Below is an extract from Legal Futures Associate BigHand’s recent report, Legal Pricing Director Priorities: Law Firm Profitability According to the Experts
Growing profitability on the back of strong growth in 2021 is a key focus for firms in 2022, and legal pricing teams are at the cutting edge of delivering that profitability.
In this article we dig into some of the findings of BigHand’s August 2021 survey on legal pricing and budgeting trends, for which we gathered 800 responses from senior legal finance roles from law firms of 100+ lawyers in the UK and North America.
Specifically, we will look at the survey findings from pricing directors to provide insights on their top priorities, including mandated matter budgeting; profit leakage; and embedding a culture of profitability. We also consider steps law firms should take to achieve alignment across the business on pricing responsibilities.
Client expectations and the rise of the pricing director
Despite lawyers having spent a lot of time over the past 18 months maintaining client relationships and going above and beyond to support clients, evolving client expectations are reframing the way they assess legal services. Clients seek metrics, with a tangible representation of the value the firm is providing.
As the BigHand Pricing and Budgeting report found, legal clients (84% North America, 80% UK) are demanding far more financial transparency – and are both far more likely to challenge bills and/or push back on payments if expectations have not been met.
Yet, how are firms meeting client (and internal) demands for pricing transparency without upfront insight into the cost of the matter? Without cost confidence, a firm is disadvantaged during initial client discussions and risks de-valuing the matter.
Discounts or low-margin alternative fee arrangements may be offered to win the business, without appreciation or understanding of the downstream impact on profit.
In response to these pressures, forward-thinking law firms are prioritising pricing analysis and processes which has driven a rise in dedicated pricing director roles to help them succeed in an increasingly challenging environment.
They are responsible for building pricing structures that guarantee profitability, and for communicating the logic across the firm for consistency and client transparency. In short, they are a critical part of any modern law firm embracing the business of law.
As Cecy Graf, chief financial officer at US law firm Stoel Rives, comments: “Providing client value is the external driver we are always striving towards, but without the internal KPIs to measure ourselves and ensure that we’re making the most effective use of our time and resources, it’s very difficult to quantify success – and hence a challenge to relay that to our clients.
“This isn’t about doing things differently; it’s about making informed decisions on how we’re pricing and staffing our matters, and having the opportunity to tweak things with an awareness on the bottom line.”
Matter resourcing for profitability
For many pricing directors, measuring and managing profitability is aligned to a greater emphasis on project management, starting with matter budgeting and resourcing.
This should not be surprising, given that once a firm is committed to a fixed price or an hourly fee cap, the most important determinant of profitability is being able to meet the client’s needs within a pre-determined budget.
Indeed, BigHand data shows that a massive 98% of NA and 92% of UK pricing directors have introduced more mandated matter budgeting in the last two years. Nonetheless, on average the report also showed that budgets are used for only 39% (NA) and 36% (UK) of matters.
Work must be done to improve this, and firms need the right tools in place to quickly and easily create informed matter budgets based on similar previous work.
Questions must also be asked of the effectiveness of this budgeting, and how it is impacted by the staffing of matters. Part of the budgeting process should include allocating the right resources.
BigHand’s report found that, on average, 22% (NA) and 24% (UK) of law firms believe that failing to use the right resource to complete phases and tasks is contributing to profit leakage. With the increase in law firm lateral hiring and firms paying their lawyers more than ever before, the need to ensure that profitable resourcing is happening – and that this resourcing is tracked on a continual basis, is now critical.
Having matter budgets at the outset of an engagement builds client confidence, with more accuracy and insight into the breakdown at the start of the matter, as evidenced by the fact that 70% (UK) and 62% (NA) of pricing directors report that their firm has implemented greater visibility in this area.
In an ever-competitive market, providing this upfront visibility of the pricing breakdown at the start of the matter is now a key part of client value.
Pricing directors have also cited profit leakage – when firms unknowingly lose revenue through a matter lifecycle – as a major source of concern; and it is directly related to matter budgeting.
In addition to lack of matter budgeting/initial under-pricing of work and incorrect resourcing – as discussed above – key contributors to profit leakage include missing or late time entry and retrospective discounting to collect payment.
Indeed, 44% of UK and 42% of NA pricing directors believe that discounting to collect payment has an effect on their firm’s profitability.
With better matter profitability tracking in place, firms could make far more informed decisions about discounting based on actual matter data. As such, 50% of UK pricing directors and 42% of NA pricing directors plan on improving visibility of financial data throughout the firm, to reduce profit leakage in the next two years.
Tracking costs throughout the lifecycle of a client matter not only provides the depth of information required to meet client visibility demands, but also offers firms vital insight into profitability trends that can be used to inform strategic planning and avoid leakage.
With the right tools in place to provide this information, firms will be in a better position to both enforce and support staff through the process changes required to adopt a profitability-focused mentality.
To continue reading the full report from BigHand, click here