LMA Program Recap: Driving Pricing & Profitability Conversations in Your Firm
By @Gina Eliadis, Director of Marketing & Business Development, Goodell DeVries
In the years following the 2008 recession, law firms and the business professionals who manage them began turning to pricing professionals to better leverage billable hours and drive profitability. Indeed, pricing has evolved into a discrete discipline. Firms of a certain size have installed pricing experts—or entire pricing teams comprising various roles—to guide decision-making.
In firms without these specialized roles, it’s the partners who decide how matters will be staffed and what the rates will be. Marketing and business development professionals don’t own this process, but that doesn’t mean we can’t be part of the conversation. There are tactics we can employ to help inform these decisions and increase profitability.
Tim Corcoran of Corcoran Consulting Group discussed some of these tactics in his January 27 LMA Mid-Atlantic Region program, “Driving Pricing & Profitability Conversations in Your Firm.” Corcoran is a former CEO who now guides law firm and law department leaders through the profitable disruption of outdated business models. He is a Trustee and Fellow of the College of Law Practice Management, former President of the Legal Marketing Association and a member of its Hall of Fame, an American Lawyer Research Fellow, a Teaching Fellow in the Master in Legal Business program at the Australian College of Law, a frequent presenter at lawyer retreats and legal conferences, and a writer whose articles are published regularly in leading publications.
As Corcoran pointed out, lawyers are no longer only competing with other lawyers. Non-lawyers are now providing (some) legal services at competitive rates. Clients may turn to more budget-friendly providers, ask their firms for discounts, or both. All this increases pressure on firms to attract new clients and retain existing ones, while realizing sufficient profits at the same time. Partners are often the ones responsible for balancing these interests. But law firm pricing professionals remove this responsibility from the partners. The pricing experts play a role in analyzing productivity, staffing, profitability, scope, and value drivers; advising on billing rates, budgets, and fees; and strategizing for long-term growth.
Yet law firms have been slow to change their approaches to pricing. There are several factors at play.
First, lawyers are trained to be risk-averse, of course, and they’re reluctant to test new pricing models if they have no precedents to draw from. Corcoran described it like this: “There’s a built-in bias against change unless we can prove others have done it and it’s safe.”
Second, the traditional compensation structure can also impede smart pricing. “There’s a disconnect between the economic benefits for the firm and the clients, and the economic benefits to the lawyer,” Corcoran explained. “When lawyers make money by raising their rates and clients want to achieve their budget goals by lowering our rates, there’s a conflict.” There’s also conflict when lawyers are penalized for not achieving their assigned rates. We must allow lawyers to have different rates and embrace different pricing that reflects the value of their services in the market.
Third, law firms have been slow to acknowledge that not all services they offer are valued by clients at the same rates. “Clients may be willing to pay high rates for expertise, but they’re not willing to pay high rates for services they can get elsewhere at a lower cost,” said Corcoran. Yet some senior lawyers charge high rates for everything, with little insight into the respective value proposition.
Pricing professionals help firms understand the market and make smarter pricing decisions. But what if your firm doesn’t have a pricing team? What can those of us in the marketing and business development functions do to be part of the conversation?
To position yourself as a resource, you must first examine your firm’s data and understand what it can tell you.
Corcoran suggested starting with a thorough review of your firm’s financials. Examine year-over-year revenue growth for the firm and for each practice, industry team, and office. Keep in mind that law firms are multi-line businesses, and those lines perform at different levels. Some practices may be booming, while others are flat. Externally, the performance of the industries your firm serves will also influence revenue and profit.
Run competitive intelligence research via a CI database or perform news searches to learn what kind of growth your competitors are having. Figure out whether your firm is performing under-market in a particular practice or industry.
Look at your utilization rates. Are lawyers who aren’t meeting their billable goals not busy because they are discouraged from taking low-rate matters?
Also look at your realization and collection rates. Are profits suffering because we are writing off too much? Or doing a poor job at collections? The best way to improve these rates is to manage expectations with good matter budgets. Corcoran explained it like this: “When a client asks, ‘How much will this cost?’ a very smart lawyer says ‘it depends, and here’s what it depends on.’ Let the client know when the scope changes, and don’t surprise them with a huge invoice later on.”
A large portion of the discussion focused on value, and Corcoran covered this from multiple angles. He addressed the “win [the business] at all costs” mentality, which compels partners to offer discounts unnecessarily for the sake of bringing in new work.
“If we’ve got a $500 an hour firm average billing rate, and one partner constantly lowers that rate, it poses a burden on other practices that are now trying to compete at a rate our clients have learned we will discount,” Corcoran said. Conversely, he also explained what happens when we are unwilling to make rate concessions. “For those matter types and practices that are not as busy as they’d like to be, we might find we’re pricing ourselves out of keeping busy.”
Failing to manage staffing ratios can also hurt profitability. It costs more to keep a partner busy than an associate, so when a partner declines to delegate work on a matter – for any number of reasons – the profit margin for that matter becomes smaller.
Corcoran also suggested looking at prior RFPs to examine the staffing ratios. For example, did we propose too many partners and lose the work? “If marketing has prior RFPs in which we’ve won work that involved leveraging associates, we can use that precedent to argue for doing so on a new matter we’re going after.”
For many of us, pricing remains out of our hands. But we can use the data compiled by our finance teams, combined with historical data we’ve accrued in the marketing and business development functions, to inform partners’ determinations. Smart pricing and staffing drive profitability. Armed with good data and sound analysis, we can become part of that conversation.