This article has also been posted in the ABA Journal
The vast majority of lawyers does not manage to consistently write 8 billable hours a day. Utilization, billable time as a percentage of the target, is typically at 90% or below. In almost every law firm we know there is time that is currently not used to work on client matters. What if we could monetize these idle hours? That would instantly create a significant boost in profit.
Recently a business trip took me to Paris. As the schedule was tight and I had a number of appointments across the city, I had to frequently rely on the use of Uber to get me there in time. Doing a number of comparable rides over a couple of days, I started to notice that the prices could significantly differ. The same ride from A to B could be more expensive in the early afternoon than in the mid-morning. When at some point it had started to rain, the price almost instantly went through the roof. This was a live illustration of how Uber’s pricing model works. It is almost like an auction: if demand is high, the price will go up and in times of low demand, the price will drop. This so called dynamic pricing is used as a sophisticated form of revenue management. Price is tailored to maximize revenue in relation to costs.
So why couldn’t a law firms learn from Uber’s pricing strategy. What if we would introduce revenue management to the legal world? A characteristic of a law firm’s business model is the fixed nature of the costs. Costs consist predominantly of salaries, rent, subscriptions, insurance, etcetera. Each month the same amounts have to be paid.
So if cost are fixed, each extra billable hour is 100% pure profit since there will be no additional cost. Instead of selling only 1400 hours at the rack rate, law firms should become more flexible and focus on maximizing revenue for lawyers.
Let me give an example: if a lawyer now has 1300 billable hours at a rate of 350 Euro, the total revenue would be 455.000 euro. With a cost percentage of 65%, profit will be 159.000 Euro. Any additional billable hour of this lawyer will bring no additional cost. So if this lawyer would make an additional 100 hours against a rate of only 100 euro, profit would be 169.000. This is 10.000 Euro of net. profit. Revenue management for law firms does pay off big time.
We believe lawyers should start focusing on revenue management rather than on the hourly rate. Start applying market dynamics in the way Uber does. Or the airline industry, they are also willing to sell you the last remaining business class seat at a discounted price. Also for them selling that seat will bring pure profit as there will be no additional costs. Airline passengers have got used to this and have learned to accept that the person sitting next to them might have a better deal.
Today we are working with our clients to introduce smarter and more sophisticated pricing models. These models introduce flexible pricing in order to better manage revenue and enhance profitability. Also for the law firm’s clients this provides new opportunities as they will have a better deal at times of low demand. Talking to the in-house lawyers we know they are ready to embrace this model. No reason for law firms to hesitate. Want to learn how this could work for your law firms: Talk to us.
For further reading: Hourly rate, the end of its life cycle?
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