In quick succession over the last 2 weeks, three articles hit my in-box, each of which in their own way highlight the need for firms to take pricing as seriously as any other existentially critical initiative. Many are doing so, but there are plenty for whom the light still hasn’t gone on. If there isn’t a sense of urgency now, time is running out.
Look, I know that just because we as an organisation do nothing but eat, drink and sleep pricing, not everyone shares our passion. But to state the obvious if you can’t get paid properly everything else is utterly irrelevant.
Forget about the new PMS, migrating to the cloud, directory submissions, CSR, ESG and DE&I programs, remote working, lateral hires, rebranding and the 1,001 other distractions that consume resources, money, time, energy, and internal goodwill.
If the firm is not getting paid properly (and in a timely manner – more of that in a moment), then everything else is an absurd luxury. To the point where the state of some firms’ finances makes their management look like the Titanic’s orchestra. “Hey, we are going broke, but let’s get a mental health initiative going”.
Competitive and profitable pricing is ground zero. When and only when the firm is sustainably profitable, can all the other important stuff be invested in. Sort of the law firm management equivalent of “put your own mask on first…”
On the 4th December, The Lawyer – Horizon (Katy Dowell) in a piece entitled, ‘Once more with feeling; sort out your cash collection’, noted, “…According to PwC’s 2023 Law Firm report, average lock-up levels – the real driver of a firm’s working capital performance – are stubbornly high and rising. Partners are taking longer to get the cash in… half of the Top 10 firms put improving working capital as a top priority.
This rises outside the Top 10: 86 per cent of Top 11- 25 firms cite it as a top concern as do more than two-thirds (67 per cent) of firms in the 51 – 100 sub-section. Many of these firms sit in squeezed-middle territory: net profit margins are tighter because of the proportionately higher costs base.”
What does this have to do with pricing? There are generally three reasons why a client is slow to pay…
- They are taking the mick (something too many firms tolerate, but that’s another blog!).
- Genuine cashflow pressures
- They have concerns, real or perceived, which have not yet been articulated.
And if it is a case of genuine concern/dissatisfaction, you can put money on it that the dissatisfaction probably has its genesis in one or more of the following…
1) Poor/lack of accurate scoping, pricing, and expectation management at the outset
2) Lack of pricing transparency
3) Lack of budgetary certainty
4) Failure to keep the client informed of costs, particularly scope creep and cost blowout.
5) Lack of cost consciousness (defined as “the awareness and attitude of project team members towards the efficient use of resources and the minimization of waste and unnecessary expenses”). You can read more on cost consciousness from the global experts on the topic – Beaton Benchmarks.
6) A perception that they have been suckered into instructing the firm on the basis of a BS quote that was unrealistically low, bordering on dishonest.
7) Unpleasant surprises – specifically asking for markedly more in fees at the end of the job than the client budgeted on.
Many clients won’t complain (until pressed) – they just don’t pay and put it to the back of their minds.
In essence, very poor pricing behaviour contributing to tardy payment, poor cashflow, heighted lock-up and a ballooning firm overdraft.
Yes, by all means ramp up credit control and chase those unpaid invoices, but much of that activity feels like ‘ambulance at the foot of the cliff’ stuff, when so much more could be done to build a fence at the top. ‘An ounce of prevention is worth a pound of cure’.
On the 6th of December, LegalTechTalk published an article that led with “…AI presenting an opportunity to finally ensure the profitability of AFAs…”
The article expressed a view that we have espoused (and worked with over 300 law firms around the world to implement including 43 of the UK top 100) for more than 20 years…
“Generative AI-based solutions are enabling profitability in alternative fee arrangements, or AFAs. Fixed fees are by far the most common alternative fee type (offered by 96% of firms), followed by stage-based fees. Law firms have used AFAs for over 10 years*** already, with 85% of firms reportedly using AFA-based flat fees because clients continue to demand it, and increasingly so, with 4 in 10 lawyers stating they are seeing a surge in client demand for AFAs.
Making capped fee arrangements consistently profitable has been a longstanding challenge, but a survey by AltFee found that AFAs now are more profitable than hourly pricing. This is contrary to the previous consensus that AFAs are not profitable for law firms and are only adopted out of pressure from clients. The reality is that poorly executed AFAs are not profitable.”
It is one of the reasons why our 3E and Aderant endorsed pricing software, Virtual Pricing Director® is rapidly becoming the gold standard. Because we are continuously engineering a lot of our IP around how to do AFAs (amongst other things) properly into VPD.
*** we disagree – some have been doing it a lot longer.
Which brings us to…
On the 12th of December, The Lawyer – Horizon (Matt Byrne) in a piece entitled, ‘GenAI may fill your stocking’, Matt noted… “The reality, as many law firm leaders are all too aware, is that this technology (AI) may shoot the traditional legal business model in its elegantly shod foot.
They know some clients will demand significant fee reductions for tasks that, sooner or later, will not take anywhere near as long to perform as they once did. Indeed, when pricing tsar Richard Burcher challenged his clients back in 2021 over whether GenAI would impact revenue growth, 43 per cent agreed and 57 per cent strongly agreed. In that context, investing in GenAI looks like the proverbial turkey ticking the ‘Yay, I’m for Yuletide’ box’. How’s that for your Christmas stocking filler?”
Which is why at Validatum® and Virtual Pricing Director® we are undertaking pioneering research and development on how to deal with the conundrum of what and how to charge for tech-enabled hybrid service delivery; for example, documentation drafted through a combination of Gen AI and lawyers – a Gordian Knot if ever there was one in the legal world.
If there is anything more existentially important to the prosperity and even survival of a contemporary law firm than figuring out how to get paid properly, I’m blowed if I know what it could be.
Maybe 2024 is the time to get serious about it?
Validatum® and Virtual Pricing Director®