Page 132 - 2019 - Leaders in Legal Business (q)
P. 132
Rates are a Profit Driver
Although this is obvious, the point still needs to be made: Billing rates remain the core
pricing structure used in the legal industry, and the level of a firm’s rates is key in determining its
level of profitability. As a rule of thumb, a one-point increase in rates leads to a two-point increase
in profit. The reverse applies as well. In our experience, firms typically have a range of 1 – 3
percent increase in profit for each point of rate change. The range exists because it depends on the
specific timekeepers involved, and the relationship between the billing rates and the timekeepers’
cost rates.
Discounts happen when clients tell us our prices are too high for particular pieces of work.
Specifically, write-downs are reductions from a bill before it goes to the client, and write-offs are
reductions requested by the client after they have seen the bill. Write-downs signal that the firm or
a partner has decided that a particular effort had no value. Examples of write-downs include:
• The work is out of scope, and the partner knows the client will not pay for it.
• The associate was inefficient in their work.
• The associate did not understand the assignment and did the wrong thing.
Write-downs become important as firms look for ways to lower the cost of delivering a
service. By identifying recurring types of write-downs and eliminating the effort before the work
is performed, a firm can lower the cost of the service.
Write-offs signal that the client did not see value in a particular effort. This may occur
because the firm did not communicate the value of the effort properly, or it may just be that the
work should not have been done. Note that, in some cases, write-offs are just good old-fashioned
flaky clients who don’t pay their bills (a cost of doing business).
Citi Private Bank Law Firm Group recently reported revenue growth has fallen to 3.6
percent throughout 2017, down from 3.7 percent in 2016. Oddly, this is almost entirely in response
to increased billing rates — an increase of 4 percent, to be exact. While the difference is marginal,
when you consider that the 4 percent increase is much greater than normal, that demand has
dropped by 0.2 percent, and that collection cycles are lengthening — it illustrates that raising rates
is not a good long-term strategy.
Firms need to adjust their pricing and pricing strategies in response to the market. The
challenge is for firms to understand and adequately address the many moving parts of pricing in
today’s market and reflect the actual cost of their matter delivery. This requires technology to
harness data.
Beyond the Billable Hour
So, how do firms now need to price? First, there are two classifications of fee types: hourly
and non-hourly. The hourly fee types are those that are still based on per-hour rates. Non-hourly
fees have no billable rate and are set using many different criteria. The table below lists the most
typical fee types.
Fee Type Definition
Hourly – Standard Client agrees to pay hourly
Hourly – Fee Cap Client agrees to pay hourly up to a certain amount for the matter or phase
117
Although this is obvious, the point still needs to be made: Billing rates remain the core
pricing structure used in the legal industry, and the level of a firm’s rates is key in determining its
level of profitability. As a rule of thumb, a one-point increase in rates leads to a two-point increase
in profit. The reverse applies as well. In our experience, firms typically have a range of 1 – 3
percent increase in profit for each point of rate change. The range exists because it depends on the
specific timekeepers involved, and the relationship between the billing rates and the timekeepers’
cost rates.
Discounts happen when clients tell us our prices are too high for particular pieces of work.
Specifically, write-downs are reductions from a bill before it goes to the client, and write-offs are
reductions requested by the client after they have seen the bill. Write-downs signal that the firm or
a partner has decided that a particular effort had no value. Examples of write-downs include:
• The work is out of scope, and the partner knows the client will not pay for it.
• The associate was inefficient in their work.
• The associate did not understand the assignment and did the wrong thing.
Write-downs become important as firms look for ways to lower the cost of delivering a
service. By identifying recurring types of write-downs and eliminating the effort before the work
is performed, a firm can lower the cost of the service.
Write-offs signal that the client did not see value in a particular effort. This may occur
because the firm did not communicate the value of the effort properly, or it may just be that the
work should not have been done. Note that, in some cases, write-offs are just good old-fashioned
flaky clients who don’t pay their bills (a cost of doing business).
Citi Private Bank Law Firm Group recently reported revenue growth has fallen to 3.6
percent throughout 2017, down from 3.7 percent in 2016. Oddly, this is almost entirely in response
to increased billing rates — an increase of 4 percent, to be exact. While the difference is marginal,
when you consider that the 4 percent increase is much greater than normal, that demand has
dropped by 0.2 percent, and that collection cycles are lengthening — it illustrates that raising rates
is not a good long-term strategy.
Firms need to adjust their pricing and pricing strategies in response to the market. The
challenge is for firms to understand and adequately address the many moving parts of pricing in
today’s market and reflect the actual cost of their matter delivery. This requires technology to
harness data.
Beyond the Billable Hour
So, how do firms now need to price? First, there are two classifications of fee types: hourly
and non-hourly. The hourly fee types are those that are still based on per-hour rates. Non-hourly
fees have no billable rate and are set using many different criteria. The table below lists the most
typical fee types.
Fee Type Definition
Hourly – Standard Client agrees to pay hourly
Hourly – Fee Cap Client agrees to pay hourly up to a certain amount for the matter or phase
117
