Law firms “lack confidence in negotiating fees”

Dicks: Profitable firms have more open relationship with clients

Seven in ten law firms say they lack confidence in negotiating fees while 40% “do not know with any certainty” what proportion of their client relationships are profitable, a study has found.

Researchers also found that ‘more training in value pricing’, rather than hourly rates or fixed fees, was the most popular option for increasing profitability.

Less than a fifth of law firms polled, 18%, expected a decline in profitability over the next three years, while a quarter (24%) expected it to be static. Most of the rest (41%) were looking forward to an increase of anything between five and 30%.

On the barriers to growth in profitability, law firms were most likely to cite a lack of confidence in negotiating fees (68%), followed by a ‘risk of burn-out for some individuals’ (59%).

This was followed by work-life balance challenges (49%), ’significant’ resources spent on chasing bills and on time recording.

When asked about the proportion of client relationships that were profitable, 40% of law firms said they did not know “with any certainty”.

The Thriving Company based the study on responses from partners, fee-earners and non-lawyer professionals at 68 law firms of a variety of sizes, based in the UK and internationally, who attended the recent Legal Iconoclasts EXPO event.

Fixed fees (39%) were more popular than hourly rates (35%), with 14% saying they based fees on ‘known value to the client’.

When asked to choose from a list of options which would increase profitability at their firms, most chose more training in value pricing, followed by better use of data and information systems, consistently gaining client feedback and a consistent price policy.

Less popular options were ‘training to improve self-esteem’, moving major price decisions from individuals and, least popular of all, reducing or ending use of the billable hour.

Researchers said: “While it is difficult to implement all of these immediately from a standing start, the results of this research indicate that many could have a significant impact on future profitability.

“There may be synergies between some too – for example, more training in value pricing and training to improve self-esteem could go together.

“Having a consistent price policy and moving major pricing decisions from individuals also seem to be linked.”

Only around a third of law firms (31%) could say that most of their staff had been trained in pricing approaches. A significant minority (28%) said that none of them had.

Most firms (53%) said individual matters were priced by individuals on a ‘best efforts’ basis, rather than having a pricing strategy applied across the firm.

There was widespread optimism from firms (58%) that most of their senior leaders would back the introduction of value pricing.

Firms that expected their profitability to increase by 10% or more over the next three years said they spent less resources on time recording and in particular chasing unpaid bills – 8% compared to compared of 35% of firms expecting their profits to increase by no more than 5%.

Although the more profitable firms were less likely to say their fee-earners lacked confidence in negotiating fees, the figure was still quite high at 58%.

Firms expecting higher profits were much more likely to ask clients what outcome they wanted to achieve and “what success looks like” (81% compared to 29%).

Robin Dicks, director of The Thriving Company, commented: “It’s evident that the firms expecting to generate increased profitability had a much more holistic and less ‘time driven’ approach to pricing.

“They have a more open relationship with clients and understand the value to them, which enables them to think about pricing differently.”

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