Law Firm Planning in the Midst of a Pandemic
JOSHUA GOLDSCHMIDT, CPA, MST
The COVID-19 pandemic, in the blink of an eye, has created many challenges. Challenges from economic uncertainty to social unrest have left firms to scrap their long-term plans in favor of a short-term approach to combat the rapidly-changing environment. This brief article provides steps law firms can consider for planning in a time of uncertainty.
Here are some steps that can help:
- Think Tactically
During this tumultuous period, your long-term strategies might go out the window. You will need to adopt tactics on the fly to deal with the shifting economy’s effects on your clients and your own business. For example, you may be forced to decentralize planning, giving greater power farther down the ladder, particularly if some employees are let go. This way, practice groups, client teams and client relationship managers can respond promptly to client needs and unexpected opportunities for generating revenue.
- Stay on Top of the Numbers
Arm yourself with up-to-date information on the firm’s financial status, as well as the state of the legal market. This includes the firm’s current cash position and budget performance year-to-date. You also need a strong grasp of the cash flow situation. Track the market to identify practice areas and services in demand and those in decline, whether just temporarily or likely for the long term. This information, along with your financial data, will empower you to make informed decisions.
- Form a COVID-19 Crisis Management Team
If you have not done so already, assign a dedicated crisis task force to monitor financials and other internal and external developments. The team should regularly meet to evaluate risks and opportunities. It also should monitor relevant government and health care guidance to ensure compliance. And it can seek out information from other geographic areas and industries to identify best practices for coping with the effects of this year’s economic uncertainty on businesses.
- Update Your Business Continuity Plan
Another team can tackle your business continuity plan. It should review how your firm handled stay-at-home orders, school closures and other effects of the pandemic — in case they become necessary again. Gather input from different firm levels and from clients about what worked and what did not. As the team identifies gaps, it can formulate solutions that will allow you to improve future responses.
Shorten Your Time Frames
Planning typically is done in increments of one to five years. But the current environment calls for one- to three-month increments, with regular reviews and adjustments within those increments.
Think about life after the pandemic
Understand that this is not forever and that while short-term planning is being emphasized now, long-term planning is still needed. Think about the lessons that have been learned and what your business can look like in the future. Evaluate if working from home and increased flexibility will change your business model. If you have grown practice areas that were only temporarily during the pandemic, think about how you can seamlessly transition to other types of services.
How Portfolio Pricing Can Increase Your Profitability
While hourly billing has been the mainstay of legal billing, it is not the only option. In the wake of an economic downturn, clients are looking for alternative fee arrangements from all their business providers, including legal services. One alternative to charging clients at an hourly rate is portfolio pricing. What is it and why should your firm consider it?
What is portfolio pricing?
Portfolio pricing generally involves charging a fixed fee for a series of matters. In a portfolio pricing arrangement, legal work is bundled and priced as a single unit. A “portfolio” might encompass all of a client’s work in a specific practice area for a set period of time (i.e., monthly or quarterly). Alternatively, it could be structured to include all of the legal work completed for a specific transaction, such as drafting a power of attorney.
Portfolio pricing arrangements might also base compensation on the outcomes, volume of work or duration of the engagement. For example, riskier matters may incorporate penalties or bonuses in addition to the fixed fee.
The downside to fixed-fee arrangements is that your firm assumes some of the risks. If an engagement requires more hours than originally estimated, you may lose money. Good project management, therefore, is essential. You also need a thorough engagement letter that covers all the services that will be included — and excluded.
What are the benefits?
Predictability of fees makes portfolio pricing advantageous for clients. But portfolio pricing offers some benefits to firms, too. For example, handling a large portfolio of transactions or legal services can produce cost advantages not available with individual matters.
Portfolio pricing also facilitates leaner, more efficient staffing — an important goal for any law firm. By establishing dedicated teams to deal with particular portfolios, your firm will likely improve efficiencies. As team members gain in-depth knowledge of the client and its people, this can lead to greater client satisfaction, build enduring relationships and increase your client referrals.
How do you create it?
As with any alternative fee arrangement, you will need to keep a close eye on a variety of metrics that will contribute to, or undercut, your firm’s profitability on portfolio pricing arrangements. At least initially, consider working with a financial advisor to set portfolio prices. Your advisor can help you identify the fundamental assumptions on which the price is based, as well as determine the scope of the portfolio. In addition, the advisor will help set budgets that reflect required profit margins and ensure that the price covers all of the relevant components. These include attorneys’ fees, administrative costs, overhead, anticipated risk and partner compensation.
During the portfolio arrangement’s lifespan, your advisor can monitor profitability and flag potential areas of concern, such as transactions that are not completed according to schedule. Your advisor can also alert you if the original assumptions for a portfolio are not bearing out so you can address them with the client and, possibly, negotiate a revised price.
Is it for all clients?
Portfolio pricing is not appropriate for every client. Do some research before pursuing portfolio pricing opportunities and take into consideration such factors as a client’s industry and regulatory environment.
Your relationship with the client is another important factor. Be sure to consider a client’s legal work, including volume, types of matters and past and pending litigation, as well as your profit margins for the work. Competition from other firms for a client’s business might also motivate you to offer an alternative fee arrangement such as portfolio pricing.
Related Read: How to Raise Rates Carefully
What are you waiting for?
As the country makes its way through the COVID-19 pandemic, billing and fee structures of law firms may need to be adjusted. Portfolio pricing can be one of the best ways to draw and retain price-sensitive clients. It can also help your firm achieve greater profitability and a more predictable cash flow by lowering overhead costs and increasing productivity. In the end, your firm will be better able to attract a diverse blend of clients.