Pricing for Profit for Professional Firms

Margins for professional firms are under pressure. It’s a tougher, more commercial world and clients are becoming more demanding when negotiating on fees.

Here’s the 3-step process we used in my consulting firm to improve margins:

  1. Establishing and building the value of the work in the mind of the client
  2. Working out a minimum price based on actual costs and a minimum margin
  3. Negotiating to achieve ‘win-win’, both at the outset and during the work, as well as at the point of billing

Some initial thoughts on particular factors that are relevant to these approaches are included below.

  1. Establishing and building the value of the work in the mind of the client 

Clues as to whether work should be given premium pricing include:

      • Urgency of work to the client
      • Importance of work to the client (what Americans call ‘you-bet-your-ranch’ work)
      • Expected savings to the client (tax work in particular can provide such savings)
      • The dominance of the firm in the category of work
      • Successful previous experience with the firm
      • Low level of competition for the work
      • Low level of experience working with lawyers

Factors which might lead to discounting include:

      • High level of competition (eg beauty parade)
      • Fixed client budget
      • General market expectation from experience of similar work
      • Lack of realisation in the client’s mind as to the value of the work
      • High level of experience working with lawyers
      • On-going relationship (eg Key Account)

Then there is the skill of authentically articulating the value of the work in the client’s mind. I say ‘authentically’ because you should be aiming to be seen as a trusted advisor, so the client should not perceive that you are trying to exploit them!

2.Working out a minimum price based on actual costs and a minimum acceptable margin

This probably represents your ‘walk away’ price. The prime skill here is that of a project manager who should itemise the tasks and estimate the level of resource required to carry out the task and the length of time required. The other approach to use is to review how much similar projects cost. So you have a ‘top down’ and ‘bottom up’ approach. This is a good example of using a belt as well as braces!

Other factors to consider are as follows:

  • Utilisation and mix of staff – if some staff are currently under-utilised, there may be a case for reducing the price of that resource
  • Volume of work – volume discounts may be worth considering when higher than budgeted utilisations can be achieved
  • Duration/continuity – staff can work more efficiently when working on fewer projects for longer periods of time
  • Strategic considerations – it may be desirable to work on a ‘loss leader’ in order to get some valuable experience which may then in turn provide you with profitable work (eg Securitisation work in 90’s)
  • Unusual extra costs – particularly in the areas of support staff

3.     Negotiating to achieve ‘win-win’

The ideal is to establish a basis for charging that both client and firm feel offer them good value. Factors to consider are:

  • Having the right ‘mindset’ (this is particularly important early on in the relationship when the client might not fully trust the law firm in terms of billing)
  • Having the skills to build credibility, rapport and trust with the client
  • The basis of billing – what are the advantages and disadvantages to you and the client of offering straight £/hour, estimated fees, fixed fees, contingency fees etc
  • How to respond to client counter-demands and the skills of establishing their underlying need
  • Strategies for offering concessions – always ask for something in return and the ideal is to offer those things that are really valued by the client but which cost you very little
  • How to resolve deadlock – a more senior person or a panel can play an important role if the issue needs to ‘escalate’
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