fixed fees

Survey: Production returns; Billings fall; Firms need to find new ways for clients to pay

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Having reported a cliff-fall in new matter instructions post-COVID in its Legal Trends Report Briefing #1 in May of this year, June’s updated Briefing #2 by Clio shows a subsequent significant upward spike in new matter instructions that have, effectively, netted out year-on-year the number of new file matter instructions.

While, at first glance, a return to quasi-normal file opening matter numbers look to be good news for law firms, as the latest Briefing numbers also shows, if you scratch the surface you’ll soon see (diagram below) a far bigger underlying problem is starting to emerge – namely clients’ inability (or possibly unwillingness) to pay!

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While the above wheel-chart is, at first glance, alarming, it’s also worth keeping in mind that a client’s ‘ability‘ to pay a legal fee pre and post the pandemic is not necessarily the same as its ‘willingness‘ to pay that fee. Which is to say there may be (and likely are) other underlying reasons as to why clients are saying they are not willing to pay fees – including a re-evaluation on the part of the client in respect of the perceived value being provided.

Of more concern to law firm management, however, should lie in the second of these two charts, namely the fact that rather than chasing fees 25% of firms are electing to forfeit the revenue.

Again, there could be a whole raft of underlying reasons why a firm may decide it would rather forfeit some of its billed revenue, and without undertaking a root-cause analysis we left to guess these (including my favourite – trying to preserve the relationship), but we should be left under no illusion that discounting and write-offs will have the biggest impact on profitability*.

A willingness to look at alternative payment methods

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For me, a somewhat surprising take-out from the latest Briefing was the statistic that 72% of consumers would prefer to pay their legal fees via a payment plan. Again, the term “consumer” isn’t defined and so we are left wondering if this is B2C or B2B; but even then, that only 53% of firms are equipped to offer payment plans seems odd.

Take away?

So what’s my top 3 take outs from this latest Briefing from Clio?

  1. Once things settle down, law firms will be as busy as ever,
  2. Cashflow will be king and clients are struggling with their own cash-flow, so
  3. Think outside of the box when it comes to pricing and how you ask clients to pay and you should be okay.

As always, these just represent my thoughts and always interested to hear your views.

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* N.B. If hourly billing is the way you work and you want to get a better understanding of the effect that discounting/write-offs has on your firm’s profitability, take a look at this post by Patrick Johansen that profiles Stuart Dodds’ ‘1-3-4 Rule

 

‘Annuity Revenue’ – who wouldn’t crave some financial certainty in current circumstances?

Annuity revenue – a predictable revenue stream from new or existing customers who buy products and services associated with new or previously purchased products. 

As the Managing Partner of a law firm today, what would you say if I walked into your office and told you that I could:

  • provide you with a guaranteed monthly revenue income,
  • with a product that creates loyal customers, and
  • where those customers become – at no additional cost to you – brand champions and refer your services to their network, free of charge, via the Holy Grail of marketing – positive ‘word of mouth’ referrals.

Sounds great doesn’t it. Almost too good to be true.

Well all I can say is that if you were anything like one of the Managing Partners servicing customers who responded to the Pitcher Partners recent ‘Legal Survey 2020 Report‘, that’s exactly what you would be saying: “thanks, but no thanks we are happy with the billable hour”.

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The fact that the billable hour remains the ‘go to’ method of billing (not the same as pricing) for Australian law firms and their customers does not, in and of itself, surprise me. I must admit, however, to being a little surprised with the 1% increase in this billing method (up from 58% to 59%) year-on-year.

Given the times (even pre Covid-19), I was also a little surprised to see that both ‘fixed fee’ and ‘value-based’ pricing remain relatively static (although it should be added that from what I could see the report lacks a definition of ‘value-based’, probably purposely so).

To me this represents a massive lack of foresight on the part of law firms and a significant lost opportunity.

In much the same way as software as a service (SaaS) companies have come to realise that one-off payments around shrink wrap contracts were not servicing the long-term financial interests of the company (unless it’s a legacy product that will no longer be supported), the time has come for law firms (and professional services firms more broadly) to realise that if we want to maximise revenue and, potentially, profit we need to rethink how we generate that revenue.

One alternative that the likes of Ron Baker and Mark Stiving have been banging the drum about for some time is ‘subscription based pricing’.

