In the conclusion of this two-part blog series, we look at how pricing professionals can best manage their firms’ expectations and promote “fair value”
Previously in this blog series, we discussed some of the key changes to the role of the law firm pricing professional that’s been caused by advanced pricing legal technology. These changes included the impact of new technology on their roles, visibility within their firm, and the changing skill sets required. However, perhaps the biggest change to emerge here is simply, how to effectively manage expectations.
Managing expectations
Those involved in pricing discussions within their firm know that a key component of their role is to help manage expectations of what is feasible and what represents fair value for both the law firm and the clients they serve.
They also know that the hardest conversations to be had can often come internally — nowhere more so than those around profitability. And it is here that the harder conversations are going to need to happen as AI-driven legal technology and its newer sibling, generative AI (GenAI) take hold. In the previous blog post, I alluded to the impact these types of tools can have, and most legal commentators acknowledge that time-based savings of 50% due to use of these technologies are not unrealistic and may even be a conservative estimate.
Law firms are going to need to increasingly adopt legal technology (and especially GenAI) into their processes and workflows, both to serve client demands and to eliminate more administrative and laborious activities. And this comes at a cost — the cost of these solutions (for example, license fees or internal development), the costs of set-up and ongoing maintenance, and critically the cost of lost billable time.
You can find more on pricing AI-driven legal services here.
Those more familiar with law firm profitability know that the engines of profitability within most firms are the associate and senior associate ranks, in which the hourly rate charged provides a healthy margin once respective costs are deducted. But what happens if these technology-based solutions remove or greatly diminish a firm’s ability to charge time, especially when considering that is where the majority of margin is generated for the firm? It is here that the pricing professional’s role in managing internal expectations around profitability will be essential.
The key questions that pricing professionals therefore need to be asking themselves and others within their firm now — before it is too late — include:
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- What work will legal technology and AI best suit?
- Who is typically doing the work?
- What does this mean for underlying law firm profitability at a matter, client, and firm-wide level?
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Although the majority of UK-based law firms “believe that [GenAI] will have a positive impact on revenue and margins,” those in pricing roles need to start doing profitability analysis now. This analysis will allow them to model the broader impact of legal technology in specific practice areas, across their firms’ client portfolio, and ultimately within their firms themselves, so that the right conversations can begin to happen. In this way, expectations be proactively managed, and appropriate pricing strategies can be developed and implemented.
Pressure on billable hours
As increasing pressure is put on billable hours through the adoption of these AI-driven tech solutions, many firms need to start (if they haven’t already) to move towards increased adoption of fixed fees. Not only does this mean that the inputs to a matter in terms of time are less relevant, it encourages greater rigor around where and how technology can support matter delivery. Very importantly, it also encourages a much more systematic review of what the matter is worth and allows for the collaborative value discovery with the firm’s clients. This process will ensure both the law firm and the client that prices are fair to both parties and is being driven by what it enables the client to achieve, such as helping a client increase revenues, improve cashflow, or manage and mitigate risk.
It is in these discussions that pricing professionals have a critical role to play.
Clearly, there are also many barriers which exist at the firm-wide level which can hinder the swift adoption of legal technology solutions and many of are these fundamental to the industry, including risks around compliance, the law firm partnership model, and continued use of billable hours as firms’ main revenue-generation tool.
However, there are other considerations that need to now be factored in by client teams and law firm management much earlier in the legal technology development process, especially as these relate to pricing. These considerations include:
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- Who leads the client discussion and who is best placed to represent the firm? No longer may this be the sole role of the client relationship partner, but now could include those in pricing, legal project management and legal technology roles.
- Who is best placed to help develop and define the value proposition? This may not now only reside with a practice group marketing team or proposals group, but again may need to be much wider in scope in order to capture different perspectives and insights from across the firm.
- Does the law firm risk driving a commoditization of their services and what are their key points of differentiation that need to be defended and articulated? Closely aligned to this: Is the law firm in danger of cannibalizing its own revenues? (For example, document automation solutions can sometimes eliminate 60% to 80% of the billable hour costs and associated revenues.)
- Who is responsible for the development and ongoing maintenance of these solutions once implemented with a client? Have these additional elements of cost been considered both at the initial product pricing stage and thereafter?
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Technology and client value
The adoption of today’s AI-driven technology is clearly going to become one of the key ways that law firms can offer superior client value when delivering legal services in the years to come. As one commentator remarked: “It may even be considered legal malpractice not to use AI one day… It would be analogous to a lawyer in the late 20th century still doing everything by hand when this person could use a computer.”
Those pricing professionals and others involved in helping client teams successfully deliver legal technology solutions to their clients and helping ensure appropriate firm-wide investments and profits need to be acutely aware of the pricing pitfalls that may occur at the early stages of this journey. For many, this may mean dusting off the pricing textbooks and remembering how other industries — such as consumer products and manufacturing companies — approach their own pricing challenges.
As to the impact of AI-driven technologies and GenAI on the legal delivery model and pricing, we still undoubtedly have much to learn, but it this instance, fortune really does favor the brave. For the pricing professional, their time — once again — is now.
(Portions of this blog series have appeared previously in the author’s book, Smarter Pricing, Smarter Profit, and in previous articles.)
