In my working career to-date I have experienced, first-hand, four economic downturns:
- The first was in the late 1980s in the UK (when I had just moved to UK from Southern Africa) and everyone walked around with negative equity for a few years (at least, those that hadn’t had their homes repossessed).
- The second was the 1997-1998 Asian Financial Crisis (AFC). This was shortly after I had just moved out to Asia and it completely redefined my legal career as I moved from someone working in Project Finance and Major Projects work to someone who did an awful lot of Debt Restructuring and Workout work (Chapter 11 stuff).
- The third was the Global Financial Crisis (GFC) in 2007-2008 – shortly after I moved to Australia (anyone else seeing a trend here?). Fortuitously Australia didn’t suffer the GFC nearly as badly as the rest of the world and technically we haven’t had a recession in 30 years (although many of the States in Australia have, the country has not).
- The fourth is what is now know as COVID-19 in 2020.
Out of all of these, the uncertainties around COVID-19 concern me the most.
Having said that throughout history, every example of adversity has also provided us with a chance at opportunity and this latest economic downturn is no exception. While there are many who sadly won’t survive, there will be many who do.
And, in my experience, those who do survive will be the firms who both understand the circumstances they face and plan for how to deal with those circumstances.
The problem with ‘value’ in economic uncertainty
The perceived ‘value’ your customer sees in your services should be core to how you price those services – in that it’s not about the cost of your services, but the value of the services you deliver.
The problem with this theory is that in economically uncertain times, your customers’ perception of value will change.
It therefore becomes critical that all in your law firm understand that now is the time to provide solutions to your clients problems and not a service.
The elephant in the room: The unused capacity issue
The traditional professional services business model is one based on capacity. In my experience, one of the immediate results of an economy that falls off a cliff is that firms run around looking for work their excess capacity can do.
And one of the go-to strategies to achieving this is that firms will look to drop their prices to gain competitive advantage.
But, as my experiences of 1997 and 2008 have shown me, this is a short term solution to a long term problem.
In both those downturns lots of law firms dropped their prices significantly in response to the AFC/GFC, who were then never able to recover the lost ground.
Essentially they smashed the value perception equation and couldn’t recover it.
You can still drive growth and profit in difficult times
All doom and gloom aside, there are some pricing-relating things that you can start to put in place to get you through this without putting yourself out of business. These include:
1. Do an audit of your work types
Do a deep dive audit and look at the types of work your firm does. Are these the types of work we are likely going to need in a post-COVID-19 world? If not, what types of work are we going to need? And can your firm provide this (or will you need to laterally hire it in)?
2. Stay away from the traditional Alternative Fee Arrangements of discounted hourly rates and capped fees. These will only lead you to a race to the bottom.
3. Align your law firm’s incentives with your customer’s
Over a decade ago Jeff Carr – Vice President, GC and Secretary of FMC Technology – introduced an Alliance Counsel Engagement System (ACES) on its outside counsel panel. Part of ACES included a methodology of aligning the incentives of the outside firm and FMC through a hold back incentive scheme under the terms of which it was possible to get remunerated more than you billed if you provided a good service outcome (dependent in part on an early form of NPS feedback – Carr was ahead of his time!).
Take out: What is your firm doing to ensure it incentives its team to financially align with those of your customers?
4. It’s time to think outside the pricing box
For most of my career as a pursuit and tender manager I have read law firm material about how innovative they are in pricing and how they think outside the box. In most cases this simply isn’t true.
Now is the time when you can change that.
For some time Ron Baker and Ed Klees have talked about subscription pricing being the new Value Pricing 2.0 (Google it). And now really is the time to consider pricing the relationship, not the transaction. Think about what services clients are likely going to need as a result of COVID-19, whether that is Employment, Safety, General Contracting, Debt Recovery, Workouts, Restructuring, Loan Borrowing – and think about this:
Which of these services can bundled into a subscription package?
For a long time I wasn’t sure I held with Deloitte’s ‘Pricing and Profitability Management’ theory that a 1% improvement in price equaled a 12.3% increase in Operating Profit.
Don’t get me wrong though – I KNOW that any pricing improvement kicks the sh!t out of any cost reduction. I know it because I have lived it.
And that’s why I can say with absolute confidence that how you price your services over the next few weeks/months/years is never going to be more important to the ongoing success of your firm than now!