Pricing Legal Services

Pricing, law firms, RFP, Client DevelopmentBefore responding to an RFP or a proposal for legal services outside of a formal bidding process, you must first assess the likelihood of winning. Lawyers usually have a good sense about their chances of succeeding in a bid process. If you have never succeeded in bidding for the prospective client’s work,  have never represented them, or have never made a concerted effort to marketing to this potential client, your chances of winning are slim.

Why then should a firm bid at all?

Why not just concentrate on current and prospective clients who are better bets?

To answer these questions, a firm must decide whether the impact of representing the seemingly out of reach client is material enough to warrant a long-term bid process. For example, responding to a an RFP in such a way that it shapes future RFP’s resulting in an advantage to your firm.

Before going for a strategic win, honestly assess the following factors:
• Your firm’s qualifications to excel at solving the client’s legal problems;
• Your firm’s demonstrable track record in the relevant practice areas or skill sets;
• Your firm’s relevant available capacity to dedicate to the client’s account;
• Whether you can offer a unique qualitative advantage to the client;
• Whether you can gvie a real price/cost advantage;
• Your plan for addressing your firm’s perceived weaknesses on the client’s part;
• How you can best remove any perceived risk on the part of the client associated with giving your firm an opportunity.

Carefully articulating each of these points may not win the business. But if the answers to these questions are compelling enough, it may spur a deeper evaluation of existing counsel and may inform future bids.

Many solicitations (RFP’s, formal bids, panel applications) require strict adherence to the form of the proposal or bid documents. These documents often favor incumbent firms for, no other reason than, prior experience with the prospective client’s cases.  Clients may try to compare submissions, making it difficult to evaluate and compare proposals that do not follow bid guidelines.

Enlightened clients may allow for alternate submissions in addition to the proforma bid or proposal response. In these instances, it is much easier to affect the bidding process strategically. Clients who allow additional alternate submissions suggest that they are open-minded to creative approaches and want to learn from their own processes.

Clients who do not solicit alternate responses may not appreciate a firm’s efforts to include an alternate proposal option. Just because they don’t ask, however, does not mean someone who can influence future decisions won’t read it.

Taking this down to a more practical level, you can apply these same concepts to smaller opportunities and clients, or clients that do not have a formal procurement process.  For example, if you have cultivated a great relationship with a prospective client, but your competition is strong and has a long-standing relationship with the desired client. Or if a client has a difficult time adding new law firms a list of approved counsel. In both cases, immediate success is not likely. However, if you can change the conversation to an innovative pricing strategy, a technological advantage, or a forward-thinking approach to the legal work, you may create an advantage for yourself.

Takeaways

Before bidding or proposing on new legal work, give an honest assessment of your firm’s chances of winning. If the existing process favors you firm, comply with the requirements of the bid and submit your proposal.

If winning the new work is determined to be a long shot,  comply with the proposal requirements, AND consider an alternate submission. An alternate approach is more likely to succeed if your firm can convey its real advantages that may create future opportunities.

Strategic approaches take time and often don’t pay off, but they are often the only chance a firm has to secure a prospective client’s work.


Pricing legal services is a complex and evolving topic. PerformLaw posts have recently covered the following points:

Please look for our future posts on the following topics:

  • Contract General Counsel services
  • Technological value adds to build client loyalty
  • Effectively communicating cost savings related to various billing approaches
  • The impact of pricing and cash flow considerations on pricing

law firm, flat fee, fixed price, alternative billingThe demand for value-based billing options presents law firms with opportunities to propose a flat fee approach for their legal services.  Law firms can improve their chances of success in developing this sort of approach with a full-featured model.  Larger firms may have the benefit of in-house pricing professionals, but smaller firms may need outside support. Regardless of who is supporting the data analysis process, a comprehensive approach is necessary.

We recommend building a model that contains the following features:

  1. An estimated hours distribution by timekeeper type for a typical case;

  2. A frequency component that allows the testing of several assumptions;

  3. Historical data for comparison to assumptions;

  4. Volume assumptions;

  5. Capacity analysis;

  6. Payroll and overhead cost per hour;

  7. Contributions to overhead and profit; and

  8. Before and after rate comparisons including a rate uplift feature.

  1. Estimated Hours Distribution

We suggest creating a chart with a vertical listing of all the elements of a typical case and a horizontal listing of either the assigned timekeepers or timekeeper types used in a typical matter.  Next, fill out the grid with the estimated timekeeper hours assuming that all cases run entire indicated the course to conclude.

Law_Firm_Flat_Fee_Approach

  1. Frequency Component

When determining price, law firms should also include a frequency component that estimates how often a particular element of a case may happen.  Estimating frequency is important since it introduces the element of risk into the model. For example, if a firm simply prices work based on the maximum estimated hours per case, clients will likely oppose the proposed price. With good data, experienced and skilled lawyers can more accurately assess the likelihood of certain events happening, resulting in more risk tolerance.