The benefits of adopting a subscription based pricing model

I have posted previously on this blog about the benefits of subscription based pricing (see here), but leaving all that aside for a second; as Amy Gallo wrote way back in October 2014 in the Harvard Business Review (see ‘The Value of Keeping the Right Customers) with the acquisition costs of acquiring new customers running being between 5 and 25 times more expensive than servicing existing customers, it makes economic and financial sense to find, and keep, the right customers.

How you price this is probably the most important step along that path.

The weakness of having billable hours as your default billing method is that you are pricing to the transaction. Whereas one of the greatest benefits of the subscription based pricing model – or even a retainer based pricing model if you must at the start- is that you start thinking about pricing the customer or even the portfolio.

In other words, you start to think about the customer and their needs first. And for an industry that always talks about the customer being at the centre of everything we do, doesn’t it makes sense that our pricing structure reflect this claim?

But it also makes sense internally, because it:

  • is smarter pricing
  • leads to smarter collaboration
  • moves you away from seasonal end of financial and calendar year pressures, and
  • helps remove any discussion around the ‘commodity’ tag.

Not to say, in these COVID-19 times, when you are talking working capital facilities with your bank, it provides you with a guaranteed annuity revenue stream.

Now who would not want that comfort right now?!

These just represent my thoughts though and always interested to hear your views.

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Report: Eight of the biggest challenges law firms associate with rates and pricing

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After a great holiday enjoying the Northern Hemisphere summer – and thereby avoiding some of the cold winter of Sydney – I returned last week to a read about law firm rates and pricing that really caught my attention, the ‘LawVision & Peer Monitor Pricing Survey: The Growing Prominence of Pricing within Law Firms‘.

Predominately North American based, it’s nonetheless an interesting read – with some contentious stuff (see the ‘LawVision Maturity Curve’ for example) – for anyone even remotely interested in following the current trends and traits affecting law firm pricing issues. But what particularly grabbed my attention in this Report was the ‘8 biggest challenges law firms associate with rates and pricing’ (Figure 3):

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And what really, really fascinated me about this list is how few of them actually have anything to do with either rates (if that’s the way you want to do things) or pricing.

As you can see from the list, in desending order they are:

  1. Managing cash leaks across the entire rates lifecycle (discounts, write­downs, write­offs, collections)my comment: neither a rates issue  nor a pricing issue, but a behavioural issue
  2. Educating the lawyers in the firm on pricing principlesmy comment: neither a rates issue  nor a pricing issue, but a training issue
  3. Managing rate discounts requested by clientsmy comment: neither a rates issue  nor a pricing issue, but a behavioural issue (and are we seriously still having this conversation!)
  4. Negotiating with clients about the firm’s value and rate/pricing alignment
  5. Putting in place a disciplined pricing processmy comment: neither a rates issue  nor a pricing issue, but a training issue
  6. Managing profitability – my comment: neither a rates issue  nor a pricing issue, but an accounting issue
  7. Developing alternative fees
  8. Pitching for work generally or through the RFP process – my comment: can someone please let me know what this has to do with either rates or pricing!

Which leaves us with:

  • Negotiating with clients about the firm’s value and rate/pricing alignment, and
  • Developing alternative fees

Both of which, depending where in the buying cycle these conversations are taking place with your customer, could actually have something to do with a rates and pricing discussion.

But seriously, Challenges 4 & 7 of 8, and we wonder why law firms struggle with the concept of pricing and the disconnect between firm and customer.

And if we are really being honest and true to our clients, then even inward looking the #1 issue should not be ‘Managing cash leaks across the entire rates lifecycle (discounts, write¬downs, write-offs, collections)‘ but should rather be: ‘How are we rewarding and incentivising in our staff?‘ – because if the answer to that is ‘utilisation‘, then everything above is relatively meaningless.

As always though, interested in your thoughts/views/feedback.

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Has your law firm considered subscription-based pricing?

Like many lawyers who have worked under billable hours or fixed fees, for most of my career I have pondered the question: “How can I make money while I’m asleep?”, or better yet, awake but not working!

Early in my career I thought I had the answer – subscription-based pricing.

At the time I was working with Linklaters on their Blue Flag program (see this article for an overview of what Blue Flag was all about) which essentially provided compliance related information to subscribers who paid a monthly fee. This was then extended to basic loan documentation that was created using automated software (an early version of HotDocs if I am not mistaken).

