Profitability, price and easy by Janine Parker, Paragon LawSelect
This article was originally featured as a column in the April issue of LPM. To read the issue in full, download LPM.
Profitability is very important for any business. From an insurer’s perspective, profitable law firms tend to have better claims records. Those firms experience a positive cycle where premiums remain competitive because the firm is an attractive risk. However, the opposite can occur. Firms that struggle financially may take measures to increase revenues and save costs – taking on work that’s outside their area of expertise or reducing staff. But fee earners that are put under too much pressure due to an increased workload will make mistakes. Dabbling in work that’s outside an area of expertise will also lead to mistakes. And if claims start to materialise, premiums can increase and profitability will be affected.
In 2005, it was rare for insurers to look at the financials of law firms – very few would ask to see the accounts of a prospect or client. After the financial crash and the subsequent loss of many firms to bankruptcy, however, insurers started to scrutinise the financials of firms in great detail. Changes to the minimum terms and conditions added to this – so if a firm went into liquidation, the last insurer would be responsible for providing run-off insurance.
Insurers would have to provide this cover for six years and there was little to no chance of them ever receiving the premium due for this. Insurers like to see that firms are profitable – but they also like to see that firms charge appropriately for their legal services. Less can sometimes be more – and conveyancing is an excellent example of this. When calculating your insurance premium, a typical rate applied by insurers would be around 10% and can be as high as 15%. For every £100 of fee income your practice generates from conveyancing, you will pay £10 to £15 for your insurance. In your commercial litigation department, this may only be £2 for every £100 of fees generated.
As such, when insurers see a firm charging only £200 on average for conveyancing work, they take notice. How can this be profitable? What level of experience does the fee earner have if the practice can afford to sell this service at £200? Often, the simple answer is that the firm is not making money from carrying out this work. Granted, firms may wish to offer certain services as a loss leader in the hope of additional instructions, but this is a vulnerable business model.
Of course, it is a hugely competitive market where prices and fees are always being challenged by potential new customers. This challenge is shared by insurers, brokers and solicitors alike. But firms that charge appropriately can reap numerous rewards. Clients that are prepared to pay accordingly for legal services and see the value of a more thorough service tend to enjoy a better customer experience. Their expectations are met, they’re more likely to provide additional custom, and a claim becomes less likely.
It’s also worth mentioning the value of keeping clients informed on bills – billing regularly and keeping clients up to date with potential changes to the estimated cost of a piece of work will improve client satisfaction. Clients don’t like nasty surprises.
And as in every industry, transparency and communication are key – and if this can also assist with increasing the profitability of your practice, then it should certainly not be ignored.