LegalFinanceComplianceJune 23, 2020

How and why to introduce pricing transparency into legal services

This article was originally published in Legaltech News.
Imagine the nice boy at the grocery store loading up the trunk of your car. “How much is all this going to cost?” you ask. “Oh, nobody can say for sure,” he says. “But we’ll send you an invoice in two or three months, or maybe four. Or five.”
Nathan Cemenska

If you think about it, this is the reality for corporate law departments (CLDs) when they do not have pricing transparency. Most CLDs do not know how much their peers are paying and, even if they did, that information isn’t always useful since it lacks detail and context. In fact, the individual attorneys in most CLDs—the people making the decisions about what to buy and how much—do not have insight into what all the help they are buying is actually costing them, let alone how much it should cost.

That needs to change.

The COVID crisis has caused a money crunch across industries, and CLD budgets are tightening. This downturn, in conjunction with other business trends, demands that CLDs stop writing blank checks for services of indeterminate scope and duration. Here are some ideas for law departments looking to do better.

1. Take the time and effort to define what you’re buying

The long-term goal of pricing transparency is for CLDs to be able to make comparisons as easily as industries like real estate, where you know how much you should pay for a three-bedroom, two-bath house because the guy across the street just bought one for $275K. But in law, finding “comps” is a lot harder. If you ask an attorney to send you some “comps” they previously worked on, they’ll likely oblige. But if you then sit down and start asking questions, the conversation will reveal important differences that force you to exclude a lot of the cases provided. Now you have fewer comps—often not enough to do a proper analysis. Back to the drawing board. If you didn’t put in that work, though, you would have included a lot of irrelevant cases in the analysis, and it would have been deeply flawed.

2. Hire a pricing expert

Challenges around comps are just one reason why law departments need to hire full-time pricing directors, as some law firms started doing years ago. This person has the time and incentive to work with in-house attorneys, identify comps, and figure out ways to keep costs within reasonable tolerances. As they gain experience, they become fluent in pricing different kinds of legal matters and a powerful weapon in your quest to control costs.

One of my company’s clients has a huge amount of IP litigation, for example. They got to a point where they began to question the “it costs what it costs” and “this is how we’ve always done it” mentality so they hired a former accountant to start pricing those matters. In a couple of years, she transformed the way they do business by putting all those matters into phase-based, flat fee arrangements. In fact, she has done so many that she knows better than the law firms themselves how much they ought to cost, and many of her in-house attorney colleagues do not even get involved in pricing but leave it all up to her.

The best part? Because this is her main job responsibility, she doesn’t waver when law firms try to negotiate out of the flat fees they agreed to. Few in-house attorneys are comfortable standing their ground in this way.

3. Support efforts to get the legal industry’s data house in order

With process work like patent filing or immigration, it is easy to create apples-to-apples comparisons. There are lots of cases, and they have common attributes that make them quick to identify. “Sasquatch” matters, on the other hand—huge, often critical matters that are much-discussed but rarely encountered—are tougher to benchmark. For example, there are only about 100 to 500 federal securities class actions across the US each year, and there are probably only a handful of organizations in the world that have access to good billing data on more than one or two such cases. Thus, when it comes to pricing, most folks are just throwing darts.

However, there are solutions. The first is to share your data. There are opportunities to contribute your data to huge, aggregated databases, where contributed data is anonymized, cleaned, centralized, standardized, and enhanced in a way that facilitates benchmarking across hundreds of CLDs. Aggregated databases like these are a necessary precondition to having a rational marketplace for legal services, where people have a good idea of how much things should cost.

The other thing CLDs can do is get their own house in order. Most CLDs do not have a data strategy. As I’ve written before, your plan should include putting your data into the SALI format or some other recognized, industry-level taxonomy. This reduces the cost, time, and frustration involved in extracting insights from your own data and makes it much easier to compare across organizations—as is required of true price transparency.

The bottom line

The dearth of pricing transparency is particularly problematic right now, with so many CLDs in a cash crunch. And yet, it’s not necessarily surprising, as a great amount of time, effort, and personnel is required to make transparency a reality. Many departments lack clean data, the proper processes, and the right expertise. It’s by no means a quick win.

However, those CLDs that have invested in price transparency are now better equipped to weather the current storm and anything the economy may throw at them down the road. Regardless of how long times remain tough, CLDs have been asked for many years now to be more cost-conscious and ROI-driven like the rest of their organizations. These two converging factors mean that smarter pricing will become non-negotiable moving forward. GCs need to step up and acknowledge its importance.

Nathan Cemenska
Director of Legal Operations and Industry Insights

Nathan Cemenska, JD/MBA, is the Director of Legal Operations and Industry Insights at Wolters Kluwer's ELM Solutions.

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