Now in its 10th year with half of all US law firms with 50 or more lawyers participating, the Law Firms in Transition survey has become a valuable resource for insight on law firm strategy and the opinions of firm leaders.
Although the research and the report are US-centric, we have little doubt that if the exercise was replicated in the UK, European and APAC markets, the results would be very similar.
The report is wide ranging in its remit and worthy of reading from cover to cover but our focus is of course on what is happening in the world of pricing.
Whilst "collaborating with clients on creative alternative fee options" at 68% is also to be welcomed, many firms have a long way to go in understanding that pricing is a specialist skill with only 31% of firms having "added a pricing director/assigned pricing responsibilities to a current staff member". This reminds us of the status of business development in law firms 20 years ago at which time many law firm partners held the view that all that was required to get new business was to build a reputation by doing good work and having a decent network.
More positively, many firms are coming to realise that it is no longer acceptable to allow pricing to continue as an interdisciplinary orphan and that it needs to be properly defined and resourced, at least to the extent that they can with what is currently a comparatively small pool of the requisite talent.
Firms should take particular note of this trend, particularly in view of the fact that the report includes “adding a pricing director or assigning pricing responsibilities to current staff member“, as one of the top three tactics that has resulted in a “significant improvement in firm performance”.
Another disappointing but perhaps not surprising metric was the extent to which firms’ efforts to change pricing strategy are driven primarily by internal factors e.g. improve profitability or external factors e.g. client or market pressure. Once again, as with so much change in the profession, it is driven by clients and the market with some two thirds reporting this to be the primary motivator and only 28% characterising themselves as self-starters.
Perhaps the most positive take out of the whole survey from a pricing perspective is that 85% of respondents said that they were proactively initiating conversations about pricing/budgets with clients to better understand what individual clients want. This fundamental shift from an adversarial paradigm to a more constructive and collaborative one must inevitably produce better outcomes for both the client and the firm.
Over the last five years, we have seen a maturation in the pricing aspect of the law firm/client relationship with much greater willingness on the part of both to engage in what could best be described as a collaborative approach to defining outcomes, job specifications, resourcing and budgeting parameters. This is undoubtedly to be welcomed.
Hourly billing remains by far the prevalent pricing methodology with more than half of firms reporting that 1% and 10% only of their fees come from alternative fee arrangements. The next band of 11% to 20% of revenue coming from AFA's accounts for another 30% of firms. Put another way, 80% of firms derive less than 10% of their fee revenue from non-hourly based pricing.
We see a correlation between this and the relatively slow pace at which firms are engaging pricing specialists. Partners need multidisciplinary help in this area and we don't see the overall adoption of AFA's increasing unless and until firms are prepared to invest in pricing skills at partner level and they are prepared to resource the internal pricing function properly. This slow uptake is perverse when viewed in the context of the 79% of respondents who felt that more non-hourly billing will be a permanent friend going forward.
In other words, most acknowledge that it's going to happen but are doing nothing about it. Carpe diem!