Most principals of legal firms are more price sensitive than their clients. You might say, “Rubbish”, but when I say to firms, “Increase your charge rates by 15%”, their first reaction is, “The clients won’t stand for that”. For starters, what you provide to your clients is a solution that they are not able to address themselves. The solution is based on conflict, which is either a current conflict, or taking an action to reduce the future risk of conflict.
What is this worth to the client? Only they can answer this, you really have no idea. After all, it’s the client’s perception of the importance or value of an outcome that they will align your fees to. The greater the importance to the client, the higher the value. The higher the value, the greater their perception of the return on their investment with you to achieve their desired outcome.
If you have a matter that has 45 hours to bill at an average rate of $300 per hour, your fee will be $13,500. If the average rate was increase by 15% to $345, your fee would be $15,525. If the outcome you produce for your client saved them $200,000, do you really think that $2,025 will matter to the client? If you are only saving them $25,000, then the extra $2,025 won’t be an issue, but the $13,500 might be.
Professional services produce outcomes for clients’, that only the client can value. However, when prices are determined, they are often discounted. This happens in a number of ways for legal firms:
1. Charge-rates are too low
2. Time is entered into WIP which means it can’t be billed
3. Time in WIP is written off
4. Time in WIP is all that is charged, irrespective of the outcome for the client
I call this discounting. It’s the same as going into a store to buy a shirt that is on sale. If your perception of the value of the solutions you provide to your clients is too low, then so will your fees be too low.
Your revenue is impacted by 2 things: Price & Volume. Generally, the lower the price the greater the volume required to achieve your revenue targets. Conversely, the higher the price, the lower the volume required to achieve your revenue targets. For manufacturing firms, or retailers, cost efficiency gains can be achieved by higher volumes produced, or lower quality raw materials, or by buying cheaper products. These cost savings can be passed onto customers, which will result in lower prices. The inputs for a legal firm are different. Whilst you can systemise your processes, there isn’t significant cost reductions to be made in your inputs to produce your legal services. Your inputs are your fee-earner labour costs. Sure, you can be efficient and keep your labour costs at a minimum, but it is very difficult to achieve economies of scale for the typical 1 – 3 principal firm by labour savings.
For a firm that is running at a 60% Gross Profit (revenue minus fee earner labour costs), just by maintaining the same labour cost structure you could achieve the same Gross Profit $ amount by increasing price by 15% and reducing your volume (number of matters) by 14%. Conversely, if you keep the same cost structure and you reduced your price by 15%, then you need to increase your volume by 20% to achieve the same Gross Profit $ amount.
I don’t know about you, but I’d prefer to do less work for more money, than the other way around.
Make sure you understand the price/volume relationship in your firm, then work out your strategy to improve your Gross Profit.