The law-firm centric model of the last century–allowing senior partners in major law firms to control every aspect of legal services–is giving way to an “integrated solutions” model with value-based pricing, according to the latest legal industry report.
The 2020 Report on the State of the Legal Market argues the legal industry is undergoing “fundamental changes” that will put “pressure on law firms to articulate how their services contribute to producing integrated solutions for clients.” According to the report, which is based on the work of Harvard professor David Wilkins and ESADE Law professor Maria Esteban Ferrer, law firms will shift their business model from attorney services to client outcomes, which will drive firms to be more collaborative, to purse technology-based solutions, to seek more continuous process improvement, and — cue the drum roll — to be more committed to value-based pricing.
First, I want to acknowledge a few other (i.e., non-value) highlights from this year’s report.
- Rates. Rates, aka Price Tags, continue to drive law firm growth. “[T]he ability of law firms to steadily increase their rates has been the primary driver of law firm financial performance in recent years.” Two interesting facts: 1) In 2007, the difference between Standard Rate and Collected Rate was approximately a 10% loss, whereas in 2019 the difference was approximately a 20% loss; and 2) Worked Rates grew between 3% (Midsize firms) and nearly 6% (AmLaw 1-50).
- Leverage. The legal industry is learning the value of matter management. Looking back to the 2017 Report, law firms were urged to improve leverage within the lawyer ranks (as well as other professionals). Law firms responded: Between 2016 Q3 and 2019 Q3, lawyer leverage improved, from 2.1 to 2.4, a 14% increase and the highest leverage recorded in many years. (N.B. This improvement was driven by the AmLaw 100; midsize firms continued the imbalance of too many partners.)
- Professionals. This year’s report shines a spotlight on the rise of client-facing professionals (e.g., Pricing, Legal Project Management), “one of the most noticeable trends…over the past two decades.” My Roll Call shows continued growth in Pricing professionals, pushing past 350 in 2019.
- Pricing Strategies. This year’s report gives special attention to the “Pricing Strategies” section of Altman Weil’s Law Firms in Transition Survey. As noted in my prior blogs (Part I and Part II), Big Law is expanding its investment in Pricing, while the rest of the industry is contracting.
- ALSPs/Big Four. The legal industry continues to witness growth in Alternative Legal Service Providers (ALSPs) and the Big Four accounting and auditing firms. These “competitive threats” had nearly 13% CAGR between 2015 and 2017, with higher growth projected.
Second, Value-Based Pricing (VBP) is much too large and much too important to address fully in this post. Look for a future post for a deeper dive. Briefly, VBP seeks to answer one question: “What is the value of your service to your client?” Once a firm determines how much its service/s is/are worth to a buyer, it then captures that value in its Price tag.
Finally, by emphasizing client outcomes, solutions and value, Wilkins and Ferrer are highlighting the underlying pillars of the Solutions Access Value Education (SAVE) framework, first introduced in 2012. According to the creators, sellers in the B2B world need to rethink the four Ps of Marketing: from Product to Solution, from Place to Access, from Price to Value, from Promotion to Education. “The SAVE framework is the centerpiece of a new solution-selling strategy.” (Harvard Business Review)
BTW: The focus on Value should come as no surprise. In 2008, the Association of Corporate Counsel launched its Value Challenge, which has propelled the concept of Value throughout the legal industry.
The 2020 Report on the State of the Legal Market was released last month by the Center on Ethics and the Legal Profession at Georgetown Law and Thomson Reuters Legal Executive Institute, relying on data from Thomson Reuters Peer Monitor. Access the 2020 Report HERE.