Today’s article in Horizon by The Lawyer – ‘The leaves are falling, and so are profits’ noted what to most is now starkly clear, that reporting season was characterised by a “revenue up, profits down” narrative.
And no-one is picking the next two years to be anything but challenging as the revenue side dips and inflation and a tight labour market continue to grind margins to fine dust. Well, that’s perhaps an overstatement but, with apologies for the lazy overuse of metaphors on a Friday afternoon, at least the gloss will well and truly come off those profit lines.
So, what to do? Everyone knows the pack drill, cut costs, shrink the work force, and generally batten the hatches.
We are sometimes asked, does clever pricing (whatever the heck that is?) only work when things are going well. Well, no, the acid test is, ‘does a sophisticated approach to pricing ‘work’ in fair weather and foul?’ The answer is, if done properly, then yes, otherwise it isn’t very ‘clever’. Any idiot can make money when demand exceeds supply.
This is just a quick blog, so you don’t have to wade through a major strategy treatise on how to survive a down turn, but there is an elephant in the room that could usefully be attended to, long before rate increases, redundancies, general cost cutting and so forth and that is, recovery or realisation - the delta between the value of the time recorded and the time that gets invoiced and turned into cash in the bank.
How big is this elephant? 2022/2023 gross revenue for the UK top 100 was ~£34 billion. Well, this is just a back-of-a-napkin exercise, but as we have worked with 43 of the UK top-100 on pricing, perhaps not a complete guess – realisation averages 86%. That means that in round figures the UK top 100 wrote off some £5 billion in billable time last financial year.
What makes it worse is, that is all profit that has gone down the gurgler. If the firm has a net profit margin of, say 35%, then on a turnover of £50 million, a 1% improvement in realisation will throw an additional £500,000 straight to the bottom line which is a 3% improvement in profit – without breaking a sweat.
But no, instead of examining why write-offs are higher than they need to be and doing something about it, the focus is devoted to getting rid of biscuits in the meeting rooms and forcing partners to stay at the YMCA for inter-office travel.
How do you fix it? Not with a band aid, piece-meal approach, that is certain. The only way to deal with it is a holistic, coherent, and well thought through strategy comprising what we usually refer to as the four pillars of pricing.
Pricing Governance – the importance of pricing governance is seriously under-rated. See Pricing governance and its impact on law firm profitability and culture
Pricing Analytics – there is often a fundamental misconception about the data required to drive strategic decisions versus the data required by a partner engaged in tactical pricing.
Pricing Execution – the paradox here is that while most lawyers are both confident and competent in dispensing legal and commercial advice and support, frequently the same cannot be said of their ability to have a pricing conversation with the client and fully monetise the value that they are delivering.
Pricing Technology – Technology built by lawyers for lawyers holds the other three components together. Technology on its own fixes nothing but a holistic approach can deliver spectacular results. Products like Virtual Pricing Director® that is deployable on-prem and in the cloud, integrates with 3E and Aderant, and prioritises very high levels of user adoption at fee earner level is now accessible.
In combination, these four components have the potential to reduce write-offs significantly, and correspondingly increase the firm’s bottom line without the faintest hint of rate increases or redundancies.
Before looking to increase revenue, might it be better to focus on plugging the leak and recovering as much of the billable time we are currently generating as possible?
