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PRICING POLICY

Establishing an effective pricing policy in your law firm

As law firms evolve, tracking key metrics and producing top-tier results are absolutely necessary, and new methodologies and thought processes have begun to play key roles in rationalizing, monitoring, controlling and setting strategic pricing.

This information can change the profitability structure of your law firm, says Brenda Barnes, certified public accountant (CPA) and managing principal of B2 Management and Consulting in Austin, TX.

Looking at the statistics

Barnes says that 2017 statistics from Altman Weil indicated that one-third of in-house counsel planned to decrease their spending on outside counsel over the year, while only one-fifth were planning an increase.

“This important statistic relies on actual client behavior,” she says. “The question to ask yourself is, are your clients increasing or shrinking their budgets? If they are cutting back, are they cutting back on you?” she asks. “Do you know where your growth is in gross, net and realized rates?”

Citibank’s survey of its big-law clients indicates that top-line growth will be around 3.7 percent, with most of the gain explained by billing rate increases of 3.2 percent. The American Lawyer reports that top-line growth for the Am Law 200 increased by 24.7 percent for the period 2011 to 2017, which is a compounded annual growth rate of 3.75 percent. Revenue per lawyer grew by 12.7 percent.

“How do you compare? Are you above the line or below the line? These are all statistics that you should be tracking through your time and billing software,” she says.

Barnes notes that law firms offering diverse teams of lawyers tend to receive a 25 percent greater share of legal spending than non-diverse firms.

Compensation changes

Barnes says with lock-step compensation for partners now being in the distant past, firms now compensate based on measurables, including originations, hours worked, and management contribution.

ALM (formerly American Lawyer Media) reported that the ratio of highest-to-lowest-paid partners is now 12:1. “So keep a close eye on your compensation ratios. When the highest have that big of a differential and they are calling the shots, in difficult times this will cause a great divide in your firm.”

You need to know where each of your attorneys fits, not only on an individual basis, but also on a practice section basis, as well as on a client industry basis, according to Barnes.

“Associate salaries were raised by about $20,000 per year. This will cost the equity partners about $56,600 each. The big question is, will your clients be willing to pay for this generous increase?”

Check-in with your clients

According to Barnes, most clients can “get past the price” if they receive high levels of expertise, high levels of service, and if the lawyers representing them invest non-billable hours in learning about their business operations.

“The important message here is that the firms need to stay in touch with their restless clients, step up to the challenges of managing their talent, and pause to remember that lawyers have a purpose beyond the measure of profitability.”

They also need to consider how long they will hang on to mediocre associate attorneys.

Pricing models

Barnes notes that according to Georgetown Law, one of the most potentially significant, yet rarely acknowledged changes in the past decade is the shift away from the traditional billable-hour pricing model in most law firms.

“Lawyers have typically been compensated based on the billable hour. The shift will create a need to realign the firm’s processes and systems,” says Barnes, adding that all departments in a law practice, including HR, finance, IT and business development, need to work together on a pricing campaign.

The focus is continuing to shift to alternative fee arrangements (AFAs) based on a fixed-price or a cost-plus model that makes no reference to billable hours in the calculation of the fees.

Some law firms allow their clients to ask for a lower bill based on their perceptions of the value of the services they have received.

“One great reason to do this is that it’s an unwavering commitment to client service,” she says.

Another trend among legal firms is the move toward outsourcing to maximize their efficiencies and lower their costs for clients.

“There is significant opportunity here to realize that attorneys and law firms need to understand what value means to their individual clients and they need to create a customized experience which will deliver the superior value to each of their clients,” says Barnes.

Making the changes

Establishing your law firm’s pricing position starts with defining your program’s objectives. Is the program focused on key clients or a larger population?

“How is the program to be balanced between pricing (rates, discounts, AFAs, etc.) and delivery (budgeting, management, and monitoring of engagements)? With regard to the firm’s strategy and culture, will pricing principles and guidelines be applied firm-wide or prioritized for certain practices or clients?”

You also need to consider how the pricing function will be determined. Will it be handled by one person or a team?

“You have to change the way that lawyers price their work and manage the delivery of their services—and that in itself is your greatest challenge,” says Barnes.

“It’s a multidisciplinary effort. That means it sits with all of the different components of your firm. It is a change-management effort. Actively managing a new process and new tools is going to take baby steps and it’s going to take some consensus at the top.”

Your first step should be to conduct a thorough needs assessment of what is required for addressing a pricing strategy.

“Involve your partners. Be realistic about the amount of time it’s going to take and the amount of resources it’s going to suck up. Include staff where you can. You’ll need to be the orchestrator of it all.”

Seek low-hanging fruit to start, Barnes recommends. “Do what is easy and will get a quick win of support. Achieving early wins will gain you support for the pricing function and build credibility.”

For example, you might develop a concise training module explaining the basics of legal pricing with clear visual aids to assist lawyers in identifying valid pricing options based on a few simple inputs.

Also consider tapping resources such as the Legal Marketing Association, which has established an annual conference on pricing.

Conclusion

Keep your expectations realistic. “There is no perfect system,” says Barnes. “You will need to accept a method and agree that it will work for approximately 80 percent of your clients.”


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