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Demanding value-based pricing (e.g., matter value-based fixed fees, success/performance fees, or scope-specific retainer agreements) from law firms represents a significant cultural shift for legal departments, requiring a departure from traditional billing models based solely on billable hours and overcoming concerns that asking for it may tarnish relationships.
This shift involves embracing a new mindset that prioritizes efficiency, transparency, and alignment of incentives between legal service providers and their clients.
Here’s a breakdown of the cultural changes necessary for legal departments to effectively implement value-based pricing:
1. Embrace a Value Mindset
In-house legal departments are expected to be strategic business partners to the company, financial stewards of the company’s money, and deliver value to the organization.
In order for internal legal teams and their trusted legal service partners to deliver value, there must be a shift of focus from simply tracking hours worked to assessing the value derived from the legal services.
Effort (hours) does not tie to the actual value received. Instead, the value focus should be on pricing tied to tasks, activities, and deliverables.
This requires a deeper understanding of the specific goals and objectives of the organization and how legal support contributes to achieving those goals and objectives.
2. Value Communication and Collaboration
Legal departments need to improve communication with law firms regarding their expectations, priorities, and desired outcomes.
Collaborative discussions are crucial for aligning the scope of work, value-based pricing structures, and performance metrics.
Further, legal departments must communicate/market the value their legal services are bringing to the broader organization, such as their role in revenue velocity and risk mitigation.
3. Transparency and Accountability
Transparency in pricing and service delivery is essential for building trust and fostering long-term partnerships.
Law firms are part of the value proposition to an organization, and therefore, how a legal department manages the relationship should align with the desired outcomes set out initially when scoping the matter(s).
Legal departments should develop initial scopes of work and required pricing structures while encouraging law firms to provide detailed pricing proposals, breakdowns of costs, and regular progress reports that highlight not only substantive legal issues/decisions but also the impact of that on cost.
This ensures accountability and alignment with budgetary constraints.
4. Focus on Efficiency and Innovation
Value-based pricing incentivizes law firms to prioritize efficiency and innovation in service delivery by tying results and deliverables to the price paid.
Legal departments should encourage and reward those law firms that use creative problem-solving and explore alternative approaches, such as leveraging technology and process improvements, to streamline workflows and reduce costs.
5. Performance Measurement and Continuous Improvement
Legal departments should establish a governance model that monitors performance from a quality and cost vs. value delivered perspective.
They should establish clear performance metrics and baseline benchmarks to evaluate the effectiveness and value of legal services provided by external firms.
End-of-matter performance reviews and annual 360 feedback sessions help identify areas for improvement and reinforce accountability on both sides.
6. Risk-Sharing and Outcome-Based Incentives
Value-based pricing encourages a shift toward risk-sharing arrangements and outcome-based incentives, where law firms are rewarded for achieving favorable results or meeting specific milestones.
Legal departments should explore different risk-sharing pricing models, such as contingent fees, success fees, and recovery fees, tailored to the nature and complexity of each matter.
7. Cultural Alignment Across Stakeholders
Achieving successful value-based pricing requires cultural alignment not only within legal departments but also among key stakeholders, including senior management, finance, and procurement teams.
Collaboration and buy-in from all parties are crucial for driving meaningful change and overcoming resistance to new pricing models. Internal change management is one of the key obstacles in implementing value-based pricing structures.
8. Investment in Skills and Capabilities
Legal departments may need to invest in developing capabilities to negotiate and manage value-based pricing agreements effectively.
This can be done via engagement of experts in this space to not only develop the initial framework but also train/coach internal legal department resources on how to manage it going forward.
This includes training staff on pricing strategies, scoping techniques, value-based price structures, law firm negotiations, financial analysis, and performance management techniques.
In conclusion, implementing value-based pricing requires a fundamental cultural shift within legal departments that focuses on value, transparency, efficiency, and collaboration.
By embracing this new mindset and adopting innovative pricing models, legal departments can significantly reduce legal spend, increase budget predictability, build stronger partnerships with law firms, optimize resource allocation, and ultimately enhance the overall value proposition for their organizations.
Elizabeth Lugones is COO/ Senior Advisor of UpLevel Ops who has built and managed Legal Operations teams in various industries in both public and private companies over her 20+ year career. She excels in global project management and business reengineering, with particular expertise in process improvement, change management, cross-functional collaboration, and team building, but her true passion is helping others find their own strengths and talents and harness them for the value of all.
Ken Callander is Managing Principal of Value Strategies LLC, a consulting firm that specifically works with corporate legal departments helping them get more value and predictability from their outside counsel relationships. His specialty is helping clients transition their engagements with law firms from the hourly fee pricing model to value-based fee arrangements. As the founder of Value Strategies LLC, Ken was Head of Legal Operations and Chief of Staff to the General Counsel at Uber Technologies. Prior to Uber, Ken was the Chief Marketing Officer and Director of Business Development at Davis Wright Tremaine LLP, a 600-attorney international law firm, and before that was an executive at Hewlett Packard in operations and marketing where he was considered an expert in the pricing of professional services.
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