  1. Historical Data

In an optimal situation, firms can test assumptions based on real case data. An experienced firm can use historical case data to run scenarios to find opportunities to improve. This firm will have a pricing advantage. If a firm has no historical data, a client may offer some help or suggest using certain assumptions, but this is less than optimal. Another idea is to consult with a peer firm or colleague in another state or jurisdiction for insight.

  1. Volume Assumptions

Understanding the impact of volume on the firm’s cost per hour is important. Volume can temporarily reduce cost per hour. Eventually though, continued volume increases will encounter rising costs and declining profits. Alternatively, too little volume may also cause cost per hour to increase and profits to decline.

When compensation plans pay on gross fees and not contributed profit, additional issues arise. Developing a profitable pricing strategy requires a true comprehension of the impact of volume at an indicated price point.

  1. Capacity Analysis

Considering the firm’s available capacity is another component of pricing. A firm with a lot of available relevant capacity may choose to price more aggressively. The reverse is true for firms that have minimal capacity available. Firms should consider that not all hours are the same. For instance, a firm may bid more aggressively bid on a certain type of work if its potential is better than existing work.  Additionally, some firms may try to cure a work slow down with a short-term strategy of picking up filler work.

Here is an excerpt of a simple capacity analysis, which only indicates available capacity and does not consider skill set matches to the proposed work. We consider skill set matches separately.

Regardless of strategy, firms should carefully consider the impacts on available capacity in the short and long term.

Non-hourly fee arrangements can transform a firm for better or worse.

  1. Payroll and Overhead Cost Per Hour

Testing the impact of any new work on payroll and overhead cost per hour is an important element of creating a profitable non-hourly billing proposal. While predictability and simplicity of billing are attractive elements of non-hourly billing agreements, the burden of efficiency falls to the law firm.

Sophisticated clients will compare their ultimate cost of hourly and non-hourly billing agreements. While inefficient firms who bid too high may win in the short run, they eventually sacrifice the entire client relationship. Firms with efficient cost structures are better suited to non-hourly billing approaches.

  1. Contributions to Overhead and Profit

When building a pricing model, a firm must first identify the direct costs associated with any proposed work. Covering direct costs enables a contribution to overhead and profit. Many firms fall into the trap of believing that covering direct costs adds to profit. On the weakest of levels covering direct overhead helps, but firms that price this way have no future. Firm’s that do not account for overhead in their pricing models run the risk tying up their available capacity on unprofitable work, which can transform a firm for the worse.

  1. Before and After Rate Comparisons and Rate Uplift

Law firms sell solutions to legal problems. Solving legal problems takes time. Law firms have limited time to sell and should maximize the return on the time they expend. An hour is a common unit of measuring time and should inform a non-hourly billing analysis. Accounting, finance, economics, marketing, and good instincts all important tools in the pricing process.

Including a rate uplift feature in a pricing, analysis can help reverse engineer a process to achieve a targeted revenue. For example, a smart firm that sets a target rate for a particular type or piece of work can work backward through the process to find cost efficiencies, some which may add value on the client side. Consider the savings that come from eliminating bill audit or the value to the firm of stable and predictable cash flow. Smart firms look for value everywhere.

Takeaways

A simple, well-built pricing model can offer true insight into a firm’s ability to compete for non-hourly billing opportunities. In some instances, a creative billing approach can be the only the chance a firm has for securing desired work.

Invest the time in creating a pricing template for your firm. If the resources are not available in-house, look to the outside for support. Subscribed PerformLaw clients should know that these templates and services are available to them at no additional charge under most pricing plans.

Close enough may work in a game of horseshoes. Miss the mark by 5% – 10% in a pricing decision, and your firm may not get the work. Or worse,  you may win the bid and suffer the loss.


  Thinking about a non-hourly billing approach

or have a proposal opportunity?

PerformLaw can help. We offer basic templates, analysis support and pricing advice starting at $750.00.*

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* These templates and services are available to subscribed PerformLaw clients at no additional charge under most pricing plans.

 


 

As a result of increanon-hourly billing agreementssing client demands for efficiency and cost control, many law firms are considering ways to offer non-hourly fee pricing to clients.  Some of the friction causing some law firms to remain hesitant about implementing a non-hourly billing approach include:

    • An hourly culture and mentality;
    • Fear of losing money;
    • Fear of changing existing client relationships;
    • Administrative systems and procedures all built to support a billable hour practice;
    • Compensation systems that reward individual production as measured in hours;
    • Lack of pricing support and knowledge;
    • Fear that clients will not embrace a fixed fee approach; and
  • Philosophical differences.

