The legal world is facing all kinds of challenges and those firms who survive are those who modernise and professionalise. With the arrival of multiple new business models, pricing structures, distribution channels and marketing approaches driven by an explosion of new technologies, the legal industry is becoming ever more competitive.
To survive, and indeed thrive, in the new era, law firms will need to be flexible and be professional in all areas of their business. If not, the danger is that the rapidly changing marketplace will leave them behind, as we have already seen with high profile collapses of leading global firms.
More than just hourly billing
One such area going through significant change is the nature of pricing.
Historically, lawyers charged by the hour – a simple, if blunt tool and in the new environment, new tools are needed for the toolkit; clients are demanding it, competitors are providing it. The good news is that the firm that embraces this approach will find it produces lots of opportunity to create happy clients whilst simultaneously boosting revenue and profits.
The main problem with hourly billing is that there are only two variables involved in the negotiation – time and rate – which does not allow a lot of room for give and take. Consequently, it often ends with an upset client (who thinks they paid too much) or an upset lawyer (who thinks their hard work was unrecognised and underpaid) or, frequently, both.
Finding the mutually beneficial structure
With a more flexible strategy, however, there are greater possibilities for dovetailing the different parties’ interests and resources more efficiently, which means it is easier to find a solution where both parties are happy.
The key is to find where the real value is for the client and then price accordingly. It could be many things: increasing recovery, reducing pay-outs, reducing risk, protecting reputation or a host of other possibilities. Once you have identified this, you can find a suitable price structure.
For example, the client may be willing to pay a higher rate if the tax recovered is above a certain threshold; or, if another client wishes to limit their exposure to legal fees, a fixed or capped rate may be suitable.
There are many structures now being commonly used: fixed fee, capped fee, blended fee, contingency fee, value based fee, tiered rates, portfolio fee and many more, including combinations of the different models. Finding the right structure allows the client to achieve their outcome at a price they are prepared to pay whilst simultaneously allowing the law firm to operate on a profitable basis.
There are three caveats, three areas where lawyers need to raise their game in order to make this approach work.
The first, as we have seen, is fully understanding where the value is for the client. The lawyer’s service is to employ their knowledge and skills to enable the client to achieve their goals. This sounds self-evident yet too frequently the client complaint is that the focus was on the knowledge and skills rather than the client goals. The lawyer needs to shift their emphasis to achieving the client’s goals or, at least, be more explicit that this is what they are doing.
The second area to improve is matter planning. Successful pricing is built on good matter planning, a process too frequently left to gutfeel or the back of an envelope. Thorough understanding of your resources will enable you to know what you can and what you can’t do whilst remaining profitable and astute planning will help you find efficiencies to boost your margins.
Then the third caveat is execution with respect to that plan. Again, matter management has not always been a traditional strength of law firms because hourly billing enables them to hide any problems. But if you are working to a fixed fee, for example, it can be a very rapid way to become unprofitable unless you manage the execution effectively.
Outcomes to aim for
So, three caveats, each an area that falls under the umbrella of professional best practice but can perhaps sometimes be neglected as they sit outside the lawyer’s comfort zone, namely knowledge and practice of the law.
But the good news is that those firms who address them and embrace a more flexible approach to pricing will soon see the benefits.
If you are able to find the right pricing model for a given situation, you are:
• much more likely to win the work, for example, in a competitive pitch situation
• much less likely to have to discount on your rates because any negotiation will be on the structure rather than the rate
• much more likely to end up with both a happy client and a profitable practice.
All in all, a set of outcomes worth aiming for.