The 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:
An estimated hours distribution by timekeeper type for a typical case;
A frequency component that allows the testing of several assumptions;
Historical data for comparison to assumptions;
Payroll and overhead cost per hour;
Contributions to overhead and profit; and
Before and after rate comparisons including a rate uplift feature.
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.
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.
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.
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.
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.
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.
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.
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.
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.*
* These templates and services are available to subscribed PerformLaw clients at no additional charge under most pricing plans.