Start monetizing those unused (discountable) billable hours
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 Uber to get me places 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 midmorning. 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.
The vast majority of lawyers do not manage to consistently write eight billable hours a day. Utilization—billable time as a percentage of the target—is typically at 90 percent or below. In almost every law firm we know, there is time not used to work on client matters. What if we could monetize these idle hours? That would instantly create a significant boost in profit.
So why couldn’t 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 and insurance. Each month the same amounts have to be paid. So if costs are fixed, each extra billable hour is 100 percent pure profit since there will be no additional cost.
Instead of selling only 1,400 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 1,300 billable hours at a rate of $350, the total revenue would be $455,000. With a cost percentage of 65 percent, profit will be $159,000. 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, profit would be $169,000. This is $10,000 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. For them selling that seat will bring pure profit as there will be no additional costs. Airline passengers have gotten 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. I have discussed this idea with a number of general counsels and legal operations managers. Without exception, they immediately saw the benefits.
Technically, flexible pricing can be seen as a discount percentage that increases if demand is low. Taking on certain matters at a highly discounted rate could also come with some restrictions, such as a longer processing time. But who cares about that if law firms can fill the summer with bulk contract review?
Jaap Bosman is a leading strategy consultant, investor and one of the founding partners of TGO Consulting, a boutique consultancy focusing on the legal sector operating from New York, The Hague and Hong Kong. In 2015 he published Death of a Law Firm, recently translated into Chinese. Jaap is a regular speaker on the future of the legal sector.
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