How Much Are Ineffective Law Firm Pricing and Partner Compensation Decisions Costing Your Firm?

Blog post originally shared on Iridium Technology is now part of BigHand. Learn more here.

Law firm pricing and partner compensation decisions produce two of the hardest-hitting impacts on your firm’s profitability. Can you evaluate the cost-effectiveness of your firm’s pricing strategies? And are your firm’s partner compensation decisions rewarding truly profitable actions?  

More law firms are finding the transparency to answer questions like these using an integrated financial analytics and business intelligence platform that enables them to:  

  • delve deeply into the resources, time, and effort that goes into providing legal services to more accurately plan and price legal matters, 
  • leverage pricing team expertise to develop more precise and cost-effective pricing strategies, and 
  • establish and track partner performance metrics that reward more profitable pricing and service delivery practices.  

Here’s how to leverage advanced analytics to gain the clarity and precision to drive more profitable pricing and partner compensation decisions: 

Implement Data-Driven Law Firm Pricing Strategies.

Recently, 68% of law firms said they plan to increase spending on pricing specialists. In our increasingly data-driven business world, clients expect greater pricing transparency and optimal matter resourcing. In 2015, just 25% of large firms saw alternative fee arrangements (AFAs) greater than 20% of revenue. By 2021, the percentage grew to 35% of large firms, with three-quarters of large firms expecting further growth in 2022.  

Data analytics reveal a detailed view of the work involved in bringing matters to successful conclusions. Pricing teams empowered with historical data and predictive modeling can build credible matter forecasts. Then, they can work with partners to craft pricing structures, AFAs, and discounts that still protect profits. Partners and pricing teams ensure clients receive the best balance of cost, coverage, and expertise by factoring in variables such as matter staffing ratios, resource allocations, annual rate increases, and discounts. 

This is a win-win scenario: clients gain cost predictability while your firm gains revenue predictability. Almost all (98%) of law firm leaders who used legal analytics to gain competitive insights and price projects or legal matters say it improved their law firm’s performance, and 81% say clients look favorably upon their firm’s use of legal analytics. 

Factor 3 Realization Rates into Law Firm Partner Compensation Reviews.  

Use pricing effectiveness as a KPI in partner performance reviews. If a lawyer immediately collects 100% of the fees they bill, and they bill for 100% of the hours they work, their realization rate is 100%. Their “revenue pie” is whole. However, poor timekeeping habits, write-offs, discounts, and other factors are like sharp knives that carve slices out of each lawyer’s pie.  

Realization rates reveal the specific amounts of revenue left after various knives carve out their chunks. Find where the slices come from to stop them next time by evaluating these three realization rates to determine pricing effectiveness:  

  • Standard Billing Realization compares the value of fees billed versus the fees billed at a lawyer’s standard rate. It reveals discounts applied to initially agreed-upon matter rates and discounts made during billing. 
  • Fees Billing Realization measures the value of fees billed versus the value of billable fees. This evaluates the level of discounting against the agreed client and matter rates. 
  • Fees Collected Realization measures the value of fees collected versus the value of billed fees. It assesses the impact of write-offs and considers how quickly clients settle their account. A high level of write-offs can indicate unhappy clients. 

Analyzing realization rates helps partners understand what areas to focus on to improve pricing effectiveness. Further evaluations of metrics on legal services delivery, such as turnaround times and support staff utilization, also helps target specific ways lawyers can work more efficiently.  

Set goals for partners to raise realization rates, such as fewer upfront discounts and more efficient matter staffing ratios. Convenient reporting options available through a BI platform enable you to measure rates any time to monitor progress and take corrective action quickly. 

Streamline and Speed the Law Firm Partner Review Process.  

If you still rely on multiple review systems and manual spreadsheets to evaluate partner performance, a modern BI and financial analytics platforms can combine KPI metrics with subjective evaluations from your existing systems into a single, unified partner review process.  

Picture this: firm leaders enter an interactive portal to view partner performance data and add their input. All information stays in one secure location. You can easily roll compensation numbers and evaluations forward year after year to strengthen the reliability of your data and make even smarter future decisions.  

Reassure Partners They Retain Relationship Primacy.

Pricing specialists set financial standards for the firm. They do not interfere with a partner’s influence. Pricing teams enable partners to commit to comprehensive matter planning and budgeting for clients who appreciate clarity and predictability. They help partners create comprehensive client proposals that go into detail on years of legal work—a significant competitive advantage today.  

Each partner remains the primary relationship holder between clients and the firm. That never changes. What does change is that partners now enjoy a collaboration that helps them boost their realization rates and raise the firm’s overall profitability—a win for everyone. 

About BigHand Partner Performance

BigHand Partner Performance (formerly Intellistat) is a review and compensation portal made for legal. Streamline your partner performance review and compensation process through an interactive portal that allows you to review partner performance data, allocate points, assign bonuses, and determine compensation for each partner. Drill-down into details like client trends, allocation points, and more.

Partner Performance