Make More Rain : compensation, pricing

RainToday Report: 76% of Law Firms Discount Fees

Admin — Fri, 06 Jun 2008 07:00:32 GMT

Pricing has been a frequent topic at More Partner Income. Some past topics include the science behind pricing, the ill effects of inflation on pricing, pricing management, and discounting.

RainToday has recently released the Fees & Pricing Benchmark Report: Law Firm & Legal Services Industry 2008. David Maister wrote a blog post on a similar report released by RainToday focused on the consulting industry on April 28th. There were some striking similarities between the two reports:

65% of consulting firms reported they discounted fees. 76% of law firms reported discounting fees;
Average discount of responding consulting firms was 11.7%. Average discount of responding law firms was 9.9%.

Of the two pre-bill adjustments (mark downs and discounts), discounting is the most difficult to change. Both show weakness in the firm, but discounting creates a feeling of entitlement from clients. How?

Marking down time tells your client one of several things (the below is not exhaustive):

I spent more time than I can reasonably charge you for the service provided: ie, I am not efficiently working the matter;
My associates spent more time that I can reasonably charge you for the service provided: ie, my firm has less competent attorneys working on your case or I have inefficient staff working on your case;
Even though I spent an adequate amount of time on this, it "seems" too high to me: ie, I am unclear on the value of my service.

All of the above are correctable. They are entry-specific adjustments that can be seen as temporary.

On the other hand, discounts are typically applied to the entire bill. This gives rise to expectations of entitilement. They can tell your clients one very negative thing: I am overcharging you up front and adjusting it on the back-end.

Just as discussed on this site in the post Discounting At Law Firms, the RainToday report suggests that there may be valid reasons to discount, but only when the discount is intentional, strategic, and, ultimately, mutually beneficial to you and your client.

Some reasons to discount given in the report include well-funded start-up clients (in expectation of long-term payoffs) and absorbing the cost of training new associates. It is also something to consider when trying to win RFPs, in exchange for quick payment of invoices or in return for a threshold amount of work that the client will provide to the firm.

The important part of discounting is that it is mutually beneficial to you and your client - there needs to be consideration for the discount. It needs to be binding so that if the client does not perform on their end, the discount doesn't get applied. If there isn't quid pro quo, you are giving a clear message to your client that you overcharge up front - and that your rates are open to negotiation.

The Science Behind Pricing

Admin — Tue, 22 Apr 2008 07:00:25 GMT

The April 2008 Scientific American contains an article titled Why Things Cost $19.95: What Are The Psychological "Rules" Of Bartering? (hat tip: Matthew Homann, in his blog the [non]billable hour). The article explains the effects that initial pricing has on a potential buyer based on a series of tests. The results found:

people appear to create mental measuring sticks that run in increments away from any opening bid, and the size of the increments depends on the opening bid. That is, if we see a $20 toaster, we might wonder whether it is worth $19 or $18 or $21; we are thinking in round numbers. But if the starting point is $19.95, the mental measuring stick would look different. We might still think it is wrongly priced, but in our minds we are thinking about nickels and dimes instead of dollars, so a fair comeback might be $19.75 or $19.50.

The authors of the tests then looked at five years of real estate sales in Florida to see the difference between the list price of real estate and the actual sales price.

They found that sellers who listed their homes more precisely—say $494,500 as opposed to $500,000—consistently got closer to their asking price. Put another way, buyers were less likely to negotiate the price down as far when they encountered a precise asking price. Furthermore, houses listed in round numbers lost more value if they sat on the market for a couple of months. So, bottom line: one way to deal with a buyer’s market may be to pick an exact list price to begin with.

Homann, in his post on the subject, took it a step further: Why not charge $297 per hour rather than $300 per hour? Then if a client wanted to negotiate, ostensibly the negotiations would be in single dollars rather than tens of dollars.

In the case of firms who are competing with other firms for business, this tactic may work well to secure a deal.

It may not work as well when clients are asking for a discount. Many times when it comes to discounting rates, clients look at percentage discounts of the whole bill rather than dollar discounts. Therefore taking a few dollars off the charge per hour may end up costing you a lot more than anticipated. Where it may work better is in flat fee or value-bill situations, where you are adjusting only the final price of the service.

So, if you have priced a certain task at $1,500, try advertising a price of $1,497.96. On top of making the client look at penny increments, it also makes it look like you have calculated the exact value of the service. Before making wholesale changes to your pricing, try on a specific area that may have a higher average of discounts (or lost potential clients due to pricing) than other areas. Track whether the change in pricing has an effect. If so, please feel free to post your results here.

