The profitability of a law firm traditionally has been driven by billing the maximum number of hours for a given matter at the highest possible rate, a formula that is increasingly fragile. Now profitability is driven by building and retaining strong client relationships with pricing and fee structured that align the buyer and seller of legal services.
Lawyers must understand their client’s threshold issues regarding legal work, since it is derived from a client’s business activities, market position, strategies and risk tolerance. Are all your lawyers able to answer the questions: Why is this matter important to this client? What are their business objectives? The answer should inform how the work is done as well as the legal strategy and tactics.
Legal work should be handled and priced in a manner that reflects a well-considered business model and the firm/client relationship. Does the client consider the law firm to be a valued partner of corporate stakeholders or are they considered outsourced resources? How does the client’s view of legal spending call for optimization of skills, work flow, sourcing and technology?
Understanding that the main constraint within many law firms is the compensation system, we address how to provide incentives to drive change to promote profitability for the law firm and predictability and service for the client.
Context determines value: evolving to value-based pricing structures.
Legal services have been priced based on hourly billing at “standard rates.” Although actively debated, alternative fee arrangements (AFAs) are gaining traction. Alternative fee structures bring together two core concepts that require a different way of thinking about legal work:
The way in which payment for services will be made.
Fee structures are about communicating and validating assumptions.
Determining what a seller will receive in return for its services.
Pricing legal services is all about value and profitability.
Alternative fee arrangements should be a fair economic exchange between the buyer and seller. They must optimize both the utilization of resources and the value received in return. Whether the ultimate fee arrangement is based on hourly rates, a fixed fee or – more aggressively – on performance targets or risk-sharing, the keys to a successful model are:
Sufficient relevant data (including comparables)
Adequate data-mining and analysis
Understanding the levels of risk and uncertainty
Clear defining of metrics and benchmarks to be used
Effective communication and motivation
Ultimately, pricing decisions must reflect a core principle: legal work is undertaken to achieve a client’s and their stakeholders’ business goals. Cost matters, but the client’s measure of value matters more. How the work is done – as well as results – will impact the client’s perception of value.
Pricing and Profitability
Optimizing profitability while strengthening client relationships in times of uncertainty and changing paradigms.
Strategic Planning and Analysis: structure and roles: stand-alone vs. cross-functional, organizational structure, relationship with practice groups, impact on compensation systems,
integration with other activities (business development, marketing, legal project management)
Legal Project Management: internal teamwork, collaboration with the client, work plans, timelines, budgets, and lessons learned from prior engagements
Fee Structures and Pricing: maximizing realization, defining incentives, developing critical skills needed, implementing processes to support fee structures, budgeting, monitoring, warning flags, and getting results
Budgeting, Forecasting and Monitoring: from basics to advanced tools and techniques and supporting technology
Data Analytics and Business Intelligence: understanding the data you already have, determining what you need, and learning how you can translate the data into information you can use to improve pricing, profitability, and support business development