer, Akin Gump Strauss Hauer & Feld, Houston, TX
The primary technology used initially by law firm pricing roles has been spreadsheets. Although very simple technology, spreadsheets allow pricing people to understand profitability, model different options, and understand costs and margins. However, they are a very manual way of meeting these needs.
With the pricing role at law firms evolving and maturing, the need for new technologies to support these roles is growing as well. Traditional law firm technologies have been useful to a degree, but with pressures increasing and needs expanding, new technologies are needed for pricing. Without these tools, pricing as a function, will struggle to stay relevant and be limited in the value it can continue to add to law firms.

Pricing Functions

Before we get into the technologies, we should first understand the functions of a pricing role, to set an expectation for the needs that the technologies will have to address. Not all pricing roles perform each of the functions described below. No matter where the functions exist within a given firm, the firms will need technologies to support each one.

When firms get into pricing, a first and necessary condition is to understand profitability. Pricing needs to always be focused on profitability and many times becomes the voice of profitability in a firm. Profitability needs to be understood and accessible on the firm level, practice level, client level, matter level, and even at the attorney level. Being able to quickly assess profitability is key to the pricing role. This information allows a pricing person to understand the profit drivers for a practice or client before exploring pricing topics for future work.

Pricing roles then have to develop pricing options. These are your classic fixed fees, blended rates, hold back success fees, and even varying levels of discounts. Each type needs to be modeled out and understood.

Sometimes before and sometimes after a pricing option is chosen, a budget needs to be developed. These can be as simple as a single number, to as complex as a per-task, per-phase budget. More often relatively simple budgets are developed. However, budgets need to be based on sound assumptions (also known as scope) and with an understanding of the cost associated with the deal.

The need for budgets then triggers the next function—that of mining past matters to use as benchmarks or budget starting points. This function requires access to past client and matter level numbers with an understanding of the costs of delivery and the margins for each budget or phase.

With a pricing model and budget in place, the pricing function can then model various scenarios to determine which options will enhance the bottom line while maintaining a focus on the client's fee concerns. This function needs to compare various approaches, again with an eye towards understanding cost and margin for each option.

Finally, most pricing roles have been pulled towards the project management side of things. This is very apparent when they play a monitoring role on the pricing deals that win work for the firm. Here the role helps lawyers stay on top of their work, so they know early on when they are going off budget or out of scope. Monitoring is a project management function that inevitably leads back to the beginning of our story on how the firm will be able to successfully price out and win the next piece of work. The result is that many pricing roles are being pulled deeper and deeper into the project management space.

All told this draws a picture of the broad and deep technology needs for the pricing function. It also highlights some specific technologies that can help propel this role into greater value for the firm.

From Then Until Now

The primary technology used initially by law firm pricing roles has been spreadsheets. Pricing people acquired data from the time and billing systems and any other related financial systems, and then imported that into spreadsheets. Spreadsheets, although very simple technology, allow pricing people to understand profitability, model different options, and understand costs and margins. However, they are a very manual way of meeting these needs.

Early on, pricing roles dug into the data warehouse scene, with tools like Data Fusion's Intellistat and Redwood Analytics. Tools like these are critical for understanding past work and for getting into the details of what drove margins for various levels and types of work, down to the client, matter, and even individual timekeepers. Without a tool like this, the pricing role cannot respond as quickly as needed to requests.

Going forward these types of tools need to evolve to provide simpler views into the numbers such that lawyers and others in the firm can quickly access and understand the profit drivers of their work.

To develop pricing options, the role needs tools that allow simple and quick model development. These tools need to include all lawyer cost rates and billing rates, along with the ability to modify the parameters at the top level. This could include changing the staffing leverage by adjusting it generally, instead of manually altering every timekeeper's hours. Redwood has a planning module that performs some of these functions. There are other tools out there that do the same, like Budget Manager from Randy Steere. Some of the legal project management systems can meet this need as well, like Engage from Thomson Reuters.

Budget development can be an extension of the modeling need, but can also become quite complex. Engage is an example of a tool that allows very complex budget building, including the use of templates. This approach takes budget building down to a very detailed, task level basis. The approach can be useful in some situations, but most pricing deals do not require that much detail. There are also project management tools that function for budget building like Cael from Elevate Services and Lean4Legal from ERM Legal Solutions.

Most of the tools already mentioned allow for different levels of scenario modeling. Here one can take a single budget, then apply a number of pricing options against that, such as a fixed fee, holdback success fee, blended rates or even fee caps. The goal is to know the margin and risk associated with each approach. Being able to see the options side-by-side has tremendous value. The monitoring function may ultimately become the most important. Most lawyers really want to stay focused on budgets and margins, but they don't have actionable information available to them. Many of the previous tools have some level of monitoring, but much of that is overly detailed or delayed in how it is delivered. As a result, many firms have developed "Dashboards" for showing real-time (or some approximation of that) information to their lawyers. Redwood has separately developed a "BI" tool focused on this need. As the demand for this type of technology becomes more apparent, more options should come into the market.

At the top of all of these technology needs, is the need for integrated solutions. Existing technologies focus on meeting one or a segment of the needs outlined above. Part of this is a result of the nature of current legal technology. Major law firm systems exist in isolation, so that data is sectioned off. The pricing role needs much of this data to be integrated.

Some tools are emerging to meet this holistic need. One is Umbria from Prosperoware. This tool combines many of the functions outlined above into one system. It also anticipates lawyer access and has relatively simple data presentations (graphs, charts, etc.). A recent entrant to the market, the full value of this approach has yet to be realized. However, other technology providers, including many of the ones listed here, are moving in this same direction.

The Future

Pricing roles have significant technology needs. Current options are only beginning to scratch the surface. With pricing driving the future profitability for law firms, the technology opportunities are significant and quite meaningful for law firms. Technology providers and IT staff have a big job ahead. They also have a great opportunity to show higher and higher levels of value for their customers and firms.

Post Script

One event designed in part to help drive these types of technologies is the P3 Conference held each June in Chicago. This conference brings pricing, legal project management and other emerging roles together to share ideas and best practices. The conference is also designed to generate a dialog between these new roles and the technology providers focused on these opportunities. For more information about the conference and to get a sense of the technologies involved, go to: www.legalmarketing.org/P3Conference.

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