The recently released Georgetown Law and Thomson Reuters 2018 Report on the State of the Legal Market paints a bleak financial picture for firms that remain wedded to business-as-usual strategies. For anyone who has been following legal market trends, this conclusion is not new; the pressure on firms to deliver greater efficiency, predictability, and cost-effectiveness has been intensifying over the past several years. The question is what concrete steps should firms take to be successful in this evolving legal market?
The 2018 Report’s analysis of static and dynamic firms provides some answers to this critical question. Dynamic firms are those that fall into the top quartile of performance based on growth in revenue per lawyer, total profit, and profit margin. Static firms fall into the bottom quartile.
The relative success of dynamic law firms is not a function of size, leverage, rate increases, or expense reductions. Instead, the dynamic firms are succeeding by taking a fresh approach to pricing and investing in technology that will help improve their efficiency, profitability, and data analytics. Below are three key takeaways from these firms’ winning strategies.
1. Focus on Communication, Not Discounts
Dynamic firms had substantially higher billing realization than static firms, meaning they discounted less and had fewer write-offs. They also collected their fees more quickly than static firms. The reason? Dynamic firms had better up-front communication with clients about costs.
These results reflect a fact that all lawyers know but are not enough are addressing: clients react poorly to bills they did not expect and do not understand. Firms can solve this communication gap by presenting pricing proposals that are well thought out and clearly scoped at the outset.
2. Embrace Alternative Fee Arrangements
The percentage of revenue derived from alternative fee arrangements (AFAs) was comparable for both static and dynamic firms. However, their approach to AFAs was very different. 75% of the dynamic firms actively pursued AFAs with their clients, while 70% of static firms only offered AFAs reactively, in response to client request.
Successful AFAs involve planning, project management and profitability analyses (which are hard and take time) as well as clear communication with clients about scope, staffing, and risk (which can be uncomfortable). It is no surprise that firms willing to tackle these challenges head-on are thriving, while those that take a less systematic approach to AFAs are not.
3. Invest in Technology
Responding to client needs requires strategic investment, and the dynamic firms’ increase in technology spending far outpaced that of static firms. Moreover, the dynamic firms’ technology investments are focused on increasing their workflow efficiency and enhancing their ability to analyze data and assess profitability.
Dynamic firms are rising to the top because they are willing to examine their processes, adopt new technology, and change their ways to better meet the demands of their clients. While this has been true for some time, the 2018 Report indicates that the pace of change is accelerating, and the divide between firms that “get it” and those that do not is widening.