Increase Prices or Reduce Costs?
From my conversations with firms, I’ve noticed a variety of different approaches taken to combat declining profits and client demands in a constricted economic climate. While some are looking to raise prices of legal services to increase profit margins, others are looking to reduce costs through overhead reductions including staff starting with support teams. While there is not a “one-size fits all” solution to this growing problem, what’s evident is that law firms are being forced to take a holistic approach in addressing issues related to profitability presently, and for the foreseeable future.
BigHand’s latest industry report focuses on how law firms are responding to reduced client demand. The data echoes my own experiences of working with law firms and the strategies they are using to navigate recent economic turbulence. Almost a third of firms confirm they are increasing prices of legal service, while 29% have changed benefits packages for legal staff - including base salaries to reduce costs, especially staff overheads.
Whilst on paper these strategies may appear effective in improving profit margins, questions are raised over the effect of long-standing client relationships, and the ability to drive new business. If firms continue to increase their prices, their clients may look elsewhere for more cost-efficient legal service. Similarly, higher prices may deter firms from acquiring new business. With inflation increasing and an already economically constricted market, is it sustainable for firms to compete with elevated prices?
Similar issues can be found in reducing staff overhead. Yes, reducing overheads can lower costs in the short term; but with reduced support staff, legal support teams must take on more work and are unable to support multiple departments. Lawyers will have to undertake more administrative tasks leaving less time for client-focused, billable work. 87% of firms confirm that clients have become far more business savvy when buying legal services over the past 12 months and as a result, 74% of firms report pressure from clients for legal work to be completed by the most cost-effective resource. It’s difficult for firms to respond to these demands and assure their clients that the most cost-effective resources are being used when operating with less staff, and fewer resources to focus attention on billable work.
The above strategies may offer some relief in the short term, but with clients becoming more diligent on how their legal services are delivered, these methods to respond to the market crisis are far from bulletproof.
Our latest research paints a clear picture of the current economic challenges facing law firms. The decline in client demand is a cause for concern, and firms must be proactive to respond to business savvy clients and protect profitability to stay afloat. While raising prices may seem like a logical step to offset escalating costs, it’s important to consider the competitive landscape of the legal industry and clients' demand for cost-effective services.
Enhancing Efficiency with Workflow Technology
I’ve seen first-hand how investment in data and technology can help firms to combat many of the issues they face in the current climate, while enhancing client service – and it’s evident from our research that an increasing number of law firms and their clients agree. BigHand’s research shows that over a quarter of firms are already using technology specifically to drive efficiency and profit, and 63% are now actively highlighting the use of this technology to their clients to demonstrate how they are streamlining operations and providing cost-effective solutions. These investments will help only improve productivity, efficiency and client relationships, while providing a competitive edge in the market.
Workflow Management Technology not only provides firms with a seamless way to delegate any and every type of support task, but it importantly gives them complete visibility of what work is being delegated and who is picking it up to ensure the correct tasks are being routed to the most cost-effective and appropriately skilled resources.
Building stronger client relationships and focusing on productivity should be an operational necessity for law firms. In a time of economic uncertainty, clients are seeking trusted partners who can provide sustainable solutions. As BigHand’s latest findings show, it’s vital for firms to improve client engagement and utilise technology to maximize efficient use of their client’s time and money. The key takeaway from the report is client demands are reducing and is expected to continue. Now more than ever it’s imperative that firms allocate resources to technological solutions that can help improve client services and relationships for the long term, instead of ad hoc corner cutting tactics that can damage client relationships, and ultimately result in sub-standard levels of service.
Access the full report to learn more on how firms are responding to declining client demand.