Discounting At Law Firms

Admin — Wed, 09 Apr 2008 07:00:27 GMT

I received an email from Brendon Carr, foreign legal consultant and host of the Korea Law Blog, regarding a recent post of his, “I Don’t Care What You Charge; Whatever It Is, It’s 15% Too Much”. The post discusses a request from a new client for an across-the-board 15% discount for his services.

In my experience working with law firms, discounting is the most difficult thing to change. Where mark-downs to work performed can be addressed internally, discounting becomes an entitlement to a client. The only ways to recoup the loss in value is to increase rates at a higher percentage than other clients, pad your hours by billing for things you may otherwise not charge to a client, tie the discount to high volume, or tie the discount to fast payment of invoices The first two are not conducive to a positive trust relationship with the client.

In my opinion, discounting should be avoided at almost all costs - the exceptions being:

In return for high volume of business that compensates for the reduced value of your time. There is nothing shameful in requesting from a client who asks for a discount to provide estimates of business it will provide and tying the discount to their ability to provide that level of business. Then you can agree to the discount, but will provide it once the threshold business the client sends you is met.
In return for fast payment of invoices. This encourages fast payment and thus a positive effect on cash flow.

When in a situation such as that of Mr. Carr, several questions come to mind:

Is asking for a discount up front damaging to the relationship between attorney and client?
Does mandatory discounting encourage mark-up of hours?
If it becomes known that your firm discounts, does it create a perception by clients that your firm expects rate negotiation and thus overcharges for its services?

What do you think? Add a comment below to share your thoughts.

We have begun taking submissions for the 2008 Law Firm Economic Survey. If your firm is interested in participating, please contact Brian by clicking here.

Regular Client Communication Pays In Many Ways for Attorneys

Admin — Wed, 02 Jan 2008 14:00:00 GMT

According to the new Managing Outside Counsel Survey by ACC/Serengeti, inhouse corporate counsel are projecting a rate increase of 5.3% in 2008. That's the good news. The better news is that last year, they projected an increase of 4.8% but rates were actually increased 6.0%! This is in line with most firms who plan to increase rates (between 5 and 7%).

The reports were posted in a recent article in The Law Marketing Portal.

Other findings:

• Predominance of hourly rates – alternative billing fee arrangements (surprise!) aren’t taking hold with in-house counsel.
• Little client oversight – 75% of in-house counsel aren’t managing outside counsel.
• “Convergence” is going away – 75% of in house counsel aren’t consolidating the work to a few firms.
• Cutting fees is not the top client priority – No need to devalue work performed with mark-downs; Corporate clients are more concerned with Sarbanes/Oxley and high profile trials of corporate executives.
• Few corporate RFPs – 76% of in house counsel didn’t issue a Request for Proposal last year. A reason given was the poor rate of firms responding – there’s a lesson to be learned here . . .
• Spending on firms is up – this year on average, companies devoted 38% of their revenues on outside legal spending. Can we thank Sarbanes/ Oxley for that too??

The news isn't all good. Nearly half of in house counsel reported that they terminated relationships with outside counsel last year. Why?

• Failing to perform to client expectations.
• High costs (likely related to perceived value rather than rates considering what in house counsel expect).
• Poor work product or results.
• Poor Communication and personality issues.

What can you gain from this survey? There is nothing here you shouldn't already know and the complaints can apply equally with any client, not just inhouse counsel. There is likely a correlation with poor communications to the other complaints from a client. A client is more likely to complain about expectations, results, and costs if they aren't receiving adequate communications. To the extent you don't regularly update your clients, this survey is a reminder that clients place a premium (literally and figuratively) on communications. Make sure all the attorneys at your firm regularly update their clients on the status of their matters.

For more information on this survey, visit the Serengeti web site here.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

2008 Predictions

Admin — Mon, 31 Dec 2007 14:00:00 GMT

Some have New Years' resolutions. Others predict what may come in the new year. Though both are likely doomed to fail, I'd rather go with the one with a better chance of success: predictions. Here are mine for 2008:

1. The effects of the credit market "correction" will lead to a sharp rise in bankruptcies and foreclosures, giving work opportunities to attorneys who are looking for a new direction after the crash of the mortgage industry (though not everyone agrees). On the creditor side at least you may be working with some of the same clients.

2. Is it a merger or is it hiring a bunch of laterals? Whatever you want to call it, I predict an increase in these transactions in 2008, particularly from big law firm defections and small law firm attempts to expand practice areas. The shifting market will favor those firms who have a diverse practice - boutiques that specialize in the wrong practice areas will wish they had held more retained earnings.

