Thoughts on ways to improve the management of professional services firms

Saturday, July 22, 2006

Professional services - pricing, positioning and service areas continued

In my last post I suggested that each firm needs to analyse and understand its own business, taking current and prospective clients into account as well as any variations between fields of law. From experience, particular problems can arise where the firm operates in several different fields with different patterns. The most common problem is simply failure to recognise the differences, leading to the application of firm wide policies and procedures that do not properly take variations into account. This can be a particular problem where firms are moving into new fields of practice.

I thought that it might be worthwhile teasing the last point by taking an actual example.

Take a firm whose largest area of business is commercial law.

In market terms, the firm positions its pricing policy so that it is charging a little below the big CBD/national firms. The competitive strategy is better value for money as compared to those firms. Rates are moved up in lock-step fashion with the national firms. Billing is generally monthly, with a major performance focus on individual charge performance combined with fast WIP turnover. The complex nature of some of the work means that leverage (ratio of more junior time to senior time) is low.

The firm moves into a new area of law with a private client/family business focus to create a new growth focus while reducing reliance on commercial law. The new initiative struggles despite an apparently strong potential market. Analysis shows:

  1. The new market with its mix of small and large clients has different and generally lower pricing structures. Application of pricing policies based on commercial clients therefore creates a very real problem. Moves to manage this through application of fixed price to certain activities helps reduce impact, but then creates another problem through higher WIP write-offs.
  2. Service delivery structures are different. There is a larger back-office function, return depends upon achieving greater leverage, more combination of individual resources. This creates management problems (more active management is required), measurement problems (while team performance measures are used, there continues to be a strong measurement focus on individual performance) and recruitment problems (deciding what staff are needed, getting them, at a time when the firm is trying to control overall head count).
  3. WIP and billings patterns are different. Instead of monthly billings, many clients are now billed against specific milestones. Monthly billings, the previous core perfomance measure, is no longer an accurate performance measure but needs to be combined with WIP.
  4. Finally and perhaps most importantly, these various differences create a major difference between the culture holding in the commercial law area and that required in the new area.

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