BigHand’s Pricing And Budgeting Survey: A Wake-Up Call And An Opportunity

Another week, another interesting BigHand survey. This time the BigHand team tackled pricing and budgeting issues. The bottom line: every client wants budgets and financial transparency, but few lawyers want to do it. (At least those in law firms.)

The survey is pretty comprehensive. It looked at data points from five years of surveys and then added the responses of some 800 senior legal finance professionals in the US and UK. For the first time, BigHand looked at law firms.

The Survey Findings

Let’s start with what the survey says about what clients may want:

• 47% of the firms surveyed say clients are increasingly demanding budgets and 50% say clients want greater transparency.
• The same percentage (47%) say clients want more alternative fee arrangements (AFAs).
• 48% of the firms surveyed say clients want more technology driven efficiencies.

Remember that these findings are not what clients are saying but what law firms are seeing from clients. That’s what makes the survey results about what are law firms doing startling:

• 53% of the firms mandate budgets on most but not all matters.
• 37% say the driving factor in doing budgets is if the client requests it.
• But 70% say they get increased billing realizations when they do budgets.
• Only 4% give updates to the budgets throughout the life cycle of all budgeted matters. A little over 30% of the firms give updates in 21-40% of matters.
• Many firms report only “moderate” use of AFAs.

So in short, clients want more and better budget and financial transparency. But most firms are not giving them that at least consistently. That immediately raises the question, why? Why aren’t firms budgeting better, reporting better, and doing more with AFAs, especially when they would get better realizations.

Lawyers Are Dumb When It Comes to Running a Business

The survey makes clear there is a real opportunity here that lawyers should be seeing and acting on. But by and large they’re not, at least according to the Survey.

The first reason for this mismatch is that a lot of lawyers in law firms don’t really know how to run a business. And if that’s not bad enough, they think that they do. In many firms, you advance both in terms of compensation and leadership by bringing business. Bringing in business and servicing their legal needs requires a lot of skills but it doesn’t necessarily mean you are a good businessperson.

Only about 30% of the firms provide any formal training to their lawyers on things like profit, sound billing practices, pricing, key performance indicators, and the like.  According to the survey, only about 30% of the firms bother to train their associates on financial performance metrics, the lifeblood of the business of the firm. Is it any wonder that law firms are not meeting the financial expectations of their clients.

We see this hubris when it comes to hiring folks who are businesspeople like financial analysts and data scientists. According to the survey, only about 30% of the firms have these resources. And, as I have written before, even when they do hire these kinds of people, they often don’t listen to them.

Lawyers Don’t Like Doing Budgets

Lawyers don’t like doing budgets because it holds their feet to the fire. There’s nothing worse than blowing through a budget and then having a client look at you and say, “What happened? You’ve got some explaining to do.” Yet despite how uncomfortable this is, lawyers don’t update clients as much as they should about where they stand on the budget, mainly because the budget has been exceeded.

Why? The truth is a lot of lawyers don’t know how to do budgets. Their standard practice is to try to determine how many hours a matter will take plus how many hours can we pad to give us leeway. As the survey reflects, on most matters, lawyers don’t include a breakdown of the cost of allocated resources when pricing a matter (only 4% provide this on most matters).

And even the padded hourly estimate is often wrong because the lawyers either don’t have or don’t capture the data to know how long something will really take. Only 49% have dedicated pricing and budgeting software that might allow them to better mine the data they do have. What business in the world these days has nearly half of the providers with no pricing software???

Data resides internally at many firms, but it is buried away and not accessible. There’s a wealth of public data that can be mined with things like litigation analytics. But it too often goes untouched.

Without data, the budgeting process becomes little more than a wild ass guess. I know, I tried it. It would be interesting to survey what percentage of firms’ budgets are blown? But it’s likely nobody would be telling.

AFAs

AFAs: everyone talks a big game but not many firms want to do them for all the reasons set out above. Most AFAs are still determined the way budgets are: how many hours do we guesstimate it will take and how much cushion can we get away with. And the result of that process is the same: a fee that’s not realistic and which gets blown. Lawyers often say we can’t do a flat fee, particularly in litigation, because there’s just too much uncertainty. The truth may be that there’s uncertainty because factors like overhead and time value aren’t considered and the data to reduce the uncertainty goes untouched.

A Wake-Up Call? Or an Opportunity?

The BigHand report ought to serve as a wake-up call for firms, but it may not be as long as most every firm is like so many of those surveyed: giving only lip service to what clients want. But for those firms that do seize the opportunity, the report shows a path forward to achieving greater client satisfaction and increased profitability. As the report puts it, “the gap between client expectations, internal capabilities and implementation remains one of the biggest challenges but also one of the biggest opportunities for forward looking firms.”

Stephen Embry is a lawyer, speaker, blogger, and writer. He publishes TechLaw Crossroads, a blog devoted to the examination of the tension between technology, the law, and the practice of law.