‘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”.

Pitcher Partners - Billing Methods

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.


CommBank Legal Market Pulse report – Q3 2014/15

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The third quarter (Q3) FY2015 edition of the CommBank Australian Legal Market Pulse Report (Report), with research conducted by Beaton Research + Consulting,  has just been published.

As usual, the Report provides useful insights into the latest thinking of Australian law firm managing partners/leadership, as well as the trends and developments impacting on the Australian private practice legal industry sector.

Interesting outtakes from the latest edition of the Report include:

  • although short-term (next 12 months) economic confidence is fairly dire, the long-term (24 months+) outlook is very positive.
  • surprisingly, given the lack of confidence in short-term economic conditions, every single top-tier surveyed firm is forecasting higher revenue in the next six months. As Marc Totaro’s introduction covers, top-tier firms expect this [next six months] revenue growth to come from Europe, Asia and Sydney; but this paints a little too rosy a picture to me.
  • both top-tier (67%) and mid-tier (47%) firms anticipate seeing revenue growth coming from their employment teams.
  • insurance (60%) related work gets the nod as the expected highest revenue growth area for mid-tier firms. While the Report doesn’t elaborate on whether this is claims related or commercial work, the recent re-jig in the market – with insurance teams moving from the top end of town firms to mid-tier firms – must certainly account for some of this positivity. This is probably also reflected in the fact that top-tier firms surveyed forecast a fall in their insurance practice revenue over the next six months.
  • excepted revenue growth within taxation (50%) ranked higher than I would have guessed among top-tier firms; but maybe this is more reflective of the time of year (Q3).
  • one possible hidden indicator in the Report: mid-tier firms seem more optimistic about getting their hands on “construction, engineering and major infrastructure” (50%) work than top-tier firms – who don’t rank this area in their top 3 revenue growth practices. On the flip-side, clearly the recent M&A work in “IT, telecoms and media” (think 9 Network and iiNet) has been going to the top-end of town with 67% of top-tier firms expecting this practice area to be one of their highest growth areas.
  • top-tier firms forecast revenue growth in UK/Europe, Asia, Brisbane, Canberra, Melbourne and Sydney, but revenue in both Adelaide and Perth are predicted to contract.

The Report also provides forecasts on expected realisation rates (and if you thought these couldn’t possibly get any worse, think again), expenses* and outsourcing.

But, saving the best to last, probably the biggest shock the Report contains is the forecasted change in staffing; and, in particular, the bloodbath that is anticipated to take place within the partnership ranks of top-tier firms. And to be clear, a 33% and 67% forecasted decline in net proportion of equity and salaried partners respectively can only be described as a “bloodbath”!

As usual, I suggest you download and read the Report – it’ll make for an interesting weekend read.

* on a personal note, I see there is a forecasted 17% reduction in “Marketing and Business Development” expense by top-tier firms in the next six months. I can only hope that doesn’t come about.

Are the legal press letting the importance of revenue get in the way of a good story?

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An interesting news item appeared on the Global Legal Post website overnight (Australian time). Citing a recently published (January 2015)  Legal Services Market Research Report by IBIS World, the Global Legal Post item, which is titled “Australian firms on the hunt for increased revenues” states that:

Pressure on revenues is forcing Australian firms to look overseas in a bid to increase turnover.

First of all, if I’m allowed to say, this is irony in action!

Given the number of international (mostly British) law firms that have entered the Australian legal market in the past five or so years as a result of perceived or real limitations on growth in their own domestic markets, to now be informed that one of the consequence of this action is that Australian firms now need to look overseas to grow their own revenue is, well, ironic.

More importantly – aside from being wrong as the IBIS Report clearly states that the market in Australia is growing (if admittedly at a snail’s pace) – is that it misses a crucial point; namely, increasing turnover for turnover’s sake is nothing short of a wasted effort!

But don’t take my word for it, as the prominent industry strategist and pricing expert Richard Burcher rightly points out in his comment to the link I posted to this on LinkedIn last night:

Surely it is bottom line growth that matters? And the assumption that this can only be achieved through top line growth is profoundly flawed. The application of a more sophisticated firm-wide approach to pricing can yield a demonstrable increase in revenue by on average 5% to 8%. For most firms that produces a profitability increase of 15% to 25% with the same clients and the same work. No wonder more than 50% of post merger firms report that it failed to deliver to the bottom line.

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Precisely Richard.

Unfortunately, however, this is not the only example of this type of legal press reporting/thinking.

Only the same day (Monday) The Australasian Lawyer reported – citing (wrongly in my opinion) another UK website – that the Australian arm of DLA had been “fingered for [the] law firm’s drop in revenue” as if huge levels of shame needs to be attached to this [revenue drop] given that it

follow[ed] a transition period where underperforming partners in the region [Asia] departed.

Well I happen to know a number of the partners who left DLA last year and one thing I can say with absolutely certainty is that they were anything but underperforming. More accurately, what they were was in practices that were no longer strategically aligned to where DLA sees the future of its business (something I think is made clearer in the UK version of this news). And, in a partnership sense, there is nothing wrong with having conversations like that. Indeed, they are to be encouraged.

So as with the discussion around revenue and profit, the discussions around revenue and strategy, while related are two different issues.

And all of this before we even get into the very real discussion of whether or not one law firm’s growth has to come at the cost of another law firm.