Law Firm Pricing Guidance — Maximize Profitability
I’ve seen several articles recently on the “surge” in pricing managers at law firms, with The American Lawyer reporting that 76 percent of big law firms now employ “some sort of pricing officer”. “Some sort of” can cover a lot of ground, and I suspect that the function at most firms falls under the aegis of business and practice analytics groups with a considerably broader mandate. Notwithstanding, there is clearly an impetus within law firms to better determine how to profitably price legal work that is not hourly based, in a business environment that is not becoming less competitive.
The Washington Post similarly reported on the phenomenon, noting the strong nexus at some law firms with staffing and matter management functions. There is no question that firms that are focused on client (and partner) profitability – which theoretically should be all law firms – will benefit from better pricing strategies. And helpful in that regard is probative analytics based on the results of past experience integrated with a predictive model that is applied to new opportunities.
Not all law firms actually have readily catalogued and easily accessible data, on a broad range of matters, which can provide a baseline for evaluating in a predictive way the economics of prospective client engagements. The firms that do are at a real advantage in this regard. The genesis for this collective storehouse of knowledge was the introduction and adoption (quite a number of years ago) of the so-called task coding structure. This structure was embraced by law firms in response to the demands of clients who wanted the ability to do their own analysis of their lawyers time, with the intent to drive efficiency and reward the most efficient service providers with new work. Law firms were slow to recognize the value of this information internally and sometimes implemented the task identification and coding process selectively when demanded by a client, rather than undertaking a firm-wide initiative.
So, law firms today are at various stages of readiness to meet the challenge of applying analytics to the pricing and profitability arena. Parsing old time records to create usable data is a time consuming and error prone process, but that’s where some law firms are. Of course it’s never too late to begin the process right and virtually every serious time entry and transaction processing system marketed to professional service firms has the capability. A word to the wise.
But analytics to support law firm pricing strategies which lead to being successfully engaged is just one part of the story. The ultimate objective is, of course, law firm profitability. Here is where analytics are especially important to evaluate which pricing strategies, applied in conjunction with other key drivers and dynamics, have delivered acceptable levels of profitability and would be expected to do the same in the future. How many firms have actually attempted to determine — in a systematic and rigorous way — the profitability of each significant client (or matter) in their portfolio? How many even developed an analytical model to do so? More than a handful, I think, but certainly not the majority. And having developed that law firm profitability model, how many have analyzed the outcomes, asking the question why is one client or matter more or less profitable than another. What are the primary driving operative factors?
In my experience, there is no single composition of factors that govern the generation of acceptable law firm profitability. I have seen very profitable matters with a quite low billing realization offset by high levels of attorney or paralegal leverage. One could make the mistake, without sound analysis of all of the underlying factors, to assume that because realization was low, so is profitability. Likewise, consider attorney productivity (utilization). Spreading a fixed attorney cost over higher than average billable hours yields a lower cost per hour that certainly impacts client profitability. Or, client work done in certain geographic areas with lower than firm average billing rates may not appear to have the same impact on the bottom line as work done elsewhere at higher rates, but would very well be an equal contributor when factoring in a lower local overhead burden. What I am saying is that there is more than one way to skin the cat, and only properly applied analytics will help avoid mistaken, and often bad, conclusions and decisions.
The message is clear. Informed law firm pricing is critical to the success of every law firm, but informed means consideration of all of the factors that underlie profitability, not just what worked before. Particularly when what worked before delivered mediocre profit.