In our ongoing blog series, Fred Esposito, of Rivkin Radler, discusses the advantages of leveraging process improvement to enhance a law firm's pricing function
In a new series of blog posts, we discuss process improvement with Fred Esposito, COO of the regional law firm Rivkin Radler. Previously, we spoke to Esposito about the rise of process improvement throughout the legal industry and how process improvement can transform law firms’ client in-take methods. In this post, we discuss the impact process improvement could have on a law firm’s pricing function.
Thomson Reuters Institute: We increasingly hear about clients being in the driver’s seat these days, holding the power to make demands and elicit concessions from their law firms, especially in areas of pricing. Do you think that is true, and more importantly, does process improvement offer law firms a tool to combat this?
Fred Esposito: Clients are in the driver seat, and law firms need to have a better handle on what clients value as well as the economics of their own firms as well. Most firms do not have a clear grasp about how much it costs to perform and deliver their legal work.
With the rise of procurement and legal operations professionals in client companies as well as pricing and knowledge management professionals in law firms, the days of producing an approximate value of a matter based solely on experience are long gone. The focus is no longer on what rates to charge, but how much is it costing the firm to produce the requested legal services. This question opens the door to many components and related processes which may or may not be contributing to an efficient work product.
Firms should be looking at all critical legal and business processes, which means starting with a way to surface, select, prioritize, and resource process improvement projects that are related to pricing.
In fact, you often can see the economic perception of some law firms and their lack of understanding of their own cost process on display. During speaking engagements, for example, I will often ask a room full of legal executives, if they know how much it costs their lawyers to produce one billable hour. Do they know that cost per hour by practice area or task? Regrettably, few hands go up — sometimes just three to five hands in a room of 100 executives. Consequently, many firms have dipped their toes into the fee arrangement pool and for lack of better terms, drowned in the process.
The good news, however, is that law firms are learning from the mistakes of the past, listening to clients, feeling some positive peer pressure, and paying closer attention to the numbers. A significant benefit of this is that process changes will be accepted.
Thomson Reuters Institute: Is this a problem that solely comes from the law firm side?
Fred Esposito: No, because in all fairness, some clients may be unreasonable in their requests for specific fee arrangements; but there are one of two ways to manage those situations. One, the firm can turn the existing or potential client away because the firm will not or cannot be that flexible; or, two, the firm can rely on its economics and produce various pricing scenarios that might fit better with the client. This would be the desired course of action.
Unfortunately, many law firms do not take the time to understand how and why their pricing works the way it does or does not. Firms should be looking at all critical legal and business processes, which means starting with a way to surface, select, prioritize, and resource process improvement projects that are related to pricing.
One easy thing to do to is to review operations and productivity data to see where the law firm can improve in pricing. For example, see where there are write-offs and write-downs, or simply ask employees and clients about pain points and improvement opportunities.
The result will be a streamlined and efficient process that will reduce and/or make more predictable the costs to produce legal services while generating profit. Thus, all this allows the firm more flexibility in their proposed fee arrangements.
Thomson Reuters Institute: How can process improvement transform the pricing function from there?
Fred Esposito: The goal is to create efficient processes that positively impact the bottom-line without sacrificing quality and while improving client and employee experiences. Firms need to have the right amount and type of data which can provide the details for how much time a task should take and at which attorney level it should be done.
This is further complemented by firm financial data surrounding operations and productivity. In short, law firms need to ascertain how much it costs them to produce a billable hour, by attorney and by practice area. Again, it is not about rates, it is about the amount of time being spent to produce the work. Deeper dives into the how the work is currently produced will be the playing field for a process improvement initiative.
Law firms must first understand how a current process is working to order to identify where improvements can be introduced. This is best accomplished by defining how the current process is working and measure and analyze the data produced.
Law firms cannot improve efficiency and create that added value unless they understand the issues that are keeping them from reaching that optimum performance. Law firms that can strike that balance will differentiate themselves from their competitors in developing business. Once a law firm is conversant with their economics, pricing becomes more predictable and profitable. Also, an inherent flexibility in what the law firm can do with pricing becomes more apparent, and more importantly, more innovative.
Thomson Reuters Institute: So, would process improvement support that better understanding of the pricing function?
Fred Esposito: Well, pricing is, in and of itself, a process that can be improved. The key takeaway is that law firms are getting the message from their clients and working harder to develop smart pricing that produces a win-win. They are also getting better at client, project, matter/case, knowledge, and budget management. Overall, they are making strides to pricing and managing their legal services.
Yet, pricing has always been viewed as a financial component; however, with streamlined processes that promote cost reduction, efficiency, and client value, it can be a significant stepping-stone for taking the client relationship to a whole new level of strategic growth. It is not just about finance; it is about building relationships with innovative and competitive advantage.
The success of this process is attributed to firms’ ability to align the needs — or the voice — of the client and their own need to provide efficient legal services while generating a profit, delivering higher quality work product and service, and providing a better employee experience, too. Taking it a step further, law firms that are successful in this area are using this work to gain competitive advantages in their marketing and business development efforts.
Using process improvement for pricing is important not only for profitability and delivering what clients want, it is quickly becoming “table stakes” for law firms that want to remain or become competitive in today’s marketplace.
Next, we’ll look at what the future holds for process improvement and the firms that pursue it.