Maintaining margins while meeting client expectations on pricing and process management

Sarah Cox Posted By Sarah Cox
from Legal Support Network

 

Introduction

The current operating environment for law firms in developed markets is difficult, particularly for domestic-facing firms and practices in the U.S. and Europe. Slow growth and changing expectations from clients are fundamentally changing the competitive landscape for firms. Some are struggling with new pricing structures while others are finding it difficult to adapt to clients’ more active direction of how firms manage their work. While these changes are creating stresses, they are also creating opportunities. Because corporate clients’ expectations on pricing and process management are not being met, they are actively seeking law firms that are willing and able to meet their expectations.

Huron Legal believes the gap between client expectations and law firm delivery presents an opportunity. With accompanying case study examples, this paper explores the pressure law firms currently face, the evolution of corporate client expectations, and the ways in which law firms can use new methods of pricing and process management to meet these expectations and grow revenue while maintaining
profit margins.

The current market

The current market for domestic firms is influenced by economic realities and changing client expectations.

Economic Realities in Developed Markets

Few law firm leaders dispute the macro- and micro-economic factors that underpin the new competitive environment law firms face in the post-downturn era. It is abundantly clear that Western economies are struggling to grow, and law firm leaders are also all too aware that legal markets in the West have not grown in nearly three years. In the U.S., the largest legal market in the world and a bellwether for other developed markets, the largest 200 law firms cumulatively added a paltry 90 domestic lawyers between 2009 and 2011, an average annualised growth rate of 0.04%.1

These conditions are creating difficult times for many U.S. and U.K. law firms. Between 2009 and 2011, 26% of AmLaw 200 firms saw revenue declines and 32%2 of firms failed to outpace inflation3 – effectively shrinking in real revenue terms. In the U.K., conditions have been even more difficult, with 40%4 of The Lawyer 200 firms seeing revenue declines over the same period and 49% failing to keep up with inflation.5 The firms that performed best in both markets did so by looking abroad. In the U.S., global firms grew their revenue by 21% over the period, while domestic-facing firms grew at 0.6%.6 Similar trends were present in the U.K., where global firms outgrew their domestic counterparts by three-to-one.7 These figures send a clear message to domestic firms and domestic-facing practices in developed countries: unless they plan to expand internationally, in today’s market growth will predominantly come from taking market share from others, not from an organic growth.

Winning market share by meeting client expectations

To win market share, firms must balance two competing goals: they must be competitive in terms of value-adjusted pricing and, equally important, they must remain profitable enough to attract and retain top talent and continue investing to improve the firm’s services and competitiveness. This leaves many firms in a quandary. Reduce rates too much, and a firm will gain market share today at the expense of tomorrow. Demand too high a profit on today’s engagements, and the firm’s leaders will see their clients, and ultimately their partners, walk out the door.

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