Why and how law firms should embrace inflation

After decades of low inflation, the industry is facing an unfamiliar challenge. Inflation causes trepidation, and the projected 13% rate the Bank of England expects to see by Q4 will hit law firms in specific ways. Newly qualified lawyers’ salary costs are up by 15%, consequently increasing expectations from business services, outsourcers and suppliers – only premises costs remain flat or are decreasing. Should you alienate clients by jacking up prices by 10%? Or accept that partner profits will deflate by 20%?

At a recent roundtable of COOs, a common sentiment was that we’ll have to “do what we have always done – but better”. That means using the three classic levers previously employed in the 1970s: slighty upset customers by raising prices; somewhat upset investors/partners by managing down expectations; and moderately upset practically everyone by cutting corners and cutting costs.

Pricing: if not now, when?

Certainly, this is the time to adopt an active pricing strategy, if you haven’t had one previously. All clients will be expecting rate increases, though few professional services businesses will be offering them proactively. The operational work involved is substantial, including new agreements, updating of rate cards and finance systems – few law firms will be staffed appropriately for that work.

But don’t burn out your newly appointed pricing manager on admin. Setting a clear strategy, aligning management teams, and convincing individual client partners of the merit of such an endeavour should be the primary focus of theirs and of senior management’s time.

This is the time to adopt an active pricing strategy, if you haven’t had one previously. All clients will be expecting rate increases, though few professional services businesses will be offering them proactively. The operational work involved is substantial, including new agreements, updating of rate cards and finance systems – few law firms will be staffed appropriately for that work.

Consider the following: are you ready internally to deal with the ‘offer’ of ‘fast-track reappointment’ to panel if you limit your rate increase to 2%? Are there relationships where you are willing to take a hit to replace a competitor that is too ambitious in its pricing?

These measures may prove necessary, but are they enough? The three levers – pricing, costs and margin – can only take you so far. All are ultimately an attempt to preserve the core of an operating model built for a different time.

An opportunity to go further

The times are a-changing – not just for law firms, but also for their clients. Assuming that inflation will be with us for some time – just like the post-Covid changes to working practices – now is an opportune time to revisit your strategy and implement long-term initiatives gathering dust.

In a recent Harvard Business Review article, 3 Strategic Options to Deal with Inflation, Oded Koenigsberg suggests considering:

• Recalibrating and cleaning up the product portfolio
• Repositioning the brand
• Replacing the historic pricing model.

To which, for law firms, we need to add: revolutionise the delivery model.

Can you afford not to action these now? All law firms I have worked with have talked about these strategic levers, and most have actioned at least one of them – but only ever one at a time, and often with reluctance, due to the financial and cultural costs involved.

Consultants often talk about the need for a ‘burning platform’ to launch a change programme – here is one on a golden platter. And the window of opportunity may be short: the Bank of England projects inflation will drop back down to more normal 2% over two years.

Embrace inflation while it lasts!