Industry analysis from Wilson Legal Solutions: Price and easy
This article was originally featured as an industry analysis in the June issue of LPM's Slaying the discount dragon supplement. To read the supplement in full, download the supplement.
It’s easy to understand why pricing and profitability are such hot topics in the legal sector right now. Regardless of firm size or one’s place in the market, it’s harder to maintain productivity levels, more difficult to raise rates, and even harder to pass those increases on to clients. But while one cannot simply count on automatic annual rate increases as many did up until the mid- 2000s, things aren’t particularly dire for law firms today. One of the reasons is the focus on understanding, communicating and managing the drivers of profitability. From the hour worked to the fee collected (or written off), firms have all the necessary data at their disposal to be more efficient and pull the appropriate levers at the right time to maximise profitability.
The basics of profitability begin with an understanding that it’s not the same thing as turnover – and that large engagements don’t necessarily mean profitable ones. The drivers of profitability are few, but all have lower level components that need to be managed. To truly understand profitability in context, the drivers must be viewed relative to benchmarks – for purposes of both internal comparison (to budget) and external comparison (to industry norms). The law firm business model is simply expressed as six major components, including: fee capacity (the theoretical maximum turnover based on standard rates, utilisation benchmarks and firm size), and production (actual production in hours based on utilisation benchmarks).
Then there’s realisation (actual rates relative to pricing benchmarks), gearing (leverage), overheads (the fixed costs of operating the enterprise), and lockup conversion time (the cycle of turning work into cash).
An understanding of profitability components is now the price of entry – the market is too competitive for firms not to have it. It’s now the application of these concepts to running books of businesses, making data-driven decisions and quickly addressing issues, that will separate the winners from the losers. Many firms are now employing data and process strategies to increase their competitive position, enter new markets and improve overall profits. Many are also recognising the importance of aligning people, process and technology to realise the potential investments in each area – and to take advantage of what’s possible based on available data and new tools to leverage it.
Each of these areas intersects with the other two in important ways: people (experts in finance, systems, and pricing – each with their specific piece that informs the overall objective), process (workflows, integrations and procedures working in an efficient manner to get things done), and technology (the systems, integrations and maintenance thereof which allow for the automation and use of existing data to manage and make better decisions).
But the biggest change has been brought by technology. Until recently, various systems were siloed, resulting in disparate sets of information and an inability to act quickly on things that required attention and activity. This is no longer the case – data integrations and workflows between systems allow for the swift addressing of issues surfaced through alerts or dashboards.
For example, today an attorney can immediately address a situation through a data-driven alert or standard data object in their dashboard. They can handle late time, write off a receivable, manage a proforma or plan and staff a matter directly from one source, through seamless workflows. This enhanced process of taking action based on information – in real or ‘right’ time – leads to more efficient resolution of issues to solve both hygiene issues like time entry and inventory management, as well as strategic ones like pricing (which is really the most direct application of profitability). It also helps reduce management overhead to follow up on such things, resulting in more time for strategic management and analysis.
This integrated set of workflows – focused on decision support and delivering not just actionable information but also the facilitation of a required action – is what true performance management systems deliver today. Wilson Legal Solutions’ Ideate Performance Framework, for example, is the only performance management system built specifically for law firms. With the most comprehensive set of content, best-in-class technology and flexible configuration, it is designed to support any firm regardless of size or profile. Performance management, while still requiring a human element – to set appropriate goals and parameters, effectively roll out within an organisation, and adjust based on inputs and new data – has been ‘productised’ to the extent that what used to require multiple sources that were disconnected has now been integrated through seamless workflows. While not simple, it can appear that way to the end user – resulting in greater adoption and usage of products and the application to problem-solving.
Profitability is often wrongly thought about in terms of the margins that are derived from it. These margins are important – but for some firms it’s a significant journey and it’s important for all of them to understand that margins are simply an expression of other drivers and how successfully they’re managed. Firms can work on profitability every day without ever looking at margins – by focusing on utilisation, pricing, inventory management and resource management. Performance management is the next step in the process of aligning financial goals and measurement with systems to allow for greater insight and efficiency – and ultimately for creating a more profitable enterprise.