Although the impact of the pandemic varied across law firms and clients, there was a positive recognition that the fundamentals of good pricing were still required, economic downturn or not
As a raft of recent legal news stories testify, 2020 was nowhere as cataclysmic to the legal industry as feared — indeed, the opposite being true for many law firms that saw above average revenue growth of 5%.
In this four-piece Special Edition of Practice Innovations, we’ll examine the challenges as the legal industry emerges from the pandemic crisis
So, what did those firms do “right” and where is the opportunity to improve when it comes to the pricing of legal services? To help us frame our journey, we took a step back to reflect on our respective experiences over the last year and engage with our peers and colleagues from the Legal Value Network. Then, we used as our basis the six key steps we originally outlined near the start of the pandemic.
2 things law firms did very well
Law firms proactively sought to help their clients, something that was less evident during the global financial crisis when some law firms were afraid of what their clients might request.
During the global pandemic, the proactive help was achieved through a combination of empathy and having open conversations about how firms could support their clients (both at a business and individual level). This took time and effort — it is much easier to either agree or refuse a client request.
Often these discussions led to a review of key pain points that some clients were facing, which in turn leads to reviewing ongoing work, reprioritizing and possibly implementing different payment terms or time-bound fee concessions.
Finally, many firms adjusted their fee structures with their clients in an effort to share risk or provide greater predictability. In fact, one Am Law100 law firm noted that adopting this three-fold approach of communication, review, and fee adjustment proved successful, which was echoed by many firms to which we spoke.
Better, more intentional pricing governance was evident during the crisis. For those law firms that had structures in place, pricing changes were reviewed and tailored. For those that had none, swift improvements were applied, and a more formalized approach took shape.
A key lesson learned from s the global financial crisis was to ensure that any rate discount applied during the pandemic was both temporary and conditional. Few firms did this during the financial crisis, but those that did were in a better position as the crisis ended. Terminology was also important during the current crisis, with any discounts being referred to by many law firms as “temporary fee relief” or something similar, rather than a discount on fees. This terminology allowed firms to reset agreed rates after a defined period, a stark contrast from the discounts that were agreed to by many firms a decade ago, many of which continue in place to this day.
Again, this took effort on the part of law firms and meant spending time with partners and attorneys to help improve adoption of agreed governance. As Eugenia Frenzel, Director of Pricing & Practice Management Economics at Perkins Coie, observed: “We docketed discount expiration dates and coached our partners on having end-of-the-timeframe conversations and a process for granting extensions.”
There were adjustments on the client side as well. One legal operations leader noted that the pandemic made price transparency and predictability more important than ever. For some clients, agreed volume discount structures were creating complications when managing hourly budgets as the potential discount value varied significantly throughout the year.
Given this, some worked to remove previously agreed-upon volume discount structures to allow their in-house lawyers to have greater certainty around how their legal spend accrued throughout the course of hourly matters. This also allowed their legal teams to more proactively and effectively understand and manage budgets and adjust direction as necessary.
2 things law firms did relatively well
Having a greater focus on fiscal hygiene
Unsurprisingly, many law firms also took the opportunity of the pandemic to improve fiscal hygiene internally, with much greater scrutiny of cashflow.
This manifested itself in quicker time-recording, more regular interim billing (either by phase or work- or time-period), and a heightened focus on collection efforts (in part, mitigating the end-of-year scramble to collect.) Indeed, this push for fiscal hygiene has been supported by a related focus on minimizing expenses.
Like many of the changes we saw implemented over the past year, the potential for long-term gain is significant. Firms should commit to making these improved processes part of their ongoing day-to-day operations.
Reviewing & selectively increasing rates
Here we observed two distinct camps — those firms that were fortunate enough to have increased their rates prior to the onset of the pandemic, and those that were caught slap bang in the middle of it.
Multiple surveys highlighted that the Am Law100 firms had their biggest rate increase in a decade (at around 5% to 6%, on average), with a high number of other firms not far behind, although many had implemented rate increases as of January 2020. In the U.K., increases were typically more muted at 3.7%, reflective of their later rate review cycle, which often occurred in either May or July. A positive development here is that many firms were willing to have the appropriate rate conversation with their clients.
Encouragingly, we also witnessed a greater willingness of many law firms to review their current client pricing and begin to proactively differentiate their rates in recognition that not everything either costs or is worth the same. This was especially true in cases in which practice areas were extremely busy, therefore allowing firms to proactively manage the allocation of scarce internal resources. Even these smaller increases made a tangible difference to firms’ bottom lines.
2 things still on law firms’ to-do list
Of the six steps outlined early in the pandemic, there are still two that remain on many law firms’ “to-do” list:
Segmenting clients based on likely pricing behavior
While many law firms have implemented a client segmentation program based on themes such as client revenue or industry sector, very few have undertaken a pricing segmentation program.
Segmenting clients based on their likely pricing behaviors allows firms to be prepared with already crafted pricing approaches prior to the inevitable client request. Firms can then proactively identify ways to both help clients while mitigating any potential impact to the bottom line. In our conversations, we know of only one firm that conducted an intentional pricing segmentation exercise during the crisis, allowing the firm to successfully tailor pricing approaches across its client portfolio.
Reviewing & adapting practice group pricing
Very few firms we spoke to actually took the time to refine and establish practice group-specific pricing strategies during the period of the pandemic and beyond. This is a strategy that is worth the effort and encourages greater consistency of approach, messaging, and management of firm investment.
Such pricing strategy is relevant for both those practice areas that flourished during the crisis and those that felt more pressure. Encouraging more frequent discussion of pricing themes as part of your firm’s practice group meetings can be a simple, but strong, start.
In closing, there were many positive strides taken by many law firms during the pandemic towards better pricing behavior, but there is still work to do. The challenges thrust upon law firms last year re-emphasized the value of pricing, legal project management, and on-going proactive engagement with clients.
Whatever the future holds, law firm retention of these practice methods will be crucial to firm success now that the darkest days of the pandemic have ebbed in the U.S. and other parts of the world.