Guest Post: Real Tools to Improve Partner and Firm Profitabilityaderantuser
As an adjunct to Daniel Ronesi’s helpful post, Why is Profitability So Important?, I’d like to add an analytical business look at how both firms and partners can improve profitability.
Since there is a finite limit to cutting expenses to increase profitability, I would suggest that firms look to grow profitability by analyzing and negotiating more profitable fees with current and prospective clients. The negotiation model that is most appropriate for producing more profitable fees is known as Economic Value Analysis (EVA). When EVA is applied to the negotiation conversation it can produce better-than-average fees with the following three-step process:
- Document the average competitive price for the matter under discussion. This is known as the “reference value” in pricing strategy.
- Throughout the negotiation involving a new matter or client, communicate the aspects of the service delivery that truly sets you apart, and which qualify you to charge more than the average competitive price. These value-add items consist of values that are important to the particular client. While value-adds can be considered AFAs, they must be more substantive and detailed, such as a testimonial from a current client, a lawyer’s creditable track record with similar matters, clear objectives, or reliable legal honorific on point with the client’s needs. Through the use of value-add price/fee building, you end up at a better-than than-average competitive price.
- Slightly reduce the price (and risk) for a new or high-volume client. The ending price is still higher than the average competitive price.
This EVA approach to managing profitability does two critical things: (1) it produces more loyal clients whose retention over time is directly linked to gross margins and; (2) the process is principled and based on objective facts so that the client is treated in a more equitable manner. In the process of using EVA for the fee negotiation, lawyers will also need to trade off concessions. They therefore need to know the cost of the concession, plus a profit mark-up to ask for “Something in Return” (SIR) for every concession. Without SIR, you will eviscerate your profit margin.
Producing better profits-per-partner, and profits for the firm as a whole, facilitates firm growth. Specifically, in addition to client retention, the second driver of profitability is employee retention. Firms with steep barriers to entry, such as few partner slots, have a high-impact disincentive to top employee retention. Furthermore, having a history of lay-offs and diminishing partner ranks is the most negative environment a new associate or a lateral hire can enter.
Producing growth over time is not just a matter of cutting expenses in times of downturns, but managing to principles of growth. The profit-per per-partner measurement is an outdated measurement of law firm viability, but shifting the focus to more profitable fee arrangements can produce great returns.
About the Author
Christine Filip (@christine_filip) is an expert level business developer and corporate strategist for professional services firms, B2B companies and not-for-profit organizations. A media commentator and speaker for professional and business associations for more than 25 years, Chris’ work centers on the multi-stakeholder drivers of profitability, including client loyalty and employee engagement, executive leadership and corporate citizenship.
She has been interviewed in all media venues on competitive strategy, pricing, negotiation skills, leadership and building relationships with the media. In 2000, she was awarded the SBA Service Award by SCORE NYC for developing and delivering marketing seminars for small business owners in all five boroughs. Chris is the author of more than 100 articles on all aspects of business development and the book, Effective Marketing for Lawyers, 2nd ed., 2006, published by the New York State Bar Association.