Law firm pricing is evolving. Are you ready?
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If there’s one tradition that seemed unshakable in the legal world, it was billable hours. Whether a standalone attorney in a small town or a major firm in New York City, lawyers charged by the hour for their services. That’s how it was for decades—but times have changed.
The shift in pricing
In 2009, the major economic downturn affected many industries, including law. In response to a challenging economy, corporate clients streamlined their engagements with law firms, turned more to in-house counsel, and expanded their efforts to negotiate reductions to the hourly rates of standing projects with outside firms. Law firms now found themselves competing not just with each other, but also with clients’ salaried attorneys.
The Great Recession also ushered in increased client demand for transparency, a trend that persists today. Today’s cost-conscious clients are asking their law firms to provide greater value and transparency in their engagements. They’re no longer content with being billed on an hourly model, but want to know upfront: What will this cost me? What are my options on the service delivery model? As a result, most firms are exploring alternative fee arrangements (AFAs) that meet client needs for predictability while fulfilling firm objectives for profitability and growth.
The rise of general counsel as a prominent in-house role has put more pressure on firms, because now there’s someone on the other side of the fence who knows exactly how the game is played. This means companies are holding their firms more accountable and scrutinizing their engagement pricing with an expert eye.
While some hoped to wait out the market dip, the supply-and-demand shift still shows no signs of reversing. According to Altman Weil’s Law Firms in Transition, 95.8% of law firms see price competition as a permanent trend. If firms are to grow in this environment, they must grab more of a client’s portfolio or win work away from another law firm. That can only be done by acknowledging the changes in pricing trends and altering traditional billing models.
Realization rates dropping
In addition to keeping clients happy, there’s another key factor that plays into pricing: the firm’s bottom line. Engagements must not just meet client needs and expectations but also provide a level of profitability that support’s the firm’s strategy.
But that’s often easier said than done. Realization rates are on the decline, with the average firm’s billing realization rate dropping 94% to 87% over the last decade, according to the 2016 Report on the State of the Legal Market from Peer Monitor. A majority (60.3%) of respondents to Altman Weil’s Law Firms in Transition survey believe that’s a trend likely to continue—and unfortunately, a sliding realization-rate drop may mean a profitability dip, too.
But strategic pricing can play a role in improving realization. When firms have strong insight into the true effort required to successfully deliver work effort, they’re better able to optimize resourcing, budget appropriately, and craft accurate estimates for their clients. The end result? Improved collection of billable time, better realization, and more profitability in their matters.
A technology-enabled approach to pricing
Pricing services accurately and profitably is easier said than done, but forward-looking firms are embracing a technology-based approach to meet that challenge. By leveraging artificial intelligence (AI), firms can mine and analyze their existing matter data to derive accurate pricing strategies that deliver greater value to both clients and the business.
And while a successful, technology-based pricing strategy supports the bottom line for a firm, it can also do much more. Firms are finding that employing the right technology can help them operationalize and scale pricing across the entire life of an engagement. For example, a firm can monitor budget to actuals in real time and gain insight into potential cost overruns, allowing them to proactively communicate the client and avoid unexpected overages and relationship-damaging disputes.
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