US-based global management consultancy Altman Weil, recently published a very useful report entitled '2012 Law Firms in Transition'. The report does however contain one piece of pricing advice that requires a suspension of disbelief.
US-based global management consultancy Altman Weil, recently published a very useful report entitled '2012 Law Firms in Transition'. I commend it to any firm that seeks to understand how the legal market is changing and where the risks and opportunities lie.
You have got to be kidding...!
The report does however contain one piece of advice that requires a suspension of disbelief.
"Law firms should price their services, whether using hourly or non-hourly fees, based upon the profit margin they desire."
Really?! They are certainly right when they state that, "firms should acquire the tools needed to fully understand costs and margin, learn to use the tools effectively and educate their lawyers."
Giving the authors the benefit of the doubt, they may have meant that you need to know what a job has cost the firm (or more helpfully, what it is going to cost) before you can price it. Absolutely.
Unfortunately many firms still lack even a rudimentary understanding of the profitability of individual practice areas, clients or pieces of work, despite the fact that there now exist some excellent analytical software tools available to help with a complex task hitherto the domain of a series of rather basic and less than fit-for-purpose Excel spreadsheets managed by only one person in the firm who created and understands them (risk management alert!).
But to suggest that having worked out what a job has ‘cost’ the firm to produce, the firm then decides what “…profit margin they desire…” misses the mark completely. It is a statement that feels like a step back into the law firm management Dark Ages, advocating as it clearly does, a ‘cost-plus’ approach to pricing.
Tell someone who cares - I don't...
Clients couldn’t give a tinkers cuss how much it cost us to produce. They are willing to pay a fee that is equal to or less than their perception of the value they have derived from the interaction with the firm. That figure could be equal to the production cost (break-even), less than the production cost (we did the work at a loss) or more than the product cost (we make a profit).
Assuming it is more than the production cost, the next question is ‘how much more?’ This question cannot and must never be answered with some arbitrary mark-up. To do so perpetuates the traditional failure to understand that the clients’ willingness to pay is determined by their perception of the value they have received; a figure that could be less than the arbitrary mark-up or it could be considerably more.
Failure to do so often results in the client being overcharged or undercharged.
Continued use of this arcane hit-and-miss approach to pricing is stubbornly rooted in amongst other things, a misconception that, like AFAs, any attempt to correct price/value asymmetry between the firm and the client must inevitably mean further discounting at the expense of firm profit. This is demonstrably wrong as firms that have made the change are discovering.
But wait, here's the good stuff...
Where the Altman Weil Report is quite correct, as borne out by their own research statistics, is:
“Opportunity still exists for firms that are willing to make the effort to figure out how to use AFAs effectively
(a) 62% of firms believe that smaller annual billing rate increases will be a permanent reality.
(b) Alternative fee arrangements are now in use at almost every law firm, but only 14% of firms report that their non-hourly projects are more profitable than their hourly projects.
(c) The 33% of firms that are proactive rather than reactive in their use of AFAs are more than three times as likely to enjoy higher profitability on their non-hourly work.
Although the billable hour is by no means dead, the use of AFAs will continue to rise. Law firms must lead the way on designing and offering non-hourly options rather than wait for clients to tell them what to do or what they want. As with electronic billing a decade ago, firms that embrace (rather than resist) non-hourly pricing and recommend creative, win/win pricing programs to clients can build competitive advantage.”
What is your firm doing to carpe diem?
Altman Weil Report - Law Firms in Transition 2012 - click here