At FMRC we have been collecting benchmarking data for over 25 years via the Legal Business Monitor. During this time, we’ve identified two underlying trends in the legal profession with relation to profitability. This blog series will present those trends and outline three indicators your firm can manage to stay ahead of the game.

The first trend is an increased polarisation between profitable and stagnant firms.  Despite similar operating environments, successful firms are more easily building on their successes, while struggling practices are working harder and harder for diminishing rewards.

The second is an increasing reliance on price. Firms are depending on regular fee hikes to grow or maintain profitability – a strategy that leaves you vulnerable to price-based competition.

These two trends are compounded by external pressures such as further commoditisation of legal services and increased competition, particularly among smaller practices.

To ensure profitability, firms need to understand and manage a number of key performance indicators (KPI). We’re going to cover three primary KPIs in this blog series. They are:

For updates on this series you can subscribe to FilePro’s newsletter, Growing Together.

Part 2: Pricing Measures

There are a few issues in the delivery of legal services that have gained as much media attention as the pricing of legal services.

There is little uniformity in the Australian legal profession when determining and setting rates. In most instances, it is driven by the partners’ ability to sell value – irrespective of an hourly rate. This introduces a personal nature to hourly rate pricing.

As a result, we have seen principals in country towns charging $400 per hour without discounting, whilst some of their peers in mid-size CBD practices are agonising over their capacity to get close to this.

When it comes to the mechanic of price, lawyers have several options. Time-based pricing is relatively straightforward, while fixed-fee pricing and value billing are more complex. Given the importance of price in profitability, successful firms are at the leading edge in terms of rates – both hourly and fixed.

Cost of production

In successful firms, the cost of production underpins all pricing decisions – be they hourly rate or fixed fee. These firms know that each practice group will have a different cost of production based on how the practice is structured, the salaries paid, the overheads consumed and the level of utilisation of fee earners.

It is important to understand that cost of production attaches itself to an individual not an activity. In an increasingly cost-conscious market there are significant gains to be made by structuring your practice and staffing your matters so as to reduce the overall cost of production.

A key component in determining cost of production is time recording. The cost of delivering legal services is hourly driven, regardless of how those services are then priced. It is not surprising that the best performing practices are diligent about time recording – as both a management tool and pricing methodology.

Realisation

Realisation involves turning activity into cash and refers to the percentage of work-in-progress on matters that is invoiced to clients. Recent benchmarking showed that realisation for many firms was decreasing and WIP write offs were on the rise.  Some firms had partners and solicitors writing off more than 25% of their WIP for a realisation of only 75%. High-performing firms usually have realisation in the range of 89% to 93%.

In a busy practice one would not expect reduced realisation – however quite the opposite occurs. Our benchmarks indicate poor realisation in busy and slow firms alike. Low realisation is usually a combination of:

• Poor pricing for fixed fee matters
• Inappropriate structure of practice groups
• Firms submitting low-ball pricing to secure tenders
• Poor training of juniors
• Junior lawyers doing work that cannot be charged
• Failing to set and meet client expectation

These factors can contribute to what may become a ‘culture of write downs’ where principals unthinkingly write off significant amounts of WIP to meet their perception of value.

Next steps

Implementing change within a law firm is notoriously difficult. You may already be aware of such capacity and pricing measures, however lack the information or proof to carry out improvements.

Reaching agreement on the changes required to improve your firm will be made simpler if you can educate your staff and peers by demonstrating the benefits of change.

Benchmarking can calculate the KPIs of your firm (such as pricing measures) and assess your performance against appropriate targets. There are a number of KPIs you can measure against, as covered in this blog series:

By using benchmarks to understand the gaps in your firm, you can readily identify where to focus your efforts to improve performance – leading to increased profit optimisation and a financially robust practice.

For updates on this series you can subscribe to FilePro’s newsletter, Growing Together.

About FMRC

FMRC is a specialist consultancy firm providing research, training and management advice to law firms. To measure the performance of your firm and improve your profitability visit www.legalbenchmarking.com.au

Your subscription provides you with access to the following law-firm performance tools throughout the financial year:

• An instant comprehensive report highlighting factors impacting performance
• The ability to select benchmarks appropriate for your firm
• Excel export for you to tailor your own graphs and reports
• Comprehensive salary and charge rate application assess salaries, budgets, productivity and charge rates for all personnel by years experience
• Scenario modelling to conduct ‘what if’ analysis on your firm – an ideal training tool for partners and lawyers
• A web teleconference with FMRC consultants to discuss your survey results and appropriate strategies