The better law firms are at pricing the better it is for the market. So said Toby Brown, a law firm pricing specialist and contributor to 3 Geeks and Law Blog. His comments were provided during an outstanding ABA TECHSHOW session titled, The Changing Face of Large Case Financing & Billing.
— LexisNexis BLSS (@Business_of_Law) March 28, 2014
Mr. Brown set the stage by noting the “GC guild was broken in 2008” a reference to the economic downturn and subsequent demand by business to put a cap on legal spending. He stated that law firms used to raise rates about 10% a year, but today, rates grow at just about 3%. In addition, productivity is down and demand for legal services is flat. These trends have given meaning to the term AFA, which he said stands for “appropriate” fee arrangement, rather than alternative. However, the pricing of such fees is complicated by discomfort on both sides – attorneys in law firms and corporate counsel alike – are not comfortable about having conversations about fees – it feels “salesy” and “confrontational.”
New meaning for AFA: “appropriate” fee arrangement — @gnawledge #ABATECHSHOW
— LexisNexis BLSS (@Business_of_Law) March 28, 2014
During his session, Mr. Brown, who is widely regarded offered several tips for pricing strategies; here’s what we took away.
1. Client motivations drive pricing.
The first step in any pricing strategy is to understand what outcome a client is seeking. While pricing isn’t difficult – its simple math – there also isn’t a “magic button.” He laid out six possible outcomes he sometimes sees from clients:
- Quick resolution
- Specific outcome
- Cash flow management
- Setting precedence
2. Client side trends impacting law firm pricing.
Mr. Brown noted several client side trends ranging from e-billing and the involvement of corporate procurement in pricing – to the rise of legal department outsourcing and outside counsel guidelines. Discounts he said are generally a one-way street for law firms because “once you give them, you’ll continue to give them.” Corporate counsel is also starting to realize it needs pricing specialists akin to the specialists law firms have hired.
3. Information a law firm pricing specialist needs.
Aside from understanding the client objectives, there is basic information a law firm pricing specialist needs to establish an appropriate fee arrangement:
- What is the time frame of the engagement?
- Who is on the team?
- What percentage of each team member’s time will be allocated to the matter?
- What factors – such as opposing counsel or jurisdiction – will bust the budget?
4. The answer to law firm profitability usually lies in leverage.
Usually, Mr. Brown said, profitability hinges on leverage and the ability to push work and hours to the lowest level. It’s pushing a slightly different angle on the billable hour as cost per hour. Moving hours to the lowest level will lower revenue, but it will increase profits and free partners to pursue new business.
5. Profitability rule of three.
Mr. Brown offered the rule of three, which as Alex Hamilton later helped flesh out Twitter, is just an example to illustrate the math behind profitability: If an attorney bills at a rate of $300 per hour, the first $100 goes to salary, the second $100 goes to compensation and the third $100 is profit. Therefore a 1% discount in price equates to a 3% cut in profit. The point is the mix of cost, discounts and leverage – whatever the bill rate – has a direct impact on profitability.
6. Get a handle on billing codes.
Many heads in the audience were nodding in affirmation when Mr. Brown noted that law firms often have several hundred billing codes for matter types, but only 20 or so are commonly used. The result is that when an agreed cap is reached in one code, the staff simply starts attributing hours to another code. What then is the purpose of the billing codes?
7. Five steps to a law firm pricing program.
Should law firms hire MBAs for pricing? Mr. Brown doesn’t think so – he likened that to asking a Ferrari mechanic to change the clutch on a VW. Law firm pricing isn’t hard but it does require a plan – a five step plan:
a) Get leadership support. The law firm CFO isn’t going to develop a pricing program on his or her own. Nothing happens without staffing a pricing program appropriately.
b) Develop a profit and pricing methodology. There are different methods for determining pricing, for example, should partner compensation be treated as profit or cost? Is there a contribution model?
c) Educate the lawyers. Whatever method is chosen, the staff must understand it – and agree and adhere – to the method in order to be successful.
d) Develop systems and processes. Mr. Brown advises starting with people and process first, and then adding technology. If these principles mirror those found in knowledge management (KM) – they are. He said that KM has become increasingly important because of AFAs.
e) Explore litigation finance. Litigation finance is a concept borrowed from the practice of personal injury law. Mr. Brown noted that contingency fees are not a preferred pricing technique for large law, but that more sophisticated litigation finance may be a viable option. He said litigation finance is a growing trend as evidenced by several companies which have recently raised capital for this purpose.
* * *
Mr. Brown published a four part series on law firm pricing that’s well worth a read:
- The State of Legal Pricing 2013 – Part 1
- SOLP 2013 – Part 2 – Client-Side Pricing Chaos
- SOLP 2013 – Part 3 – Firm-Side Pricing Chaos
- SOLP 2013 – Part 4 – Legal Pricing Strategy
He offered two industry resources for legal professionals interested in learning more about law firm pricing strategies:
If you enjoyed this post, you might also like:
Session: 5 Effective Law Firm Billing Techniques #ABATECHSHOW