82% of firms confirm they have experienced rising client demands for financial transparency since the pandemic began. Clients also want more AFAs, with respondents reporting an average increase of 27% in client demand since the pandemic began.
However, law firms are lacking the data and processes to meet these client needs and maintain profitability – with tracking of actuals against a budget taking place for less than 38% of matters.
These are some of the results from BigHand’s latest industry survey, with over 800 responses gathered from senior legal finance roles, Managing Partners and LPM from firms of 100+ lawyers in the UK and North America. The resulting report is an accurate view of the latest legal pricing and matter budgeting trends in 2021.
Firms are also needing to gain more cost control due to payment problems becoming more widespread. Not only have 94% of firms experienced a delay in settling bills, but 54% also confirm that write-offs have also escalated by up to 60%.
Improving pricing management and cost tracking not only provides management and pricing teams with far better, up-to-date insight into performance but also provides a platform for improving client communication and ensures any potential problems are highlighted and addressed early in the billing cycle.
From a cut in premises costs, to reductions in headcount, hours, and salaries, to a drop in partner drawings; 98% of firms took radical steps to control costs at the beginning of the pandemic. This enabled firms to retain profitability during a time of crisis, but with costs inevitably creeping upwards, how will firms maintain the level of profitability achieved during the pandemic?
To meet client expectations, 46% of firms have provided greater visibility of the pricing breakdown at the start of the matter over the past 18 months, and 42% have introduced alternative fee arrangements including tiered discounts, portfolio / group fees and collar fees. However, less than 2% provide budget updates throughout the project lifecycle on 100% matters, showing that firms are still constrained by a lack of data.
The report also reveals a lack of matter budgeting and failing to use the right resource to complete phases and tasks, which are contributing to profit leakage. 74% of firms have introduced more mandated matter budgeting to counteract this – but less than 3% mandate the use of set budgets for all matters.
Tracking all costs throughout the lifecycle not only provides the depth of information required to meet client visibility demands – with associated benefits of avoiding late payments and write-offs – but also offers firms vital insight into trends in profitability that can be used to support strategic planning. With the right tools in place to provide this information, firms will be in a better position to enforce the process changes required to implement matter budgeting and tracking for all matters.
Firms understand that cultural change is required to achieve a more profitable business. 66% of firms have hired new dedicated pricing experts in the last 18 months, and 24% are introducing more training to encourage a change in lawyer behavior. To add to this, 50% of firms plan to introduce lawyer remuneration incentives/penalties based on reducing billing write-downs in the next two years.
It’s clear that a significant cultural shift is afoot throughout the industry to increase the focus on profitability. Firms are making improvements to their matter pricing by ensuring the right people are in place, with the right training and remuneration.
Responsibility for profits is also slowly extending from Partners to Associates, with 83% encouraging Associates to have awareness of the profit of a matter, but only 36% are providing Associates with real-time automated reporting per matter – meaning the majority still do not have the required information to improve matter profitability and reduce budget overruns.
Pricing directors and teams cannot achieve significant change when working in isolation. The entire firm has to be focused on the business, not the practice of law, to achieve real, sustainable improvements in profitability in an increasingly cost-squeezed market.
Things are changing however. In terms of technology, 76% of respondents plan to introduce a legal pricing solution in the next two years, and it would seem there is senior level commitment, with 86% of Managing Partners confirming investment is planned in technology. Digital transformation has accelerated across the legal industry along with every other, and any divergence in digital maturity will be very evident to clients.
BigHand’s Legal Pricing and Budgeting Report 2021 confirms the extraordinary pace of the change occurring within law firms and the rapid evolution towards real-time visibility of all matter pricing across the firm to enable individuals to take responsibility, deliver client value and maximize profitability.
To access the full report, please click here.
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