Sara Randazzo’s recent How Can Law Firms Increase Revenue? Charge More reported about some law firms dealing with revenue demands by increasing the rates that they charge. Increasing rates, especially at a time when demand for legal services is tepid at best, seems counter-intuitive. But for some law firm leaders, the need to increase revenue overwhelms contrary logic and rates get raised.
Given today’s legal market, raising rates should raise eyebrows. Productivity at law firms is challenged, clients are pushing back on increased legal fees, more clients are bringing legal work in-house and alternative service providers are taking more market share.
Of course, to many law firm leaders the idea of raising rates is both tidy and familiar. In an industry where law firm success and confidence may turn on the most recent compensation round, making sure attorney compensation continues to rise is a paramount concern. Facing this pressure, the increasing of revenue almost always becomes a necessity. The reliable raising rate tool comes out of the toolbox, gets used and the short-term challenge is met.
Unfortunately, law firm health is not a short-term matter and the raising of rates offers few guarantees in the long-term. Besides being a crutch, it can be a lazy man’s misguided attempt at maintaining a law firm’s health. And as some clients evolve into being more like competitors than consumers, the need for clients to pay rates of any level, let alone rising ones, is reduced.
Planning for the long-term health of a law firm requires that leadership temper its reliance on the raising of rates and consider some new ideas. Admittedly, in implementing the new ideas rates may need to be raised as a bridge towards the implementation of long-term initiatives. But if leadership is looking for long-term health, it should think beyond raising rates and pursue other initiatives, including possibly:
Having Technology Play a Central Role in the Future. You can’t open a legal publication these days without reading about the critical role that technology will play in the future. Artificial intelligence, algorithm based communications, data analytics-all will supplant to some degree the labor-intensive activities on which today’s law firm model is based.
Moving Away from the Hourly Rate. The need to consider a different fee model is not simply based on a growing client discomfort with paying higher rates (especially for the junior to mid-level lawyers-a firm’s bread and butter as Martha Neil reports), but also because client demand for efficiency will make hours harder to come by. Stout rates times a smaller number of hours does little to grow a revenue stream. Other means of charging for legal services responsive to clients will need to become the norm.
Thinking About Investing in Innovation. Transform the firm’s culture into one that constantly looks for ways to deliver legal services so valuable that clients will gladly pay. Except for the bet your company cases, many clients that pay legal fees view them as a necessary evil. Innovation can change that outlook and build greater relationships.
Rethinking the Personnel Model. Technology may reduce your personnel needs and with it your personnel costs. The growing free-lance economy may make it possible to minimize the financial burden of the large workforce that is taken for granted today.
Rethinking Overhead. Few firms aren’t willing to cut costs. If a firm works hard at the four transformative steps above, it may find that its overhead is reduced. Even if less lease space and personnel costs are offset by increased investment in technology or other innovations, the value added may prove more tangible to clients than unproductive empty offices and employees currently covered by the rates they pay.
Some firms have no choice but to raise rates in order to meet revenue targets. That can be a bad place to be. With client expectations and innovation making inroads on the industry financial model, long-term thinking must not be forgotten as rates are raised. If your firm raised its rates this year, was it simultaneously working on long-term initiatives that would reduce future reliance on the raising of rates?