May 3, 2007
Law Firm Survival Is Tied to Its Blended Rate
Paul Calthrop, writing in the May issue of the Harvard Business Review, gives all of us something new to think about regarding pricing. Calthrop is a partner in Bain & Company. His article is titled “Higher Net Price—Or Bust.”
He makes the point that lower pricing may be a viable strategy for entering a new market or launching something new, but otherwise it signals a path toward commoditization, which he says “…inevitably undermines the firm’s prospects of achieving sustainable revenue and profit growth."
For a law firm, Calthrop’s warning reinforces the importance of tracking the firm’s effective blended rate metrics. It also explains why it is so important for the firm to have strategies and tactics in place to increase its blended rate. You don’t achieve a continuing increase in the firm’s effective blended rate through price increases. It comes from increased value:
- Increasing efficiency coupled with pricing alternatives
- Moving into more valuable practice areas
- Increased specialization
- Adding new value to established services—convenience, response times, certainty, etc.
- Moving to new clients for whom your services have higher value
- Etc. Etc. Etc.
Price increases are still important, but the typical pricing increase strategy for a law firm is the annual increase to cover increased operating cost. Adjusted for inflation, it has a zero impact on the firm’s effective blended rate. Moving the blended rate can, however, be achieved through better pricing strategies:
- Multiple standard price sheets pricing higher value services at appropriately higher prices
- Targeted price increases to move underpriced services, clients and matters to higher competitive price
- Having more prices based on the deliverable versus the hours worked, i.e., Alternative Pricing
And the effective rate can be increased through improved collection and faster billing of services. Both improve realization and decrease lost revenue arising from adjustments and uncollectibles.
Managing partners need to take Calthrop’s warning to heart. If your effective blended rate is not moving up, then the firm is increasingly engaging in areas undergoing communization. Short of reinventing how legal services are provided, that will lead to an unsustainable trend of declining partner income.
For more on measuring and tracking blended rate, go to the prior post Blended Rate and Utilization Model for Law Firms.
Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center at 877/377-3740, e-mail info@juris.com ,or go to www.Juris.com.
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Filed under Pricing by Tom Collins
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