Contrary to what some may believe, business skills can be learned by anyone, even liberal arts majors, says Nicholas Zinn, Strategic Pricing Manager at Covington & Burling.
“A diverse knowledge base makes you a well-rounded person,” Zinn told the Future Leaders Shared Interest Group on October 25, 2017. “The more you know about business, the more valuable you become. It will really accelerate your career.”
Profitability, Zinn said, is the lifeblood of a business. In a law firm, revenue can only come from billed and collected fees, whereas many areas of running a law firm fall under costs. Therefore, firms have to be smart about what they’re charging and what type of work they do.
Law firms also need to be cognizant of what various efforts cost. For example, Latham & Watkins recently reported that the cost to respond to an RFP, on average, was $70,000.
Not All Law Firms are Created Equally
On one side, you have firms doing commodity work, where the client is totally price sensitive, and the lowest-cost firm will win the business. At the other extreme are “bet-the-company” firms, where the legal work will directly advance the client’s business. These clients are price insensitive – they will pay a premium for this kind of work. Most law firms, Zinn said, are somewhere in the middle, known as mid-market firms. The work is important and must be done well, but clients are price sensitive, so pricing is important.
The area of law can matter in what firms can charge, as well. Clients are willing to pay 3.3 times as much for M&A work as they are for insurance matters, for instance.
Firm size, too, has an impact on rates, as there is a 40% gap between the largest firms’ hourly rates and those of the next largest group of firms. These largest firms are also doing more than 50% of the M&A work, so they are doing the work with the highest perceived value for clients.
What’s in a Fee?
Ever since the 2008 recession, Zinn said, clients have begun to push back against large yearly fee increases, using new procurement professionals which have become more common in large companies. Law firms have an average profit margin of 40% according to the 2017 AmLaw 100 Annual Report, while clients have an average profit margin of 7.5%. Clients are becoming less accepting of this large discrepancy. They’re also consolidating the number of firms they’re willing to use - 62% of corporate clients use 10 or fewer firms compared to the 360 firms an average client might have used prior to 2010, and this trend is accelerating.
Clients are now demanding alternative fee arrangements, rather than accepting traditional hourly rates. Today, 7.5% of matters across the country are done as alternative fee arrangements, and some clients are no longer accepting hourly rates at all.
In response to this increased pressure from clients, pricing became a regular role in law firms after 2008, Zinn said. Pricing professionals, who are mostly MBAs with finance backgrounds, help the firm strategize when it comes to pricing. They help lawyers learn to better manage matters, foster collaboration within the firm, help eliminate surprises with project management, and improve cost predictability through alternative fee arrangements.
Zinn went through the four key elements of pricing strategy: price, utilization, leverage, and realization. Realization, which is the percentage of worked fees at standard rates that is actually billed, is extremely important in keeping law firms from losing money.
Zinn also discussed alternatives to flat discounting, including fixed fees, blended rates, and tiered fee discounts. He emphasized that strong budgets are vital to mitigate risk.
“Our obligation,” Zinn concluded, “is to support our lawyers and let them focus on bringing in money.”
By Rachel Patterson, Digital Marketing Technology Coordinator, Crowell & Moring LLP for the September/October 2017 LMA Mid-Atlantic Region Newsletter