3. Business Intelligence tools, sprouting at shows in 2007, will be a central feature showcased around trade shows. To the vendors who can make it the most relevant for firms who don't currently see the value will come the spoils.

4. 2008 is an election year and it appears that the nation's polling infrastructure still has some work to do. That opens an opportunity for enterprising attorneys well placed when voters balk at the results.

5. The billable hour finally dies. Just kidding. My prediction (going out on a limb) is for the traditional fee arrangement to be the primary method of billing clients for another year, though the cries for its demise will still be heard. Though there are more opportunities for change (ie, client demands for more cost certainty), movement towards alternative arrangements will likely show up more with new firms who use their unique fee arrangement as a way to differentiate themselves from the marketplace.

6. In spite of an economy that will slow, lawyers will still be busier than in 2007 (and most should be more profitable, even those accidentally successful) - can't help it, the practice of law is "recession-proof" (just make sure you diversify - see prediction #2).

Happy New Year!

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Billing Practices That Cement Relations with Law Firm Clients

Admin — Wed, 01 Aug 2007 17:07:59 GMT

I hear the same thing over and over again. It isn’t so much the cost of legal services as it is the lack of predictability. Business managers abhor legal fees because of a feeling that they are beyond the manager’s control. They are unpredictable. The delay between when legal work is performed and receipt by the client of the law firm’s bill makes things even worse. A corporate manager can’t turn off the flow of legal expenses that are already in the law firm’s unbilled pipeline for work performed.

Law firms appear to be desensitized regarding their billing practices. Yet it is a firm’s billing practices that drive clients away. Not that the client will be any happier with their new choice. Rather than being drawn to another law firm because of higher value added, it is dissatisfaction with the existing firm’s practices that sends the client in search of something better.

What is needed is deliberate sensitivity by billing attorneys to the client’s concern over legal bills. Those concerns aren’t the same for every client’s contact. Nor are they the same for every case or matter. Nevertheless, for most clients the following steps will go a long way toward cementing your relationship for the long term.

Offer a retainer relationship for all minor matters. If your are unsure about the level of work involved, shorten the period before the retainer is renegotiated or include a provision that lets you renegotiate at any time the volume of routine legal work changes materially in the judgment of the firm. The objective is not to undercharge for services; it is to remove the surprises in your relationship.

Offer an estimate for all matters or cases handled outside of the retainer. If necessary, break the matter into phases and provide your estimate for each phase. Revise your estimate as circumstances change. One client said, “We don’t hate bad news; we hate to be surprised with bad news!”

Do not let unbilled charges accumulate. Clients prefer to be billed promptly for work performed. The typical law firm takes almost 70 days before it bills for work performed. Clients find that delay to be a disservice and they find this un-businesslike practice a negative reflection on the law firm. At the end of each month, or more frequently, bill promptly for all services performed.

Discuss your billing procedures with the client. Can you send your bill directly to the client’s accounting department with an information copy to the firm’s client contact? Do your plans regarding the presentation of information on the bill meet the needs of the client contact? Get rid of charges for soft costs, which produce more aggravation than revenue. Instead, increase your prices for services to offset any reduction in revenue due to the elimination of routine soft costs like faxes, telephone, copying and so forth.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Law Firms and Corporate Clients Continue Their Dance

Admin — Mon, 09 Jul 2007 18:27:33 GMT

The June 2007 Corporate Counsel reported that Circuit City is requiring law firms to discount legal fees by three percent for prompt payment. What is interesting about this is that the interviewed Circuit City representative reportedly explained that they were already paying promptly and decided they should get something for it. By "prompt", they apparently meant in 20 to 30 days. Outside of the legal sphere, that would be “normal trade terms”!

Asking for a three percent discount for making payment on time takes gall. At the end of the year that three percent discount adds up to a 36% annual interest rate on the average amount involved. Giving in to the discount signals that law firms are simply willing to take whatever punch their big corporate client throws at them. Those big accounts look great until you realize that they have you around the throat. Or do law firms give in to those demands because a lot of legal billing may be like a balloon? Squeeze it here and it bulges there.

In the long run, what the client pays and what the law firm receives have to be a fair deal for everyone. Without that fairness the relationship will not last. Law firms should be proactive in reporting the value delivered. Corporate clients should be investing in systems that track the comparative value (benefit vs. cost) of its various attorneys rather than squeezing here to just experience a bulge there.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center: 877/377-3740, e-mail info@juris.com or go to www.Juris.com.