Last month BigHand released the results of our legal pricing and budgeting survey which gathered 800 responses from senior legal finance roles, Managing Partners and LPM from firms of 100+ lawyers in the UK and North America. I was struck with the findings and how they highlighted the need for firms globally to address matter pricing, budgeting and tracking – you can find all the stats in this blog and more in the main report.

With the financial pressures that the COVID pandemic has placed on businesses around the globe, managing costs and ensuring revenue streams are as profitable as possible is now critical. For a law firm, ensuring that a matter is being offered at a profitable rate and managed with detailed budgeting and subsequent tracking to ensure it is delivered at or under the agreed price, is essential to optimise revenue and mitigate profit leakage.

Write-offs and matter profitability

Write-offs are one of the largest factors when it comes to seeing a lower-than-expected profitability value on a matter due to the reduced recovery rate. This issue was even more apparent during the pandemic. Firms saw a dramatic increase in the number of write-offs, with 54% of respondents confirming these have increased by up to 60%, and 14% stating they have increased by more than 60%.

A high percentage of write-offs can be prevented through having an accurate budget in place and using this budget to track actuals against it. Doing this allows for early conversations to be had with clients to pre-empt overruns or an increase in scope, and increase the chance of clients paying for it, instead of receiving a bill-shock at the end of the matter and refusing to pay more than the initial quote.

When working with our clients, we see matters with budgets almost always outperform those without, and it would not be unheard of to expect an increase in profitability with matters that have budgets - some firms report having more than a 10% swing in recovery for budgeted matters.

AFAs on the rise

The report also showed that as a result of client demand, 24% of all matters are now offered on a fixed fee basis. It struck me that this ever-increasing prevalence of AFAs being offered, without having the right people, processes and technology in place to be able to compare budget against the AFA, is a concern. Without being able to monitor and report on costs against budget, it becomes very difficult to ensure profitable delivery. Create a budget, and you can ensure the AFA is profitable by allocating the required resources and time required, and continuing to track the status of the matter through its lifecycle – something that the report revealed only happens 38% of the time on average.

To add to this, 82% said clients have demanded more financial transparency over the last 12 months, asking for details of the ‘hows’ and ‘whys’ of the budget, price and resourcing structure. This demand has been a trend that has been increasing over the last few years, but has really been brought to the fore over the last year.

A lack of clarity and transparency with clients around pricing, leads to unexpected and possibly uncommunicated overruns, which in turn can lead to write-offs. This puts a strain on the client relationship with the potential for the client to find another legal provider who is providing the level of transparency they are seeking. By using a dedicated pricing solution to increase budgeting, a plan can be provided to the client as a visual guide to explain the structure of the matter, and trigger client conversations with notifications at key stages in the matter lifecycle. Reports can also be generated to help aid conversations, highlighting key metrics and KPIs to demonstrate how well the matter is progressing.

Dedicated Pricing Technology

One of the key benefits to using a dedicated solution instead of using spreadsheets is data. This is both data that is consumed by the application to assist in creating budgets using historic information, and data that can help build commercial acumen in the firm – by highlighting recovery and profitability, for example.

82% of respondents confirmed that Partners and Associates are held responsible for profitability within the firm, but only 37% have access to real-time reporting and notifications about mater progress which makes this responsibility exceedingly difficult to achieve – a dedicated solution can help to empower individuals by providing them with the tools and information required to meet these responsibilities. A technology solution running alongside the right people and processes can act as a catalyst for more innovation and a greater ability to deliver value to clients.