For decades, lawyers charged by the hour for their services. But times have changed, and law firm pricing is evolving.
In 2009, the major economic downturn affected many industries, including law. In response to a challenging economy, corporate clients expanded their efforts to negotiate reductions to the hourly rates of standing projects with outside firms. They also streamlined their engagements with law firms and turned more to in-house counsel.
Law firms now found themselves competing not just with one another but also with clients’ salaried lawyers. These lawyers also put more pressure on firms, as they began scrutinizing engagement pricing with an expert eye and holding firms more accountable.
Additionally, the Great Recession led to an increased client demand for greater value and transparency — a trend that persists today. Cost-conscious clients are no longer content with being billed on an hourly model. Instead, they want to know the costs upfront as well as their options on the service delivery model. As a result, most firms are exploring alternative fee arrangements (AFAs) that meet client needs for predictability while fulfilling firm objectives for profitability and growth.
According to Altman Weil’s Law Firms in Transition, 95.8% of law firms believe price competition is a permanent trend. To stay ahead of the competition, your firm will need to learn how to grab more of a client’s portfolio or win work away from other law firms. But to do that, your firm must first understand the changes in pricing trends and altering traditional billing models.
Falling realization rates
Engagements shouldn’t just meet client needs and expectations; they should also provide a level of profitability that support’s the firm’s strategy and bottom line. But that’s often easier said than done.
Realization rates are declining. The average firm’s billing realization rate has dropped 94% to 87% over the last decade, according to the 2016 Report on the State of the Legal Market from Peer Monitor. And a majority (60.3%) of respondents to Altman Weil’s Law Firms in Transition survey believe that this trend is likely to continue — and will likely lead to profitability dip.
Strategic law firm pricing can play a role in improving realization. When firms have strong insight into the true effort required to successfully deliver work effort, they’re better able to optimize resourcing, budget appropriately, and craft accurate estimates for their clients. This results in improved collection of billable time, better realization, and more profitability in their matters.
A technology-enabled approach to law firm pricing
Pricing services accurately and profitably can be tricky, but forward-looking firms are embracing a technology-based approach to meet this challenge. Firms can use AI-powered tools to mine and analyze their existing matter data, so they can derive accurate pricing strategies that deliver greater value to both clients and the business.
In addition to supporting your firm’s bottom line, a technology-based law firm pricing strategy can also help your firm operationalize and scale pricing across the entire life of an engagement. For example, your firm can monitor budget to actuals in real time and gain insight into potential cost overruns. Your firm can then proactively communicate with the client and avoid unexpected overages and relationship-damaging disputes.
Intapp offers technology built specifically for law firms like yours. Schedule a demo to learn how Intapp can improve law firm pricing and other operations.