Finance: Fixed Ideas

Finance teams are transforming firms’ pricing models while remaining profitable, as budgets remain firmly on the client agenda

What are the main ways finance professionals can help their firms in an increasingly competitive and fragmented market?

Lindsay Beardsell
Lindsay Beardsell

Lindsay Beardsell, general counsel, SuperGroup: Speak to clients. Clients can tell firms what their competitors are doing to attract and retain clients. It is also important to be innovative. They should put themselves in the shoes of the client and really think about what the client wants and needs. Happy clients mean retention and retention means a reliable stream of revenue.

Andrew Merrick, chief financial officer, Irwin Mitchell: Finance professionals provide clarity in reporting financial performance and targets and work with both legal and non-legal support teams to ensure the business is operating efficiently, delivering the service clients want at a cost that remains competitive but enables the firm to make a fair profit.

Finance experts can deliver greater insight into the cost of delivery and profitability, ensure support teams are delivering a cost-effective service that enables legal teams to deliver great client service and ensure everyone has clear visibility of costs and budgets.

As the market changes and competition increases, all of these things will be vital for firms to compete effectively and remain strong financially.

Jason Powell, chief operating officer, Parabis Group: Finance professionals have a responsibility to help law firms think differently about their business models and how these models need to evolve to meet the challenges of changing external factors.

Traditional performance measures applied in the new world of assured outcome pricing will drive perverse behaviours that will place law firms at increasing risk of demise or inhibit their ability to compete.

Fundamentally, finance professionals should be helping firms understand what is core or not, what is genuinely value adding for their clients. Their entire investment thesis needs to focus on value add and the elimination of wasteful, non-value adding activities. At Parabis, we think of this as de-coupling, and finance professionals are central to this process. 

As margins inevitably become squeezed, other aspects of performance management become increasingly important to solvency, for example work-in-progress and debtor management. Finance professionals can lead the debate in terms of process, incentivisation and reporting changes required to support this new paradigm. 

What are the main challenges facing law firms’ finance teams when pricing
disaggregated work streams?

Jason Powell
Jason Powell

JP: The mechanics of pricing work where the production process has been de-coupled is relatively straightforward when based on a clear understanding of time and motion and supported by comprehensive and granular operational data.

However, these models do drive an additional layer of complexity not just in the pricing algorithm, which allots standard costings to different streams of work, but also in the tracking of actual performance to budget.

Law firms now possess (or are investing in) more sophisticated matter-recording systems which distinguish between levels of work as well as time involved – and thus the relevant charge.

Outside of the law these budget performance models are relatively commonplace, with established costing methodologies. For example, in the printing industry standard costing models and the tracking of performance through variance analysis has been around since 1913.

To what extent are you seeing a trend for professionals from outside the legal sector coming in to augment finance teams with specialist knowhow?

JP: This is a growing trend because many of the solutions to the problems faced in the legal sector have already been faced in other industries. We can drive real insight and perspective by augmenting finance professionals from other sectors with established law firm finance teams.

AM: A fully effective team in any industry will comprise a combination of experienced sector professionals supplemented by individuals who can bring alternative approaches from other industries. This is an increasing trend in the legal industry as the sector looks to upgrade its non-legal support functions in response to regulatory reform and increasing competitive pressures. 

Embracing skills from a wide range of sectors will promote new ideas and should lead to increased competitiveness in the sector through channels such as customer service, new e-commerce services, joined-up CRM, cost reduction, process efficiencies and reduced risk of mistakes. The end result will also be more time for lawyers to use their legal expertise working with clients.

A modern legal business needs a range of skills to thrive and people from outside the sector have a lot to offer in terms of ensuring we continue to deliver quality, competitive services to clients and will continue to look outside the sector for other skills when needed.

Irwin Mitchell was one of the first firms to become a legal disciplinary practice in 2010, one of the first to be an ABS and currently have three non-lawyers on the board of our holding company. We also have five further non-lawyer members of our equity structure and have promoted five non-lawyers to associate director status – which are partner-level positions – in the past three years, adding to the other non-lawyers who were already associate directors.

Where do parties on either side of the equation (in-house and private practice) see the right balance in terms of margin?

Andrew Merrick
Andrew Merrick

AM: Rather than a focus on margin per se, we are seeing a greater focus on fixed-price arrangements, established on the basis of discounted hourly rates. Clients want value. That does not necessarily mean cheaper, it means ensuring transparency of costs and giving them a great service they are happy to pay for, to come back to us and to tell their friends about us. 

However, we will still offer bespoke services too because that many clients want it and are prepared to pay for it if the service is good enough. Therefore, reputation and customer service will remain a critical component along with cost. 

JP: The margin question should be a function of technical expertise (of the lawyer or inputted into innovative processes) and risk share. For the foreseeable future, highly technical aspects of the law will continue to attract the highest hourly rates and therefore margins, as will new commercial models that share outcome risk between
each side. 

Low complexity, low-risk work will continue to be challenged in terms of margin, requiring scale to continue as a successful business model. 

LB: The relationships that work well are those where the client feels like they are getting value for money and the firm feels they are making a reasonable margin. There will always be some areas where the margin is expected to be lower (where there is a retainer for short verbal advice, for example) but where more is made on the work outside the retainer. There should be a holistic view of the relationship and the type of work and there should be complete honesty. I would want to know if the firm felt it was not making a reasonable profit, as this would ultimately result in the relationship deteriorating.

Has the hourly rate model finally died?

LB: There will always be a place for billing based on an hourly rate, but it is now limited to certain types of activity such as litigation and, even with these activities, law firms need to give their clients a degree of cost certainty by giving accurate cost estimates to allow effective budgeting. For most types of work, law firms are prepared to cap or fix fees as they understand that general counsel have to justify their expenditure and manage a budget.

The best relationships between a client and law firm are those where there is complete honesty and a recognition of the pressures on the other party. The ability to scope work carefully helps with this.

AM: I don’t think so. There is certainly an increasing trend of fixed-price arrangements in business legal service work, which is something we have seen in personal legal services for some time. The experience we have gained from fixed-price operations in personal legal services is invaluable. But this does not mean the end of a bespoke service and hourly rate work will continue to have its place in some areas. We believe the legal businesses that will do best in the changing market are those that can offer both a competitive fixed-price service where clients want it and also more bespoke work for other clients. Our experience is that clients are still prepared to pay for bespoke services if the service is good enough and we intend to carry on offering our clients a range of services and price models to meet their needs. 

JP: Absolutely not, but we see hourly rates increasingly as just one of a number of options available as we move forward. The days of one-size-fits-all charges are over. New models such as fixed-price, risk-share, assured outcome pricing or a blend of these will become more prominent as clients and their law firms agree terms that deliver a good balance for all concerned of expertise, value and profit.