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As the Billable Hour Model Fades Away, Senior Pricing Execs Emerge as Legal Industry Profitability Czars

3.27.2017
In their recently published “2017 Report on the State of the Legal Market,” the Center for the Study of the Legal Profession at Georgetown University Law Center, and Thomson Reuters Legal Executive Institute, noted that 2017 marks the 10-year anniversary of the Great Recession–and the corresponding impact on the legal market that followed:

One of the most potentially significant, though rarely acknowledged, changes of the past decade has been the effective death of the traditional billable hour pricing model in most law firms. 

While the term “billable hour” hasn’t disappeared, the underlying concept has been significantly transformed. As clients have increasingly demanded up-front agreements on budgets “… the imposition of [this] discipline on law firm matters forces firms to a very different pricing model than the traditional approach of simply recording time and passing the associated costs through to the client on a billable hour basis.”

More than ever, the pressure is on law firms to accurately forecast matter profitability and to price and negotiate with clients accordingly. This pressure has, in turn, resulted in the expansion of scope and accountability of a relatively new profession in the legal industry: senior pricing executives.

Whether chief pricing officer, global pricing director or another title, the concept remains the same: A senior executive with enterprisewide responsibility for developing and leading strategic pricing practices and methodologies, managing pricing operations and representing the firm in high-stakes client negotiations.

Other major professional services institutions have had a head start in the legal industry in advancing the capacity and value-add of their strategic pricing functions. Accenture (at $34 billion revenue, the world’s largest consulting firm) maintains a global Negotiations Center of Excellence, with senior executive pricing and negotiating professionals (often partners) who serve as engagement leads on new business matters, internal coaches to other client-facing partners, and as front-line negotiators themselves.

Senior pricing executives come from many developmental paths–from FP&A/technical finance backgrounds to MBA/strategy, business development, practice management, and even senior partners with extensive experience in key client negotiations and profitability analysis. Whatever the profile, the individual must have the credibility and capability such that they are viewed by the partnership as a trusted senior advisor, expert colleague, and an appropriately representative member of business leadership to clients.

Technological savvy and proficiency in the “next generation” of data analytics, reporting tools, and systems have substantially increased in importance in the pricing function as well. Effectively capturing data, developing realistic economic models, accurately (and consistently) producing excellent forecasts and driving variance analysis on the back-end are all essential components of operational pricing infrastructure.

In addition to managing these areas, senior pricing executives must also possess the communication skills to synthesize and articulate technical pricing and profitability information in clear, actionable, business language for lawyers who may be leading experts in their fields of practice, but not well-versed in pricing minutiae.

The 10-year anniversary of the Great Recession is a fitting reminder that the resultant change in law firm economics is here to stay–and the next iteration of law firm transformation could center on lawyer compensation. “Even if a firm determines the appropriate pricing for a given matter using sensitivity analysis to maximize profitability, the chances are (at least at most firms) that the performance of the partner in charge of the matter will, at the end of the year, be evaluated primarily on the basis of the number of billable hours recorded in respect of the matter.”

The disconnect between utilizing precise profitability tools in pricing matters, and the blunt tool of the billable hour in determining compensation, may not be sustainable long-term. At present, however, there is no disputing the major evolution of the senior pricing executive role and the necessary increase in sophistication and importance of a competitive law firm’s strategic pricing capabilities.


This article was originally published on law.com on February 23, 2017. 

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