Law Firm Pricing and Budgeting Trends for Optimized Profitability

It confirms the extraordinary pace of change occurring within law firms and the rapid evolution towards real-time visibility of all matter pricing across the firm to enable individuals to take responsibility, deliver client value and maximize profitability.

The full report delves into these areas and more in detail, including:

• The impact of the pandemic on billable hours, write-offs and profits per equity partner.
• How law firms are responding, including the expansion of alternative fee arrangements (AFAs).
• The state of law firm matter budgeting and tracking against actuals and its impact on the bottom line.
• How people, process and technology are more important than ever as firms return to “normal” working patterns and plan for the next phase of growth.

STRATEGIC PRIORITIES TO MEET CLIENT NEEDS

During 2020, law firms had to provide an unprecedented level of support for clients, many of whom were facing huge operational challenges to survive.

• 82% of firms confirmed they have experienced rising client demands for financial transparency.
• Clients also want more AFAs, with respondents reporting an average increase of 27% in client demand for them since the pandemic began.

Firms have responded to client demands for more visibility and flexible pricing models:

• 74% have introduced more mandated matter budgeting.
• 46% now providing greater visibility of the pricing breakdown at the start of the matter.
• 42% offer AFAs like fixed fees or capped fees.
• 38% have introduced upfront billing or billing on milestones.
• 34% have introduced extended payment terms.

However, 40% also feel compelled to offer discounted standard rates, flat discounts or early payment discounts — which will create new profitability challenges. Furthermore, while upfront improvements in pricing information are welcome, firms are not providing enough information throughout the matter process.

Less than 2% of firms provide updates on budget throughout the project life cycle on all matters. It suggests that firms are still constrained by a lack of processes and technology, and clients are being left in the dark over potential overruns, which in turn could damage client relationships.

“The entire firm has to be focused on the business, not the practice of law, to achieve real, sustainable improvements in profitability in an increasingly cost-squeezed market.” 

With client demands placing ever greater pressures on matter budgeting and pricing to maintain profitability, it is now essential to introduce effective planning and tracking of costs.

CULTURE CHANGE

The report reveals a significant cultural shift throughout the industry to support the changes and increase the focus on profitability. Firms are making improvements to their matter pricing by ensuring the right people are in place, with the right training and remuneration.

• 66% have hired new dedicated pricing resources in the last 18 months.
• 25% plan to recruit a pricing specialist in the next two years.
• 50% plan to introduce lawyer remuneration incentives or penalties based on reducing billing write-downs.
• 24% plan to train lawyers in pricing practices.

However, pricing directors and teams cannot achieve significant change when working in isolation. The entire firm has to be focused on the business, not the practice of law, to achieve real, sustainable improvements in profitability in an increasingly cost-squeezed market.

There is also widespread recognition of the need for change and the availability of technology solutions to deliver accessible real-time information that can support far more effective pricing and profitability management:

• 76% are planning to introduce a legal pricing solution in the next two years.
• 86% of managing partners confirmed planned investment in dedicated pricing solutions in the next two years — underlining the senior level commitment to this investment.

For any pricing director targeted with driving significant improvements, this senior-level commitment to change is a huge advantage, overcoming many of the typical difficulties associated with achieving management buy-in to technology investment.

Law firms are now actively looking to support lawyers to achieve better financial outcomes with tools that provide data-driven budgets and costs, better resource plans, lower write-offs and clear client reporting. An investment in matter budgeting, pricing and tracking technology that is designed for law firms to manage their matters financially will play a key role in ensuring firms can keep profitability objectives on track.

Following a year when firms went above and beyond to support clients, expectations have risen — and that includes expectations that law firms will embrace digital technologies at the same rates as clients. Digital transformation has accelerated across the legal industry, and any divergence in digital maturity will be very evident to clients — and provides a foundation for continued innovation.