What small law firms can learn from Clayton Utz about pricing, value and profitability
Julian Midwinter & Associates sat down with Clayton Utz’s Head of Pricing and Legal Project Management, Libby Maynard, to learn about the latest in best practice pricing for law firms. In particular, we discussed what smaller firms can do to improve pricing, value and profitability.
Price, value and project management are inextricably linked
JMA: What is the interaction between price and value?
Libby: You can't separate price from value. They are inextricably linked. If you look at the fair value line, which has price on one axis and perception of value on another, most firms will line up on the diagonal line.
If you are too far above the line on price, you will be perceived to be gouging and lose work, and if you are below the line, your brand will be impacted or clients will actually start to question your desired positioning.
JMA: And where does legal project management fit into it?
Libby: Legal project management, or efficient matter management, is another important intersection when considering price and value. Scoping, estimating and then delivering to an agreed scope are a big part of the value equation.
Clients want good legal and cost outcomes - and choice
JMA: What can firms do to satisfy their clients when it comes to pricing?
Libby: On a matter by matter basis, the firm needs to uncover the specific needs and objectives of their client, and then relate the solution to that need. If the connection is good (i.e. ‘I can solve that for you in exactly the way you want it’), there will be less of a question about price.
If the price is seen to be too high, then you haven't made the connection or you have misunderstood the brief, so you may need to re-scope.
The cost outcome is usually as important as the legal outcome. You must deliver on both.
JMA: How is Clayton Utz addressing this?
Libby: What we’re focussing on is being transparent and presenting several options, rather than just offering one option with a series of qualifications and assumptions. It’s about giving our clients a choice, and keeping them up to date if things change.
We’re trying to make sure that we proactively think about what a client is trying to achieve, and then put together the right series of options or choices aligned to that.
What pricing alternatives are firms actually using?
JMA: There’s a lot of talk about caps, collars, contingencies, success fees and other complicated alternatives – what are firms actually using?
Libby: Essentially, there aren’t that many options if viewed individually – it’s how you bundle them together that makes the difference. There is still a focus on hourly rates, because that is what people are used to. There is increasing demand for fixed or capped fees, volume discounts or tiered hourly rates, risk sharing, fee free periods, or a combination of all of these in the one transaction. Most of these rely upon hourly rate as the basis of the calculation, so it is still essential to ensure that your hourly rates are set appropriately.
How to determine appropriate pricing
JMA: Every other week, it seems consultants are pronouncing the death of the billable hour – so how can firms work out appropriate pricing?
Libby: A good starting point is to accurately scope and estimate work. The basis of any project plan is knowing what effort is required to do the piece of work – what level of resource are you going to use? How many hours is it going to take?
To know if your plan is accurate, you need to record how long it actually takes to do the work. When you analyse that, it makes your scoping and estimating more accurate the next time.
Looking at past matters to understand what was done and how it was done will inform the next similar matter. It's worth spending time looking at those matters to see how close you came to delivering on your estimate.
Your estimate won't always be your price. You may need to build in a contingency for taking the risk of a capped fee, or to allow for things you can't predict with certainty. On the other hand, there might be efficiencies you can pass on to a client because you have done the same thing for them before. Or you might agree to do certain pieces of work at a lower price or rate for strategic reasons.
The way you price is not always about scoping and estimating – but it is the best way to build your plan, and you know the cost of producing that outcome.
JMA: So firms still have to time record?
Libby: Time recording is not going anywhere anytime soon. Most firms, in my view, will continue to use time recording, and they will shadow record even if they don’t show that to the client – although clients often still want to see it.
Increasingly, clients are seeking to direct how much time different lawyers should spend working on something. It then comes down to a discussion about outcomes and risk.
Where should small firms start?
JMA: What about small firms that don’t have a dedicated pricing specialist role – what do you recommend they do to make a positive impact?
Libby: To quote Richard Burcher, you need to look at governance, analytics and execution. That is, look at how you make pricing decisions, look at the underlying numbers and the impact of your decisions on profitability, and then put it all into action.
I would start with understanding the cost of production. A number of firms I have worked with don't understand what their cost of production is. They need to work out what it costs to run certain matters, particularly where they’re doing smaller matters at fixed or capped prices.
As well as knowing what it costs to do the work, firms need to assess if it’s actually profitable. They need to understand, on an hourly basis, what their labour costs are, and what their allocated overheads are. And they need to test that on a few matters.
At the beginning of a matter, I recommend determining what people and other resources are required, how many hours it’s going to take to do the work, and how you are going to price it. You can then assess the profit or return against the desired profit outcomes for the business. A simple spreadsheet will do the trick.
If you haven't done this before, go back and analyse a few matters that you’ve already done to see if you’re making any money.
I also recommend having a clear mechanism for making pricing decisions based upon the analysis you do. As a firm, it is just as necessary to ensure a reasonable and competitive return for your partners as it is for your clients. This needs to be led from top.
JMA: And what if firms don’t embrace project management, pricing alternatives and value?
Libby: I think that, over time, they will not deliver value to their clients and they will not capture a share of that value themselves – in short, the business will not be sustainable.
So, there you have it from the expert – some simple ideas to help your small firm think and act on pricing, profitability, and alternatives. And if you don’t have a consultant or a dedicated in-house resource to advise you, you can get more insights and practical advice from our recommended reading list.
Recommended further reading
Pam Woldow, Legal Project Management in One Hour for Lawyers, American Bar Association, 2014.
Susan Lambreth, The Power of Legal Project Management: A Practical Handbook, ABA Book Publishing, 2014.
Free online articles
Amy Burton-Bradley, Julian Midwinter & Associates, Scoping work simply (blog post)
Jim Hassett (US based legal project management consultant) – many free articles and a helpful blog
Richard Burcher – tips and articles on his blog