Law firm pricing approaches in challenging times

Topics: Billing & Pricing, Business Development & Marketing Blog Posts, Client Relations, Data Analytics, Efficiency, Law Firm Profitability, Law Firms, Legal Managed Services, Midsize Law Firms Blog Posts, Process Management

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Pricing lessons from the previous global financial crisis little more than a decade ago are still extremely pertinent today for those of us in the legal sector.

Although the current cause, magnitude, and environment today differs, as any good pricing practitioner will tell you if given half a chance, the approach to good pricing of legal services should not fundamentally change in an economic downturn because the same key principles still apply.

Strong underlining themes are still pertinent, such as: i) having a differentiated pricing approach and recognizing that not all clients and practice offerings are under pressure; ii) focusing on the value of your offering — because, after all, the value of your services have not disappeared over night (often quite the opposite); iii)  adapting your pricing approach to your clients’ needs; and iv) ensuring that your robust pricing governance processes in place still remains — albeit with a few more subtle tweaks today than normal.

However, given the unprecedented business environment being faced by all, there are a number of further steps that I’ve gathered from my personal experiences as a pricing director with a major law firm during the last downturn and current conversations with clients. Adopting these steps will help you more easily navigate those potentially tricky pricing conversations you are — or should be — having with your clients now, while ensuring a more sustainable and profitable future in the longer-term.

Step 1: Segment your clients

Your firm’s larger clients, those in sectors heavily impacted by the crisis (such as the airlines, hospitality, or real estate), or other extremely price-sensitive clients, are very likely to seek one or more of these options: extending existing panel terms; delaying panel decisions; requesting deeper discounts on ongoing or future work; and delaying or even cancelling potential matters as they look to prioritize their legal spend. Other clients — those that are perhaps not as economically distressed — may also request some of these items as they seek to take advantage of ongoing uncertainty.

Segment your clients based on their likely pricing behaviors, either by importance or sector so your firm is prepared with set approaches in place prior to the inevitable client request. This will allow you to proactively identify ways to both help clients while mitigating any potential impact to the firm. After all, good pricing needs to remain fair to both parties, regardless of situation.

Step 2: Help your clients

This cannot be stated enough: Focus on the wider client relationship rather than the revenue at this time. Lessons from the previous downturn highlight that goodwill built now will pay dividends once the current economic environment improves. The opposite is also true.

Emphasizing the value and outputs you are delivering to your clients is key so they can clearly see what they are getting and feel they’re receiving a tangible return on their current investment. In addition, proactively engaging with clients about current ongoing matters and helping them re-evaluate their legal priorities will also raise your profile in their eyes. Helping them to save money now should also help reduce any pressure they may place on your rates later on. It also maximizes the likelihood of being paid.

And remember, there are a number of alternative ways to help clients through this period of uncertainty without resorting to discounts. These include offering deferred payment terms, billing credits towards existing bills or future work, or potentially changing matter scope to reduce legal expenditure. For those who feel they need to make immediate financial concessions for a client, as a minimum, ensure that any form of client-specific investment are agreed on a time-bound basis (e.g., for next three months, or for the duration of matter, whichever is shorter).

Step 3: Manage your discounts

At this time, it is especially important to take a firm-wide view to any client investment being made. This puts a much greater emphasis on good pricing governance and oversight and avoids random discounting from individual partners, even those done with the best of intentions.

This time might also give your firm the impetus to move away from hourly rates. Highlight the opportunity this may give the client to drive costs down now and in the future by a different fee approach, such as a fixed fee or a retainer (where you can apply any appropriate investment irrespective of timekeeper or experience level). Avoid changing the reference price or rate for specific levels of expertise wherever you can. Once changed, it can be very difficult to get those rates back to status quo level. One of the key lessons from a decade ago is that the fluctuation of pricing works much easier going down than going up!

If you do need to renegotiate existing client rates, however, resist the temptation to negotiate in numbers ending in fives or zeros due to the adverse impact on firm profit. For many firms, a 1% higher realization typically adds up to 3% higher profit. But also, the opposite is true — a 5% discount can reduce existing profit by up to 15% — and that can take a long time to recover.

Don’t forget — poor management of discounts and rates can often have an adverse impact on your brand. Discounting needs a coordinated, cautious approach.

Step 4: Review & adapt your Practice Group pricing

Certain practice areas will be extremely busy at this time — for example, dispute resolution, COVID-19-related litigation, restructuring, those services related to technology, and also very likely M&A as the market begins to recover.

For those practice areas in demand you should be charging an appropriate fee, and not discounting unless there is a very good reason. Merely being asked to by a client does not count. Others matter types may have weaker demand and therefore targeted, time-bound investment may be required.

Now is also the time to define and agree to practice group-specific pricing strategies for the next 6-to-12-month period at least, if you haven’t already. This will encourage greater consistency of approach, messaging, and management of firm investment. This is relevant for both those practice areas which will flourish during the crisis and those which will feel more pressure. Encouraging more frequent discussion of pricing themes as part of your firm’s practice group meetings can be a simple, but strong, start.

Step 5: Review & selectively increase your rates

For many, this theme is the proverbial elephant in the room. Firms that do not raise rates will see a decline in overall profitability as costs increase in many areas. In addition, firms who do not regularly raise rates — even by small amounts — will face much greater obstacles when seeking to recapture any previously forgone rate increases in the future, as clients experience sticker shock at the level of subsequent increase being requested.

Take time to review your rates and make an assessment of where and for which clients or matters rates may need to change. Even marginal increases (for example, of 2% or 3%) will make a tangible difference to your bottom line.

Step 6: Focus on your cash flow & accounts

Our final step is one that many firms are already doing: Establishing a continued and improved focus on cash flow and accounts receivable within the firm. For all potential new matters (subject to some form of agreed materiality or threshold), law firms should determine the level of likely recovery and required resources. More specifically, firms should determine whether this matter is appropriate for the firm to support given the existing client relationship, client payment profile, and potential fee or profitability. Otherwise scarce resources may become even more scarce, and profit will stagnate or even decline.