Rise of the pricing specialist

Amid a host of new market pressures, many firms are looking to make their pricing systems more sophisticated, and some have taken the bold step of appointing pricing specialists. We met one of them, and sought his and other experts’ views on how you can capture value with a more progressive pricing strategy.

Pier D’Angelo is an amiable, lowkey sort of guy, who does not make a show of his sharply analytical mind. So you could be forgiven for missing the fact that he is a very rare breed in professional services firms – and one of the pioneers in a quiet revolution in sophisticated pricing.

Sporting the title General Manager, Pricing & Markets, D’Angelo is busily imbuing the Australian and Asian law firm Allens Arthur Robinson with a new ethos as the firm’s first pricing specialist. One might call his approach ‘360-degree pricing’, because it goes far beyond simple number crunching.

Birth of a pricing specialist

How did Allens come to appoint Pier D’Angelo to such a novel and key role?

D’Angelo has been at Allens for over 20 years. The first seven, he served as a lawyer. He has degrees in commercial law and accounting, which give him a solid financial background. Then he moved into marketing, eventually serving for eight years as head of business development.

“I had a natural interest in pricing issues, and particularly when the GFC struck, I became increasingly involved in helping the partners with strategies around pricing,” D’Angelo says.

“About two years ago the partners asked me to take up my current role. They saw the potential for it to develop, and I made it my personal goal to build up my knowledge, reading the literature extensively. Now I am the firm’s ‘go to’ person on pricing issues.”

Interestingly, D’Angelo says he does not spend a lot of time crunching numbers.

“I have an excellent team who do that. My job is thinking, asking the right questions, working with the partners to identify the issues that we need to take into account. Though of course you do have to be numerate to do a job like this. And having a great team behind you is a must.”

The four dimensions of pricing

Pier D’Angelo General Manager, Pricing & Markets, Allens Arthur Robinson

From inside Allens’ glass-walled offices in Sydney’s Deutsche Bank Place, D’Angelo outlines the four-dimensional framework needed for proper pricing.

“The first dimension is, of course, having a strong grasp of the financial and cost elements.

“The second is the value proposition: what sort of value is being created for the client? Professionals create value many times the cost of the service, and that value should be the basis of how a firm wins business.

“Then there is the competitive landscape. Who is the client’s next-best alternative? Even if the service in question is of incredibly high value, you can’t seal the deal if that competitor is prepared to do it for much less.

“Finally, you have to take into account the objectives of your organisation. The pressures of the GFC have caused some firms to discount heavily just to keep bums on seats. But others have taken a longer term view, realising the damage discounting could do to the firm in the medium and long term.”

On the basis of this framework, we can infer that a good pricing specialist is a rare breed: someone who is financially literate, understands the value proposition and business strategy of their firm, and has a strong knowledge of the competition.

Pressures for pricing change

What is forcing professional services firms to become more sophisticated about setting fees? The situation varies between professions. PSF Journal looked at the pressures facing law firms, where the market changes have been particularly powerful.

Firstly, there has been a fundamental shift in the way many clients go about purchasing legal services: many now bring in procurement people, who assess value very differently to how senior executives and in-house counsel see it.

Trish Carroll, Founder, Galt Advisory

Secondly, as Trish Carroll, legal consultant and founder of Galt Advisory, puts it: “For over 10 years, there has been a growing noise from clients for alternative fee models. Hourly rates still have a role, but an over-reliance on them is risky from a client attraction and retention perspective.”

Finally, clients are increasingly placing an emphasis on value for money.

“This has been ramped up by the GFC,” says Tristan Forrester, Principal at Beaton Research & Consulting. “Clients are using their power to get better deals.”

International law firms in particular are moving to appoint pricing specialists. Baker & McKenzie, for example, recently appointed Stuart Dodds as Director of Global Pricing based in its Chicago headquarters. He previously held the same position at Linklaters in London.

Day in the life of a pricing specialist

Just what is Pier D’Angelo doing to capture value and increase pricing sophistication? Among other things, he:

• advises his leadership team on the firm’s pricing policy
• advises Allens’ partners on dealing with often arduous procurement procedures, negotiating and managing alternative fee arrangements, and discounting
• monitors pricing trends in the market and advises what the firm’s responses should be, and
• with expert assistance from carefully chosen consultants, delivers a lot of training to develop the pricing skills of the firm’s lawyers and partners – such as communicating value and producing accurate fee estimates.

A big part of the role of a pricing specialist is to encourage professionals, who are typically very focused on their technical craft, to think more broadly about the value they can create for a client.

Where appropriate, D’Angelo suggests pricing models that more accurately reflect the value of a piece of work.

“Some clients will come to you and say they want your interests to be aligned with theirs; they want both wins and losses shared, so a risk-sharing deal might be ideal. Others really want certainty, so a fixed price can be the way to go with them.”

He gives the hypothetical example of a company that approaches his firm wanting help with corporate restructuring. The lawyer who is quoting might have 30 years’ experience of this particular industry, and can immediately see opportunities to do two or three things he or she has done before that could save the client $1 million a year in compliance and other costs. The lawyer then calculates the hours and comes to a fee of $25,000.

“I challenge the partner: is that a fair return? You need to go to the client and explain the value you are creating through your skills and experience. Then perhaps suggest a fixed price of $50,000. Most of our clients are very sophisticated consumers of legal services. They have a keen sense of value for money.”

Pricing problem for engineers: while large accounting and law firms are seen as charging a premium for their services, buyers say that the median fee charged by large engineering firms barely exceeds that charged by mid-sized engineering firms.

What about accountancy?

The Big Four accounting firms have made it their business to resist price pressures from clients.