As I was to find out though, the problem with this business model is that there is always someone willing to undercut you on price, with little attention to the value you were providing.

And so I never really took it much further.

But I remained interested in the dilemma of how I, as a knowledge provider working on hourly or fixed fee arrangements, could make money while I slept (outside of writing a book and get loads of royalties).

A couple of things recently changed my view on this whole issue though.

First, I listened to Episode #217 of Ed Kless and Ron Baker’s the soulofenterprise.com podcast in which they discuss ‘The Automatic Customer: Creating a Subscription Business in Any Industry’ a book by John Warrillow.

Ed and Ron continue this discussion in Episode #221 (Part II).

One of the big take-outs for me from the podcast was the fact that Porsche has introduced subscription pricing (see here for a story on this).

That’s worth repeating – you can subscribe to drive a Porsche!

And get this, Klaus Zellmer, CEO of Porsche North America, says of subscription-based pricing that:

“We engage people with a brand that they usually wouldn’t,”

As a law firm, imagine…

Second, I recently read that ‘Apple will lean more on subscriptions as iPhone sales drop

That’s right, Apple – as of the date of writing this post – the world’s second biggest business by stock market value is moving towards a subscription-based business.

Which made me think – what’s the biggest doing?

Answer: ever heard of Amazon prime?

So if subscription-based pricing works for these big players, why not your law firm?

As always though, would be interested in your thoughts, views, feedback.

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What the year 2081 will mean for law firm discounts

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Over the holiday’s I finally got time to read D. Casey Flaherty’s ‘Unless You Ask: A Guide For Law Departments To Get More From External Relationships‘ published by the Association of Corporate Counsel (ACC).

Casey’s publication is excellent and very insightful. Although written for in-house legal departments, it contains information that every private practice lawyer should be across. If for no other reason than it has an array of sample questions they may be asked.

But, it is a brief piece in the publication on asking for discounts on hourly rates/bills that I wanted to share with you all. Because Casey has managed to put into words, both succinctly and comprehensively, my own feelings on discounts.

So here it is (see pages 64 & 65):

Without some grounding in value, discounts just become a game.

First, you can only push the discount lever so many times. A recession hits or you run a convergence initiative. You get your firms to take a big haircut. What’s next? It will probably be a few years before you can return to that well in any meaningful way. Continuous improvement, on the other hand, should be a constant. There is always some process to refine, some assumption to question, or some technology to take better advantage of. Discounts can be part of a strategy. But a strategy that relies entirely on discounts is hollow.

Second, there is a huge volume of data that suggests that while most clients see themselves as negotiating progressively deeper discounts, what they are really doing is negotiating down the size of the rate increase. Last year, the client got a 10% discount off a $500 rate. This year, the client gets an 11% discount off a $520 rate. What really happened is that that firm increased the rate from $450 to $463. You can perform this trick—4% rate increase, additional 1% discount—for a quite long time before the rate flattens out. How long? 66 years. In 2081, the paid rate ($1,600/hr) would finally stop increasing as the discount (75% off a published rate of $6,399/hr) caught up to the rate increase.

Third, while almost every law department will proudly refer to the deep discounts they’ve negotiated, only about half even get one. That’s because a true discount is not calculated versus a lawyer’s published rate—of which there may be several—but is calculated by reference to something called a standard rate, an internal firm number used to determine realizations, profitability, etc. With a few exceptions, almost no one pays published rate and therefore everyone thinks they are getting a discount. But only about half of clients actually pay below standard rate. And even they are not getting as deep a discount as they think.

Fourth, if you count discounts as savings, please stop. If you’ve reduced rates below what you were paying previously, that’s one thing, especially if you also have a mechanism to monitor and hold the line on hours. But if you are just counting the delta between the published rate and your paid rate, it introduces some bizarre incentives. It encourages firms to jack up published rates so they can offer you the optical illusion of a bigger discount. It encourages you to select higher priced firm so you can report greater ‘savings’—i.e., you show double the savings by paying $700/hr to a lawyer with a published rate of $900/hr than you do paying $350/hr to a lawyer with a published rate of $450/hr. And your savings accumulate with every extra hour of work the firm bills. There is something inherently perverse about a savings metric that makes you look better the more you spend.

