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Pricing & Profitability with a Twist - Process Improvement

October 24, 2023 8:18 AM | Michele Bisceglie (Administrator)

Author: LSSO Editorial Board Member Frederick J. Esposito, Jr., MBA, CLM | COO, Rivkin Radler LLP

Now that we are living in a post-COVID virtual world, the legal profession has taken new twists and turns, but much to the profession’s credit, it has been one of the more successful change management initiatives ever encountered. The landscape of the profession has changed, which in turn has initiated several cultural shifts in how law firms take on new business. With client demands placing even greater pressure on engagement budgeting and pricing, law firms are stepping up to the challenges while balancing the need for profitability. All of this brings us back to the 2008 recession – we remember the collapse of the real estate market, how credit dried up, and how law firms struggled through a most difficult time. The new business model that followed created an atmosphere for commoditized work – thus creating opportunities for third-party legal service providers such as LegalZoom – but more importantly, we saw a shift in client expectations and the need for ‘alternative’ pricing. In response, we saw many alternative fee or fixed fee boutique law firms emerging, so the business model for law firms radically changed with a renewed attention to pricing, legal project management, efficiency, business development, more client focus, and the biggest one of them all – value. The considerations that stemmed from 2008 still ring true, and even stronger today. Business development has taken the front seat and while demand has been fluctuating the last few months, we are starting to see a steady increase in demand and now law firms must be ready to engage. Clients have become more discerning, which has created a very competitive market for providing legal services. 

What Do We See Happening?

First, clients, particularly General Counsel, continue to push back on fees, looking for more predictability and creative pricing. While Alternative Fee Arrangements (AFAs), now referred to as Fee Arrangements (FA), and Legal Project Management (LPM) have been around for quite some time, they are making another strong comeback. In addition, today we are seeing more focus on not only LPM as a tool for managing legal work and FAs, but we are now adding Process Improvement to the mix.

Second, pricing is no longer about getting the right price for the services provided; it has become more strategic and more integral to the development, sustaining, and maintaining books of business. Process Improvement provides the methodologies for evaluating processes for maximizing efficiency and minimizing waste so legal services can be provided at reduced cost or, at minimum, providing solid cost metrics for determining favorable pricing for clients and profit for the law firm.

“Without Data You’re Just Another Person with An Opinion.” – W. Edwards Deming

With changes in the law firm business environment taking place at an increasing rate, law firms need to take deeper dives into client, employee, competitor, financial and technology data – and much more – to fully understand how their firms really work. With respect to pricing and profitability, law firms need data from these areas to understand the factors that contribute to the cost of producing legal services. Also, they need to understand what their competitors are doing so they can differentiate their firms in a legal market that is looking for– or expects – now that the dynamics have changed. More important, law firms need to understand how they are measuring profit – by firm or practice group? client or matter? originating or working timekeeper? How are expenses allocated? Law firms can discuss income statements and financial performance, but do they have the necessary data to analyze and address the issues of cost to produce legal services, qualify and quantify firm risk, ascertain predictability in spend for clients? And do clients perceive the value of the services provided for the FA proposed? Herein lies opportunities for law firms.

Law firms will need to rise to a new level of operational proficiency to effectively price legal services. Some of the metrics to consider in our ascent: efficiency, client retention, legal market, collaboration, leverage. and ‘fiscal hygiene.’

Pricing and Process Improvement – Aye, That’s the Ticket!

While there is a rebirth of FAs and LPM, there is also more focus on efficiency now that law firms are working in a post-COVID virtual market. During the last recession, FAs and profitability could be hit or miss. This was attributed to a lack of formal structure or deep focus on pricing strategies other than going through firm historical data and trying to get in line with legal service budgeting. One of the benefits of working virtually has been the added perspective of being able to see inefficiencies or ‘waste’ in preparing/providing legal services that, in turn, can produce excessive and unnecessary costs that impact pricing and profitability. 

The knee-jerk for many law firms is to implement ‘quick fixes’ due to the urgency of delivering timely work product, and whether law firms realize it or not, they are diving headlong into a Process Improvement and management mode. Process Improvement is the added ticket that allows firms to consider HOW they are producing legal services and WHAT they can do to improve how they create and deliver value to the client.

Process Improvement is a systematic practice of analyzing workflows and the steps taken to produce the current outcome. Law firms analyze the steps searching for issues, problems, AND opportunities, which includes the review of data as noted above, and then solving those problems by creating opportunities that are then developed and implemented for a more improved and efficient workflow. LPM steps in so we can manage the new process for continued optimum performance. It is clear the relationship between urgency and arriving at innovation has created opportunities for law firms to make needed process changes that will benefit firms operationally, but even more so strategically, with improved processes for better pricing and maximum profitability.

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