Annette Kimmitt, Managing Partner, Ernst & Young

Annette Kimmitt, Managing Partner at Ernst & Young’s Melbourne office, says there is a growing shortage of high-quality auditors, yet some companies still see auditors as a commodity despite the complex nature of their work.

“In my view, pricing hasn’t changed in line with the changed nature of an auditor’s role,” Kimmitt says.

When it comes to her firm’s broader practice, she says: “Fees are negotiated with clients on an engagement-by-engagement basis and cover a broad range of approaches, reflecting the broad range of services we offer and practices we run.

“For example, while the use of success fees remains a common practice in the mergers and acquisitions space, fees based on time and expenses remain the norm in other parts of the business. Overall, I don’t believe our approach to this multitude of pricing options has changed as a result of the GFC.”

Among mid-tier accounting firms, the level of pricing sophistication varies greatly. Some give a good upfront estimate of fees and brief the client frequently on the work that has been done. Others simply do the work and generate a laconic monthly bill.

In the end, the latter are doing themselves a disservice. Says Forrester: “In professional services, there is an intimate relationship between how much you can charge and the extent to which you can demonstrate cost-consciousness. You need to communicate to clients that you spend their money wisely, almost as if it were your own.”

Engineering firms lagging behind

One profession that appears in need of a dose of 360-degree pricing is engineering. Analysis carried out by Beaton Research & Consulting shows that while the top-tier firms in law and accounting are perceived to charge significantly more than mid-tier firms, top-tier engineering firms aren’t seen to be earning more than their smaller counterparts for similar work.

Tristan Forrester, Principal, Beaton Research & Consulting

“This is a surprising finding that confirms our view of how undeveloped the concept of pricing is in this profession,” Forrester says. “What’s curious is that while there is a significant shortage of their services, engineering firms have been busily discounting and cutting each other’s throats.

“Part of the logic of being bigger is that you can offer breadth and depth of expertise and therefore earn higher fees, but our analysis shows there is no premium being earned by the large engineering firms.”

One of the key engineering pricing measures is the net labour multiplier, which measures the revenue required for each dollar of direct labour spent on projects. The trouble is that this is used as a base from which to discount if necessary.

“Instead, it should be seen not as a maximum but sometimes as a minimum to try and improve on,” Forrester says. “Can we do something innovative with risk sharing, demonstrate that we understand their business better than competitors, and charge more?”

Some pricing experts feel engineering firms may be costing rather than pricing when they set fees – insufficiently taking into account the difference between the cost of providing services and what firms choose to charge for them.

The dangers of discounting

The twin pincers of the global financial crisis and the demand by clients for value for money have led to many firms taking the discount route – but it is one full of perils.

Says D’Angelo: “If you are producing a premium product, you must compete on benefits and value, not price, or it can destroy you. If you do give discounts, you have to be consistent and fair in how you do this.”

When it comes to discounting, the experts identify the good, the bad and the wimpy.

Most firms have some partners who are good at handling the question of discounts. Then there are others who just don’t get it; they don’t understand the business model and operate in an ad hoc manner. Finally, there are the wimps who simply give in, offering a discount before the client has even asked for one.

Forrester tells of two law firms that wanted to stay on a banking legal services panel. One succeeded through discounting, the other through spending a lot of time talking about its success in managing costs. So one firm had to content itself with earning less, while the other stayed on without making this concession.

D’Angelo believes there are at least four ways a firm can bring value to clients. These are: help them get more revenue, reduce expenditure, reduce risk, or enhance their reputation.

Firms can demonstrate the value of their services through articulating exactly what they can do for their clients. For instance, a firm might undertake to launch a financial institution’s new product in three months rather than the nine months anticipated in a highly regulated market.

“Getting to market faster may give the financial institution a competitive advantage and generate more revenue than would otherwise be the case. Higher fees would be justified on the basis that the firm is still delivering value for money,” D’Angelo says.

Firms can also shape the way they provide their services to deliver that value. For instance, the firm that helps a company through a difficult and harrowing piece of litigation can end up with a very satisfied client, even if the process was expensive.

What if you can’t afford a pricing specialist?

For the foreseeable future, pricing specialists are going to be rarities in professional services firms. But there is still much that firms can do to improve their pricing systems, short of employing a specialist.

Our experts outline three steps that can help any firm.

The first step is to look at your pricing policies and tools. What ways do you have to ensure your prices meet your requirements; what is your pricing policy; and what are you trying to achieve?

Second, do some pricing research. Many firms do not do this at all, or only at a relatively unsophisticated level. You need to identify where your pricing opportunities are – that is, where can you push prices? You need to know as much as you can about areas where pricing is very sensitive and other areas where price is relatively unimportant when it comes to choosing a provider.

The third step is to build your practitioners’ skills and confidence in setting and negotiating price. This is still the big gap in many firms. They need to develop a complex and nuanced dialogue with clients; for instance, they need to be able to discuss why the client feels a price is too high, and explain the value built into that price.

Turning partners into pricing specialists

It is all very well to talk about improving the pricing skills of practitioners, but how do you actually achieve that?

Allens’ approach gives an important clue to how firms can do this. D’Angelo says before he became confident enough in his role to train partners himself, Allens got the ball rolling by identifying the pricing concerns partners faced most often, then offering training around those issues.

“You need to remember that partners are highly intelligent people who have graduated at the top of their class in some of the hardest courses around,” D’Angelo says. “You can lose their interest in five minutes. If you are going to provide training, you have got to do it well.”

Allens also brought in a consultant with professional sensitivity and extensive pricing expertise, and worked with him to tailor training programs. “There is nothing you can buy off the shelf,” D’Angelo warns.

That means firms need to be creative and bold in their approach to pricing. But great rewards await the ones that can set prices that truly reflect the value of their services.