Guest post by John Wallace, managing director of Ridgemont, a specialist construction and real estate boutique law firm
Wallace: Shift to value pricing
An increasing spotlight on work-life balance has made some law firms question whether billable hours targets are fit for purpose. But is there a credible alternative?
The inevitable result for law firms is that 20% of lawyers are considering leaving the profession within the next five years, according to a study by the International Bar Association last year. To coin a phrase, something is rotten in the state of Denmark.
Typically, a fee-earner’s billable hour target would be calculated as a multiple of their salary. Bonuses would only be paid if the individual exceeded that number. This encourages poor productivity (recording as many hours as possible for a given task) to the detriment of the client, discourages more profitable ways of charging for work and requires lawyers to work late into the evening and at weekends.
Law firms (partnerships) are notoriously hesitant to institute change. Change means risk, which is a partner’s kryptonite, and partnerships simply want to maintain the status quo of consistently high profits per equity partner. Adopting a new fee model is therefore almost impossible.
However, by adopting ‘value pricing’ and refocusing on profit rather than billable hours, law firms can delight their clients and reduce the burden on their fee-earners, whilst driving profit. Here’s how.
Value pricing
Value pricing is the concept that pricing of goods or services is primarily based on the client’s perception of the value associated with the particular work rather than the perceived value of the provider.
It is the polar opposite of the traditional law firm method of calculating fee-earner (and other) costs and multiplying by X, or simply pricing at a level that the client is prepared to pay. Those methods risk disproportionate pricing and unsatisfied clients.
Revenue targets explained
For some, value pricing will be too big a step. In which case, without doubt, fee-earner focus should be shifted away from billable hours and towards revenue and profit. This will empower fee-earners to achieve revenue in the most efficient way possible. Greater efficiencies can be found that again lower the demands on fee-earners.
Here’s how to make revenue targets work at your firm:
- By encouraging an entrepreneurial culture, fee-earners can exceed a revenue target by ‘boxing clever’. To achieve this, law firms need to promote alternative fee structures (they don’t all have to be ‘no win, no fee’), provide training on value pricing, recognise that not all work will be hugely profitable, and actively encourage fee-earners to achieve their revenue target in as efficient way as possible.
- At appraisal time, genuinely recognise not only financial performance, but also wider contributions to the firm and give them the same weight as revenue. This will achieve buy-in and make fee-earners feel like they are ‘on the bus’ and part of the journey.
- Where fee-earners fail to reach their revenue target, ask why. Do not ask the fee-earner, ask the business. A fee-earner’s failure to reach a revenue target is most likely due to the firm’s, not the fee-earner’s, inadequacy.
- Set realistic revenue targets that stretch your fee-earners but are achievable without suffering the same fate as those adopting the billable hour. Put mechanisms in place to ensure that fee-earners who do throw themselves at achieving their revenue target do not do so to the detriment of their mental health and wellbeing. Create a supportive and positive culture whereby the firm enables the fee-earner to reach their target, as opposed to the firm being expectant.
Our fee-earners each have a revenue target, but we are not obsessed with it. It is a useful metric to measure productivity against, but we do not give it any greater weight than a fee-earner’s wider contribution. We recognise contribution to marketing, recruitment, systems and processes, corporate social responsibility, culture and so on.
We strongly believe that the firm must take responsibility for the originating and delighting of clients.
Fee-earners each play an important role in that, but to put pressure on fee-earners to market, sell and be the technician as well puts too great a burden on them. It is no wonder many fail to achieve their targets despite suffering burn-out trying in the process.
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