Any one of these challenges is enough to sink a non-hourly billing initiative, and without client pressure, law firms are resistant to change.  How then can entrepreneurial lawyers pursue non-hourly billing approaches without running afoul of firm management?

Non-hourly billing approaches have existed in some practice areas for many years, but for firms who have never done them or applied them to a broader range of practice areas, the fee setting process is uncomfortable and sometimes beyond their internal capabilities.

Let’s discuss some of the more challenging aspects of moving beyond the billable hour for most defense firms.

An hourly culture and mentality

In most defense firms, hourly billing is the dominant billing method and has been for decades. If fact, many clients are increasing their investments in software and personnel to manage hourly billing agreements. The focus of many of these investments includes ensuring adherence to billing agreements and controlling legal expenses by evaluating costs at the task level.

Smart law firms have responded by improving their timekeeping systems, improving time descriptions, training lawyers to describe their time correctly, and adjusting cost structures to offset reduced realization rates. Some have gone as firm far has hiring outside bill review services.

The battle seems never ending and not likely to abate soon. Some lawyers, however, are actively searching for solutions that address client legal cost concerns while allowing for more professional judgment regarding the defense or prosecution of a client’s case.

Trying to mesh hourly billing and non-hourly billing cultures is difficult, but requiring time accounting across all billing agreements is a one way to at least ensure that an accurate comparison between approaches can occur.

Fear of losing money

In our experience, the definition of losing money can differ among law firms. Some consider a fully loaded (collected fees minus salary, benefits, and overhead) profit calculation, while others consider a gross margin approach (collections minus salaries, and benefits), and others only compare realized rates to a standard rate.

Defining profitability using an opportunity cost approach (comparing effective rate alternatives) is okay assuming the opportunity costs are real. Additionally, when using cost approaches to evaluating profitability, it is useful to consider any cost efficiencies related to a non-hourly billing method.

For example, the absence of billing and possibly collection costs (carrying costs and invoice follow up) can reduce overhead. Use of different levels of timekeepers at the firm’s discretion may also provide staffing efficiencies leading to lower payroll costs.

A quality cost accounting system can provide needed data for setting fee agreements. A comparison of actual costs to estimated staffing and overhead costs will enable a firm to refine pricing algorithms over a series of cases. Making these comparisons requires a different approach to time accounting. Instead of detailed time entries designed to pass billing muster, it is more important to track hours by task or phase of a case. For example, grouping all time by timekeeper and task within the discovery process can provide needed data for future fee estimates.

Law firms can mitigate the fear of losing money with a good pricing process, accurate cost accounting system, and a comprehensive data collection and reporting approach.

Fear of changing existing client relationships

The cliché “if it ain’t broke, don’t fix it” comes to mind when considering wholesale changes to the pricing model for an existing client. The problem is the many firms are in unprofitable relationships and do not realize it. Overcoming a firm’s resistance to running and detailed profitability analysis on a client is often very difficult. It is even more challenging when a client is large and when there are potential compensation implications.

Firm’s that have a well-developed profitability reporting system have an advantage. Partners in these law firms benefit from knowing how much profit they are risking when entering a non-hourly pricing discussion with a current client.  Even with this information, it’s hard to accept change. Many lawyers prefer cutting costs and increasing production requirements to changing billing models.

Firms that link compensation to profitability incent partners to improve results. Firms that combine rewards based on contributed profit with the freedom to take educated pricing risks can help their partners overcome this fear of change.

Administrative systems and procedures all built to support a billable hour practice

As with most people, administrative personnel can find change difficult. Imagine coming to work day and having to change many of the current systems, processes, and procedures. On top of all the daily pressures, who has time for an experimental change? As unappealing as such an administrative undertaking sounds, it is often necessary.

Lawyers who do not bill hourly, need different types of information and different reporting metrics. For example, a lawyer who is using a fixed fee pricing model would likely prefer metrics that indicate efficiency defined by who is completing tasks in the least amount of time. This lawyer may want base rewards on speed and accuracy instead of gross billable hours.

Administrative systems must adapt to the information needs of non-hourly billing practices. Compensation formulas, policies, and procedures must allow for the assignment of premiums and discounts on cases. Salary and bonus programs may need alteration.

Depending upon the actual billing method used, a firm’s workload distribution, and potentially different support needs, administrative systems and procedures built to support a billable hour model must change.

Firms that do not fully support differing billing methods run a risk of losing valuable partners to more accommodating competitors or even a new start-up.

Compensation systems that reward individual production as measured in hours

Perhaps the most significant obstacle for lawyers who want to move past billing hourly is a firm’s compensation system. Many firms reward for personal production defined in hours or timekeeper collections, origination collections, profitability, equity and other factors.

