The second breakout session that I attended on Thursday morning at the P3 conference was "A Case Study on Profitability through Pricing and Client Value," presented by Redwood.
The program told us:
For years the legal profession’s main focus with respect to ‘profit’ has been on driving productivity and revenue. Well before the boom in alternative fees this perception had changed drastically. Now in a new world with heavier client demands, budgeting needs, alternative pricing, and changing structures the true drivers of profitability have come under additional scrutiny."
Attendees of this session will learn about the components and changes within the drivers of profitability. In addition they will engage in a case study using real data under a pseudonym to analyze trends, identify wayward pricing strategy, and hone in on alternative ways to look at a firms’ [sic] profitability."
The session started by looking at shifts in firm behavior, such as discussions of profitability. Some firms think you shouldn’t include profitability in the discussion because it muddies the water. But without it, they’re doomed to fail.
Firms are still confused about profitability, and they don’t understand what it means. There’s a lack of understanding about what drives business. The panelists talked about the a new set of four P’s:
- Preserve (the relationship)
- Provide (value)
- Protect
- Profit
Along with shifts in firm behavior, there are also shifts in client behavior. There’s a greater use of AFAs in the legal departments. Who is driving these changes? Tech firms and clients. But corporate law departments don’t WANT to be change agents – they’d prefer to be brought forward by law firms.
Per an Altman Weil study, 71.6% of law firms are reactive with their AFAs, as opposed to proactive. We’re in a completely reactive state. There needs to be more upfront planning – 99% of mistakes happen because w’ere not asking the right questions.
Problems for Law Firms
Because firms still struggle with profitability, there’s a need for experienced business professionals to assist them in the process.
Culture and compensation have an impact – when it comes to partner compensation, the right behaviors need to be rewarded. Here, "transparency" and "profit" are NOT four letter words.
The reality is that there are key components to this qualitative portion:
- Revenue by originations
- Work attorney revenues
- Billable hours
- Realization percentage
When it comes to profitability, there are five golden rules, whether you’re using an AFA or not:
- Profitability is a management exercise, not an accounting exercise
- Client profitability models must have an allocation of partner compensation
- Models should be low maintenance, simple as possible, and have buy-in
- The first goal of profitability analysis should be to surface actionable information
- Profit analysis
Successful Approach to Matter Planning
Every matter could have an alternative arrangement – any type of bespoke work with the right data and arrangement CAN be more profitable. If properly managed, those arrangements could be more profitable, and you’ve also provided the client with predictability and results.
Profitability 101 in an AFA world requires estimation, efficiency and project management. The risk model has changed – controlling the drivers that can be controlled has become more important:
- Limit risk where you can
- Learn from previous experience
- Learn to say no…quickly
- Accurate forecasting
- Don’t underestimate the power of collaboration
The key question here is how do you manage AFA profitability and incorporate it in strategic and tactical decision making? There’s a close tie between analytics, budgeting and LPM initiatives. An analysis must be done in conjunction with and outside of the hourly model.
We finished the session with an interactive case study (a handout which I unfortunately didn’t receive, and don’t have access to). The panelists broke us into three groups to review a real-life scenario and discuss the hurdles that the firm faced, what accounted for those, and how they could have improved things and been more proactive. It was an interesting real world example.
Tomorrow, we’ll be discussing P3 again, so make sure to tune in!