Profit: Firms looking to stem ‘leakage’
Large law firms are damaging their profitability by poor scoping of work and under-pricing it, and are also set to penalise lawyers who offer clients overly large discounts, a survey has found.
“In a competitive market, firms are pushing hard to secure business, but in any professional services marketplace the goal is profitable work, not just gaining market share,” the report by tech firm BigHand said.
It surveyed 257 finance executives at firms with over 100 lawyers in both the UK and US, and found that, as well as under-pricing by 37% of UK firms, 32% had a problem with “poor scoping of work” in the early stages, as well as not using the right level of resource to complete phases and tasks.
To reduce “profit leakage” in the next two years, 46% of UK firms said they would be “training lawyers in pricing practices”, while 35% said they would be improving billable time entry.
A majority of UK firms (54%) said they were taking action, whether through penalties or incentives, to encourage their lawyers not to give discounts below the standard rates. Half of firms (50%) said they were planning to take action to increase cash recovery.
Along with the discounts and write-offs they offered, 35% of US firms were “avoiding difficult conversations with customers” over unpaid bills.
In the UK, the survey found that ‘aged’ work in progress (WIP) was more of a problem than ‘aged debt’ when respondents were asked which areas of lock-up they believed had the biggest impact on cash flow – 51% compared to 37%. In the US, it was the other way round.
Back in the UK, researchers found that just over half (52%) of chief finance officers had access to WIP data, and only a fifth (20%) of partners.
Researchers said: “If firms want to create a culture of profitability, giving immediate access to up-to-date WIP data to more partners is clearly essential”.
US firms had “already made some of the cultural changes required to address cash tied up in WIP”, by improving “profitability awareness among lawyers and increasing billable time entry”, while in the UK “both cultural and process changes” were needed to improve cash flow.
Dan Wales, BigHand’s strategic accounts director in the UK, said: “The fastest way for a law firm to increase profits is to increase its prices. However, that is only beneficial if law firms can realise the income.
“Firms have yet to successfully implement visible performance gains that have a direct correlation to more revenue. Many firms are still seeking help and support in this area of financial hygiene.”
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