Fifth, finally, and most importantly, undue emphasis on discounts tends to confuse unit price with total cost. Rate differences are linear. Hours can differ by orders of magnitude. The $350/hr associate might look relatively cheap until it takes them ten hours to deliver work half as good as what the $800/hr partner delivered in one. Attention to the unit price ($350 v. $800) will obscure both quality and total cost ($3,500 v. $800). We intuitively understand the difference experience can make. Systems—the proper integration of process and technology to augment expertise in delivering legal services—are experience institutionalized. Systems merit attention in trying to understand the relationship among quality, unit price, and total cost. Discounts are only a small fraction of one piece of that puzzle.

There you have it: why discounts should not be anywhere near the front of your pricing arsenal.

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R.I.P. AFAs in 2017?

I thought I would start my calendar year of blogging off with a slightly controversial post:

Will 2017 be the year that we finally sees the demise of so-called Alternative Fee Arrangements (AFAs)?

For those unfamiliar with the various types of AFAs currently in use – and there cannot be many of you out there, then Patrick on Pricing’s Continuum of Fee Arrangements is a good starting point.

Okay, so a fair amount was made of a chart in a ‘ACC Report – Law Department Management: Establishing Value In An Evolving Business World’ published late last year which predicted a 50% increase in the use of Alternative Fees this year. Given the ACC is the leading voice for in-house counsel globally, including, now, Australia, pretty clear evidence of the future direction of AFAs you’d think.

But, to my knowledge, little has been made of the fact that the same chart foresaw a 30% decrease in the use of Alternative Fees this year by those same in-house counsel.

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And so I asked myself: Given their popularity, what could possibly be driving in-house to contemplate a reduction in their use of AFAs? This is especially so given that the ACC has very much been at the forefront of championing their use? And, potentially, in such large numbers?

The truth is, I don’t know the answer to this question. It could be as simple as the fact that in-house counsel expect to instruct out less work that fits the AFA model. But I also hazard a guess that with some in-house counsel it will have something to do with one or all of the following three possible reasons:

  1. AFAs are not transparent – no one, apart from the person who sets them, knows how they got to tat price. As such, it’s really difficult to compare them.
  2. AFAs don’t represent value. Despite a belief that they represent value over hourly billing, in the view of many in-house counsel they simply don’t. Therefore, much easier to use the foe you know (hourly billing with discounts).
  3. AFAs are not alternatives. Simply put, the core to most AFAs proposed by law firms remains: Units of Labour (manpower) x Time x Rate = Price. QED, they are not “alterative”. Indeed, their very names even suggest it with “blended”, “phase”, “task”, “volume”, “flat”.

To be clear, I don’t want to see the demise of value pricing. Indeed, quite the opposite. Nor am I particularly an advocate of hourly billing. I am however, wholly against the use of the term “alternative” when they clearly aren’t. And so I’m not overly surprised that 30% of in-house counsel are saying they will see a decline in their use this year.

Given the glacial speed of change in the the industry, I’ll wait to see if there is any change here this year. My gut tells me though not to hold my breath and that we are likely to be in the same place next year as we are now.

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AFAs accounted for less than 10% of all matters in the US last year

This month saw publication of the End-of-Year 2015 edition of the Enterprise Legal Management Trends Report by LexisNexis and CounselLink.

Based on data derived from outside counsel invoices – accounting for US$21 billion in legal spend in the USA – processed through the CounselLink platform, to my mind what makes this Report different to others is this: it provides insights others might miss because while talk can be cheap, the numbers rarely lie.

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From an Australian perspective, a couple of surprising statistics come out of this year’s Report.

  • the use of AFAs, to govern the service payment of matters, only accounted for 9.4% of matters processed through the CounselLink platform. Given all the chatter and whining you hear from law firms, I would have expected this rate to be much, much higher.
  • Employment and Labor (at 17.3%) is a fairly significant practice area leader in the number of matters (but not revenue – see below) using AFAs, but Real Estate accounting for something less than 2% of its practice area matters using AFAs seems out of whack.
  • Nearly 10% of Regulatory and Compliance matters are done under AFA arrangements. At first this seemed a little strange (given the grey hair nature of the advice being sought), but then I thought a large number of compliance programs could be sold using retainers, fixed fees and other AFAs.

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Moving on to percentage of “billings” executed under AFAs and things start to get really interesting.

