How do you measure success? Ask a lawyer and she may say, “By the number of hours I bill.” Ask a marketer and he may answer, “By the number of clients my firm has.” Ask an economist and he will tell you, “By how profitable we are.”
As we’ve seen in recent years, a firm can have a long list of clients and/or bill a staggering number of hours, but it won’t necessarily stop them from going under. However, this much is true: a profitable firm is a successful firm. In the LMA Annual Conference session titled, “Pricing, Profitability, and the Role of Marketing,” panelists Toby Brown, director of strategic pricing and analytics at Akin Gump Strauss Hauer & Feld LLP, and Colleen Nihil, firm-wide director of project management at Dechert LLP, explained how a long list of clients and/or billing a large number of hours can actually lower profits.
Toby and Colleen went on to explain why legal marketers need to understand profitability and law firm economics, in general. As one of the four “P’s” of marketing (along with product, promotion and place), pricing is well-within our realm, yet is often overlooked. They further illustrated how we can use this internal law firm knowledge to our advantage in winning and keeping clients.
A major part of the discussion was geared towards how to create value-based billing for a client. Why do clients want it? What makes a client a good candidate for this arrangement? What type of research should be done? How should it be handled internally within the firm? Each question was addressed plainly:
Why do clients want a value-based billing arrangement?
Many prefer this to the classic hours-based arrangement simply because it provides an element of predictability. Clearly, all clients want cost-savings and efficiency. However, the panelists advised that the firm should first have a conversation with the client about setting up a new pricing arrangement. Understanding what the client wants and why they want it should guide the firm when setting up a new agreement.
What makes a client a good candidate for this arrangement?
Obviously, a client with very predictable legal needs is the best client for a value-based billing arrangement. However, many clients could be eligible if enough good, solid research is conducted, which leads to the next question:
What type of research should be done?
Research on the client’s past history with the firm is imperative in order to decide if it is eligible for value-based billing and what a reasonable and fair pricing structure will look like. Two approaches were discussed:
Bottom-Up
- Compare and contrast the client against other similar clients at the firm – size, revenue, industry, etc.
- Pull benchmarking data: What services does the firm provide to client? How much does each matter cost? Is there any outlying data?
- Don’t look at just historic data, but also look at how the firm can drive down costs. Think about using zero-based budgeting for this process.
- Build out the matter. Look at what strategy will be taken on the matter and figure out the firm’s value.
- Model the matter based on different types of rate structures (fixed-fee and other alternative fee arrangements)
- This approach will require the firm to categorize matters better in order to ensure reliable benchmarking.
Top-Down
- Start from an estimated figure for the matter.
- Create a scoping conversation, asking the questions: What will double the figure? What will make it shrink? What is the likelihood of…? Determine the cost of the matter, not the price.
How should value-based billing be handled internally within the firm?
Toby and Colleen stressed the importance of educating attorneys on profitability and its four drivers:
- Rates
- Realization (percentage of money collected versus standard billing rate)
- Productivity (number of billed hours per time-keeper, per year)
- Leverage (amount of non-partner work versus partner work performed)
Once attorneys learn how profitability works, they can begin to structure their matters in a way to increase profitability (rather than hours or simple revenue). However, some attorneys learn how to “game the system” which can lead to unhealthy profitability; this is something that should be monitored. Toby directed the audience to his paper, “The Four Horsemen of Law Firm Profitability,” which dives deeper into law firm economics.
Toby and Colleen summed up their presentation in three bullet points:
- Focus on the work that you can have the biggest impact on
- Understand your clients’ pain points
- Make sure you have this information before responding to an RFP.
These points fed into their overarching message, “It’s not what you do, it’s what you choose not to do.” In the end, increasing profitability and implementing value-based billing arrangements come down to trust and communication between the firm and client. Once those two pillars are established, a new pricing agreement can easily be built with the two parties coming from places of understanding and a mutual interest in success.
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