Firms that pay based on profitability have an easier time handling different billing methods. All that these firms need are policies regarding cost accounting and the assignment of any positives and negatives related to over and under realization.

Firms that consider billable hours, gross individual and origination collections may have a harder time compensating partners with different billing methods.  Resentments can surface when partners with low personal billable hours generate high profits and command high pay. Many lawyers are thoroughly ingrained in a billable hour mind set and will resist paying market pay to partners with low billable hours.

To overcome compensation challenges, we recommend that law firms shift to a system of paying based on contributed profits.

Lack of pricing support and knowledge

Pricing in most small and mid-sized firms is usually not a refined process. Most rates are set based on what the lawyers believe clients will pay. In some instances, our clients ask us for cost and profitability data. Overwhelmingly, these law firms request information about profit assuming certain hourly rates.

Typical questions include:

  • What is the lowest hourly rate we can accept and still make money?
  • If I staff a client’s account with a particular set of timekeepers, how much will I make?
  • A client has offered more volume in exchange for a discount; is it a good or bad deal?

Periodically, we encounter law practices with non-hourly billing methods. Plaintiff representation, collections, certain estates and trust work, and individual loan closings frequently billed at a fixed amount. Even in these well-established areas, however, pricing is either dictated by the market, statutorily set, or based on authoritative guidance and professional norms. The science, if there ever was any, was applied long ago.

It has been our experience that most law firms do not consider pricing as a professional discipline. Often it is thought as a financial concept only, which is a mistake and leaves out important strategic elements. This lack of pricing support and knowledge handicaps many firms and stalls efforts to move to a non-hourly billing approach.

Smart firms who are committed to a more informed pricing approach, even with their hourly clients, seek pricing support in the professional services market.

Fear that clients will only want the best elements of a non-hourly billing approach

The predisposition that many clients and lawyers have is that a non- hourly billing agreement will end in either the client or the lawyer winning or losing.  This mentality can make it hard to negotiate an appropriate legal fee.

Lawyers who are in demand and have experience setting legal fees can better communicate the value of their services.  Clients can assess the lawyer’s track record, consider the importance of their legal issue, and effectively lean on the market to set the price.

Alternatively, a sophisticated client experienced at setting fees can reassure less experienced (pricing) lawyer by referencing previous deals with their competition. In these instances, one party has experience, and one party does not. Reputable attorneys and clients understand that if they drive too hard of a bargain, it will harm the long-term relationship and potentially the result.

When both client and attorney have experience, the situation is optimal. When neither party has experience, failure is more likely. To address the higher likelihood of an adverse pricing agreement, we recommend negotiating safeguards. For example, a firm may set a price for the discovery phases of a litigation matter but convert to billing hourly if a case goes to trial.

Philosophical differences

The philosophical differences related to billing clients can make it difficult for firms to change billing methods. It has been my experience that lawyers who do not bill on an hourly basis resist keeping time records. In some instances, they may believe that recording time on client matters and setting future fees based on these time records is a way to mask hourly billing.

Further, they may feel pressure to cut the bill if they can achieve a result for a client in less time than anticipated. Fundamentally, many non-hourly lawyers price based on the result delivered and not the effort expended.

Others believe that keeping time may incent cutting corners when the hours reach a certain level. Finally, the evaluation horizon for a non-hourly pricing agreement may include more than a single engagement, and trying to “make money” from each case can undercut an implied bargain.

Lawyers who are committed to an hourly billing model believe that it is fair for the client and themselves. These lawyers view pricing as a function of effort expended expressed in units (fractions of hours). Lawyers who bill hourly may believe that non-hourly fee agreements are acceptable for certain types of work, but are not a mainstream approach for all legal work.

When a lawyer’s value expressed as dollars per hour, it is tough to move away from hourly billing. Many clients are also conditioned to focus heavily on price per hour more that the total case cost or ultimate result.

For these reasons, it is just easier for many to stick to the billable hour method. Essentially, it is what most clients want, and it makes no sense to try to change billing approaches.

Regardless of philosophy, we believe that both (hourly and non-hourly) can work if the right data is available. Most defense firms are not good at setting non-hourly fees. Many of their systems, procedures, and rewards support hourly billing. Hourly firms tend to oversimplify the estimating process and lack the training and support to implement more efficient case handling approaches.

Combine all of this with a substantial amount of client hourly demand, and there are more reasons not to change billing methods than to try something different.

We believe that defense-oriented law firms should at least try non-hourly billing approaches in instances where a client relationship is not working economically. Clients on tight legal budgets may appreciate a legal billing agreement that saves them money by eliminating the combined cost (Client and Law Firm) of reviewing legal bills.