  • at 12.4%, by far the biggest practice area using AFAs by billings is Corporate, General and Tax (excluding Mergers and Acquisitions, which is a separate line entry). Not sure I would have guessed that.
  • Finance, Loans and Investments ranked third highest practice area using AFAs by billings last year. Again, don’t think I would have picked that.
  • by billings, only 7% of Employment and Labor practice area matters are executed under AFAs. So, 17.3% of Employment and Labor matters were conducted under AFAs, but only 7% of billings. Might just be me, but that seems strange and I’d want to dig deeper into why that might be the case if my practice was showing these numbers. Then again, may just be the Pareto Theory in practice!
  • At roughly 2% of practice area billings, who says Real Estate has become a commoditized practice area? Because these numbers aren’t showing it.

Interesting numbers showing through this Report. Lots of chatter around the rise in M&A activity/revenue and the fact that “New Law” isn’t being hired to do big ticket work, but the use of AFAs and rationalization of legal panels (which I may well blog on later this week) were my two big takeouts.

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The law firm disconnect in two images

This week saw the publication of LexisNexis’s Bellwether Report 2016. titled:- ‘The Riddle of Perception‘.

Based on structured interviews with 122 independent lawyers and 108 clients (all UK-based I believe), this year’s Report provides valuable insight into the thinking of lawyers and law firms and, incredibly, how far removed that thinking still appears to be from the views of their clients.

None so is this more starkly brought home to me than in two separate images in the Report in response to questions put forward around the issue of fixed fees.

The first (which is actually the second in the Report) can be found on page 22:-

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where, in response to “Which of the following is an opportunity for your business going forward?” – 43% answered: fixed fees.

The second is found earlier in the Report on page 18, where when asked what “Changes forms implemented in the last year or plan to implement in the forthcoming year?” – a “deliberate shift towards fixed/capped fees” raked 12th. with only 13% saying there was anything planned around this for the forthcoming year.

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Now call me crazy, but that seems to be as close as you can get to madness.

Read the Report though, it really is very good.

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Almost 20% of Australian law firms revenue is now coming from fixed fees

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It has been a full six months since the last CommBank Legal Market Pulse (conducted by Beaton Research + Consulting) was published and from what I can tell from this latest publication, not very much has changed in that time.

While some members of the Australian legal publishing world have commented on the rising optimism (note this is “perception”, and this has gone from awful to not quite so awful), what grabbed my attention was a piece towards the end of the report (page 19) that states:

“Revenue is still predominantly derived from hourly rates. However, almost 20% of all firms revenue, irrespective of size, is now coming from fixed fees.”

I don’t have to hand data from 5 years ago that would allow me to do a comparison to see what this means in real terms, but given that IBISWorld puts the size of the Australian legal market at $23BN, that’s a lot of fixed fee generated revenue.

Somewhat surprisingly, there doesn’t appear to be a huge difference in the percentage of fixed fee revenue being derived at “top-tier” and “mid-tier” firms – with fixed fees accounting for 19.4% of revenue at top-tier firms and 19.2% among mid-tier firms.

The types of work for which fixed fees are being agreed/charged is also very similar – 88% for transactional matters at top-tier and 89% at mid-tier.

Notable, and surprisingly, is that top-tier firms would appear to be much more willing than mid-tier firms to offer fixed fees for litigation work – 50% to 33%.

But the test is always in the tasting (for wine lovers at least): so how good are Australian law firms at fixed fee pricing?

Well, not very if the data is to be believed. Asked for the margin on fixed fees relative to hourly rates, the responses were:

  • higher: 13% top-tier / 15% mid-tier;
  • lower: 0% top-tier (which seems a little hard to believe) / 56% mid-tier (which is probably being too honest)
  • about the same: 75% top-tier / 19% mid-tier; and
  • not sure: 13% top-tier / 11% mid-tier (which should be worrying some managing partners out there).

As well as finding out that Australian law firms are not very good at fixing fees, the report also tells us that over 67% of all law firm revenue still comes from standard hourly rates or discounted hourly rates. Here though, over 25% of revenue comes from “discounted” hourly rates – which begs the question: when do you start saying your discounted rates are your real rates?

Lastly, almost 3% of all law firm revenue now comes from retainer arrangements (2.6% for top-tier, 2.8% for mid-tier). Now that’s certainly something worth keeping an eye on!