Pricing utopia: Helm360 on how to price legal engagements effectively
The art of estimating accurately has long been a challenge – whether that be to estimate the development effort to build a software product or estimating the effort required to represent a client who is suing another party, the outcome remains the same… estimating accurately leads to higher customer satisfaction, higher quality output and above all repeat customers.
Traditionally, a law firms approach to pricing engagements has been to use an expert view of how long it will take them to deliver the relevant services to their customer. While this can sometimes make sense in a small law firm, when you start to scale up, it can lead to a number of issues as follows:
- EXPERIENCE FACTOR: Most estimations are based on the assumption that they are going to physically deliver the work. What it doesn’t account for is experience level if a different resource is used or the level of support a senior lawyer may need to provide to deliver the work.
- OPTIMISM LEVEL: Some estimates will be too optimistic. For example, it’s easy for us to assume best case scenario but that can quickly change if we haven’t considered any contingency or considered things that could go wrong. The flip side of this, of course, is that the estimate is too pessimistic and therefore results in a loss of new business from being uncompetitive.
- PROFITABILITY BLINDFOLDS: Unless the person providing the estimate has a good understanding of the cost their time and disbursements, it’s easy to focus on the winning part of customer engagement and not the profitability of the engagement. It might be great for a lawyer to have a growing client portfolio, but does it make good business sense if the margin on that work is low or negative?
How do we take these challenges and turn the estimation process into a repeatable, predictable method that can ultimately lead to pricing utopia?
Define your engagement
Before you can consider producing any kind of estimate, you need to ensure that all components of the engagement have been thought through and considered:
- Is this a straightforward conveyancing engagement or a more complex defence case that is likely to be more difficult to estimate?
- Are there any risk factors that need to be considered?
- Any unknowns that need to be accounted for?
Ultimately, not considering these factors in your estimate could leave to budget overruns and dissatisfied customers.
It’s also necessary to define what type of sale this is. If the goal is to make a strategic sale where profitability is not the key factor, then this needs to be considered when producing the estimate and tracked accordingly.
Produce your estimate
Once you have defined your scope, the next stage is to produce your estimate. One of the most effective ways to do this is to use history to dictate how to price your current engagement. For example, looking at prior engagements for a particular practice group area by profit margin or leverage might be a great starting point to create a new estimate for a similar type of work. However, this along is not enough. Some thought needs to be made into the resources that will be used for this engagement – especially if their experience and therefore cost rate is different from the original delivery. Ultimately, changes in resources can have a massive impact on profitability of an engagement. For example, if the legal research for the original engagement was conducted by a Paralegal but for the new engagement this resource is expected to be replaced by a Senior Lawyer, this will have a negative impact on profitability. Consideration needs to be made as to whether it makes sense to use expensive resources to deliver what a lower cost resource could – it should make the difference between making a profit or a loss at the end of the day.
If, however, it’s a brand-new area, adding some contingency to the expected profit margin will enable a law firm to protect themselves from a loss-making engagement.
Track your progress
Effective reporting is the key to successfully tracking an engagement once it is underway. Winning new business is not enough, it’s important to keep track of progress to ensure:
- Budget to actuals are in line with the original estimate and therefore profit margin is being maintained
- Any changes to scope are being correctly accounted for and tracked
- Any overruns are caught early and communicated to the customer
Effective tracking will ultimately lead to:
- Increased customer confidence – keeping them in the loop at all stages with accurate reporting will make them feel they are fully informed
- Tighter grip on scope changes will help reduce write offs
- Increased profitability for the law firm
How can Helm360 help?
Helm360 provides industry leading products and services to the legal and professional services market. Our Terminus Vision platform provides a fully-fledged Matter Pricing, Budgeting and Tracking solution that works out of the box with leading law firm finance systems like ProLaw, Elite Enterprise and Elite 3E. It also comes bundled with our AI Chatbot technology “Termi” that allows firms to take the complexity out of interacting with complex systems through natural language.
Terminus Vision provides firms with the following key features:
- Matter pricing, budgeting & tracking solution
- Cloning from historical matters
- Template driven estimates
- Scope change tracking
- Out of the box integration with leading law firm finance systems
- Automatic imports of time and cost data
- Full report suite including Budget to Actual and Precedent H reporting
- Alerting through Termi Chatbot technology