It seems like a simple and obvious concept. Shouldn’t the objective of every matter that the firm engages in be to charge the highest price possible? If it were only that easy. There are several factors that drive pricing decisions regarding what is ultimately charged for each engagement. The goal of this post is to define what those metrics are and to provide a better understanding of what each one incentivizes.
Let’s start with the easiest and most well-known law firm pricing metric. Simply defined, realization is the amount of the standard billing rate you are able to charge for a particular fee earner. If realization was used solely when pricing out an arrangement, the goal would be to always charge the highest rate possible for each fee earner. Well, what if the client is rate-sensitive? What if the work in this particular scenario does not demand a high rate? How do we get around this issue? This is where the other metrics come into play. At Ballard Spahr, we don’t have a particular realization benchmark. Our goal is to charge the appropriate rate for the type of work being performed.
Leverage is defined in multiple ways throughout various industries. To the legal world, leverage represents the percentage of partner time compared to other fee earners working on a matter. Shouldn’t the goal of every engagement be to use the right fee earner for that particular type of work? Shouldn’t we, as a firm, be incentivized to put work into the hands of the most cost-capable resource? That would provide a win-win for both the firm and the client, allowing the firm to utilize its resources and the client to benefit from not having to pay a higher price for work that should be done at a lower price point.
Revenue Per Lawyer
When we evaluate the healthiness of each matter, one of the key statistics is revenue per lawyer. Just like it sounds, this is the amount of revenue generated divided by the lawyer FTEs working on that matter. This is the intersection of realization and leverage. Each year, we establish a revenue per lawyer goal. We are conscious of this goal when pricing out each new matter that the firm undertakes. Obviously, not every matter will be at the benchmark, but the goal allows us to evaluate which matters are worth taking on.
Profit Per Partner
Ah, yes, it always comes back to profit per partner. Similar to revenue per lawyer, we set a benchmark each year for where we want matters to fall in terms of profit per partner. The same is true in the revenue per lawyer scenario, as this is a combination of all the metrics from above. The definition is just the profit from a given matter divided by the partner FTEs. There is more than one way to achieve a healthy profit per partner on a matter. In some cases, it may be very complex work that allows us to charge a higher rate. In others, the work might be best suited to junior associates, thus keeping the partner role limited to an oversight capacity.
The Right Price
Is the goal of each pricing arrangement to charge the highest price possible? In my opinion, no. The goal is to charge the right price. The right price is dependent on a number of factors. Using this blog, we will continue on our quest to define what the right price is. For example, how do we make sure we are charging the right price for a fixed fee arrangement? In a risk-share arrangement, how do we ensure that we are treating the arrangement with equitable risk with the client?
Stay tuned for other exciting topics from the world of pricing to come!