Law firm pricing and profitability Nigel Morland FCA
Law firm pricing and profitability – the firm view · How can firms defend and improve margins? · How do firms scope and cost matters, price jobs and measure profitability? · Using tools and technology to best support what we do · How can firms be more creative in how they price jobs? · What is the value for the client and how are you differentiating your firm from your competitors? · Calculating the upside and downside risk and sharing in the pain or the gain of the work your firm is doing · Pricing structures for local vs international clients; how do you set and prove the value of those rates to the client? · What next for pricing and the increasing numbers of pricing specialists in law firms? 2
Background - Recent Survey * Only 10 % of law firm leaders think law firms will take the lead in reinventing the legal market Just 39% of firms are making significant changes in the efficiency of legal service delivery (but 90% think it is a “market shift”!) 16% of firms are finding ways of making fixed price matters more profitable than hourly charging 43% are offering training in project management “Perhaps no other long-term initiative will do more to support staffing innovation, pricing innovation, efficient delivery of services, improvements in margin and reductions in overhead than true project management training. “ “An ongoing drag on firm leaders’ ability to lead change is found in their partners who are often unaware of the ways in which the profession is changing or who simply don’t want to do things differently. ” * Altman Weil Survey – over 300 US firms surveyed in March and April including 42% of top 350 US law firms 3
How can firms defend and improve margins? – the basics Strategy • are we acting for the right clients? Clients • are we providing what they want? • at a price they are willing to pay? • that’s sufficiently profitable for us? Internal • are we structured to deliver as efficiently as possible, e.g.? • people • supporting systems • locations • analysis • training and attitude 4
Profitable business... Demand Supply Chain Chain Profitable Clients Lawyers Select Sell Pitch Lead Develop Recruit Work 5
How do firms scope and cost matters, price jobs and measure profitability? Project management skills are the key to proper scoping Costing matters – dangers: defining what cost actually is over-complicating the analysis lawyers lack of self confidence looking at matters in isolation Measuring profitability by matter by client by client by industry type by work type by partner by office by practice area 6
How do firms scope and cost matters, price jobs and measure profitability? Project management skills are the key to proper scoping Costing matters – dangers: defining what cost actually is over-complicating the analysis lawyers lack of self confidence looking at matters in isolation Measuring profitability by matter by client by client by industry type by work type by partner by office by practice area 7
Four key factors affect matter profitability: Recovery Leverage rate Profit Negotiating Project skill management 8
How do firms scope and cost matters, price jobs and measure profitability? Project management skills are the key to proper scoping Costing matters – dangers: defining what cost actually is over-complicating the analysis lawyers lack of self confidence looking at matters in isolation Measuring profitability by matter by client by client by industry type by work type by partner by office by practice area 9
How do firms scope and cost matters, price jobs & measure profitability ? Essential at client level to factor in: • Departmental/work type variations • Secondments • Loss leaders • Volume discounts • Pure write-offs and aborts • Success / failure fees • Value accounts • Extra back-office costs (including BD) • Intermediary costs (e.g. e-billing fees) 10
: Contributive (i.e. > £700k per partner) : Dilutive (i.e. < £700k per partner) : Marginally dilutive 11
How do firms scope and cost matters, price jobs and measure profitability? Project management skills are the key to proper scoping Costing matters – dangers: defining what cost actually is over-complicating the analysis lawyers lack of self confidence looking at matters in isolation Measuring profitability by matter by client by client by industry type by work type by partner by office by practice area 12
How can firms be more creative in how they price jobs? Understand the finances Review the processes (greater efficiency = greater scope to be more creative) Better training in options: 9 common bases for pricing jobs key features of each key risks key negotiating tips Better training in negotiation skills so partners have the confidence 13
Calculating the upside and downside risk and sharing in the pain or the gain Really understand the matter Discount the client’s view of success Clearly identify critical risks and try to minimise Previous experience – good and bad Should the upside and downside be equal? Short term v Long term (e.g. taking shares!) Encourage consultation – the “smell” test! Essential to have central control 14
Pricing structures for local vs international clients 15
What next for pricing? When will things get back to “normal”? 16
What next for pricing? When will things get back to “normal”? Will we ever see the good old days again? - when we just billed based on hourly rates! 17
What next for pricing? When will things get back to “normal”? Will we ever see the good old days again? - when we just billed based on hourly rates! Those are not the good old days!!! - billing based on hourly rates came in with computers and time recording Before that we often billed the client based on such concepts as: - the value we gave - the importance of the matter - the level of expertise brought to bear 18
Oscar Wilde, Lady Windermere’s Fan 19
“What is a cynic? A man who knows the price of everything and the value of nothing. And a sentimentalist, my dear Darlington, is a man who sees an absurd value in everything, and doesn't know the market place of any single thing.” Oscar Wilde, Lady Windermere’s Fan 20
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