How Pricing Leaders Can Improve Profitability and Negotiations
On March 23 and 24, 2021, Intapp hosted a virtual Pricing Leaders Exchange where representatives from major global law firms shared leading practices and discussed topics of mutual interest. Pricing leaders delved into reports and research findings from 2020, reflected on the ways the COVID-19 pandemic has affected law firms around the world, and explored ways in which their firms can remain competitive moving forward. Here are some of the highlights from the discussion.
Analyzing the Economy and Law Firm Profitability
Executives reported that 2020 profits per partner (PPP) were surprisingly strong while costs were down significantly. Firms saved money during the pandemic on expenses such as travel and physical office space — a dynamic which is unlikely to repeat as the pandemic subsides. Despite most employees working from home, revenue appears to remain consistent with previous years. With a stable revenue topline, net margin will increase due to bottom-line costs reductions.
With the continued shift toward remote work, profitability calculations may change, especially as lawyers may be less willing to bear a full share of overhead costs. One approach to the profitability conversation is to disassociate compensation from profitability analysis, and instead focus on profitability analysis at the client level. A report that lists clients and their profitability helps lawyers compare across clients and critically evaluate revenue forecasts. Disconnecting the bottom-line number allows firms to review each individual client, determine how to improve that client’s profitability, and even decide whether to drop that client.
A major takeaway from the events of 2020 is that firms should be very cautious when approving concessions or discounting. Firms need to make it clear to clients that any discount is a one-off, one-time exception with a limited effective period. Any analysis for carrying over 2020 discounts into 2021 should include quantitative historical economics (e.g., profitability, billing, and collection patterns) and the valuation of the concession itself. Determinations must also involve a client view. Firms should explore which services the firm provides to the client, the length of the relationship, and the client’s track record of generating profitable referrals.
In the U.K., law firms traditionally reset or increase their rates each May, which could create the tricky environment of clients asking for discounts against already-discounted rates. For fee-sensitive clients, it is important for firms to evaluate and substantiate discount continuation, and clearly communicate the expectations around rate concessions offered throughout 2020.
Creating Profitability Narratives and Negotiating with Clients
Publicized profitability reports for law firms may spur clients to ask for discounts, in turn creating challenges for lawyers. Pricing leaders must restrain any impulsive responses to such requests; instead, leaders should ensure lawyers trust their pricing teams and have the training and education to guide negotiations. Similarly, pricing leaders may wish to offer partners refresher courses on the business of law to help them better understand key concepts.
Messaging and stories around pricing are likewise critical when communicating with clients. Firms may wish to point out to clients, for example, their immense value revealed during the pandemic, and assure them of similar value during future crises. Access to data, insights, activity, outcomes, and history are also useful during negotiations, and can be surfaced using integrated solutions.
Firms must also continue to ensure they’re taking on the right business. Clients that offer rates mandates instead of entering a balanced negotiation may not be the best partners for a firm. Furthermore, making a concession quickly can hurt a firm in future negotiations. If a client sets up stringent demands from the outset, that client will likely continue to seek low rates in the future. Partners need to think about these long-term implications during negotiations.
Improving Accuracy and Profitability
To truly remain competitive, firms must be able to meet the growing demands and expectations of clients, especially around transparency and accuracy. Investing in AI-based technology can greatly help firms easily access and analyze key information, allowing firms to successfully meet client goals while also maximizing profitability.
OnePlace Operations & Finance provides AI-enabled software that helps professionals work efficiently, consistently, and profitably while ensuring client success. You’ll be able to scope, price, budget, resource, and monitor engagements with unparalleled accuracy and visibility, as well as ensure that timekeeping is supported by automation and data-derived intelligence while aligning with client billing requirements. The software also automatically analyzes all past engagements by shared characteristics to derive data-validated intelligence that can be used to improve your pricing strategies. To learn more about using AI to deliver higher profit and better client value, take our Profitable Delivery Self-Assessment.