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UK: Measuring the True Cost of a Legal Client

  • Professional Indemnity Insurance
The Knowledge
18th June 2024
Amid escalating client expectations, cost management is crucial for firms
As the legal sector adopts new ways of working and meeting client needs, it also faces new pressures when it comes to the perception of services it provides. At the same time, net profit margins for the top 100 UK law firms have been flat over the past five years, according to the PwC Law Firms’ Survey 2023 UK.[1] Against this backdrop, legal clients may feel justified in demanding more for their fee – and firms, in the interest of keeping business flowing, may feel an even greater need to accommodate them. This environment makes it especially important for firms to understand the value they provide to clients, along with the varying costs and risks that clients generate, and consider the ‘cost’ to the business of taking that client or matter on.
That doesn’t happen consistently. Firms earn money from clients unevenly for a range of reasons. There are variances in costs depending on the jurisdictions where business is done.   Lockup days will vary across offices and practice groups. Certain areas of business may generate more claims – or claims may be higher across the board than they were in the past (indeed, Travelers research has found that for law firms of all sizes, the severity of claims has climbed steeply in recent years). Of course, the demands of clients themselves can be difficult to predict and manage too.
“Everything a law firm does comes at a cost, so when firms are assessing the true cost of a client, it’s important for them to look beyond the specific work they are engaged to complete and consider the bigger picture,” said Sharon Glynn, Managing Director at Travelers Europe. “There are a multitude of commercial concerns every fee earner needs to consider when deciding whether or not to accept instructions: the nature of the client, what ancillary value adds you might be asked to provide, your ability to reasonably meet demand and manage expectation. All of these factors impact how profitable a client will be for a firm.”

Piecing together the bigger picture on client cost

Many law firms see the need to have a more carefully managed structure for monitoring client costs. Whilst some client costs are difficult to anticipate, others are not – and factoring them in can strengthen a firm’s risk resilience. Here are some key areas where firms are focussing now and looking to generate stronger controls:
  • Taking steps to improve working capital performance: by using centralised collection processes, improving reporting, recording time promptly, improving control of contractual billing terms, and adopting more automated processes
  • Measuring overall costs more accurately to ensure awareness of how steep expenses may be chipping away at the firm’s fee
  • Measuring team utilisation and ensuring appropriate work allocation and delegation
  • Planning to account for the range of potential financial outcomes of client work
  • Increasing touch points with the compliance team to manage differences in general requirements and audits
  • Assessing work streams to determine if they tend to generate more disputes and claims – and providing appropriate risk management resources and support to mitigate the risks of such disputes and claims arising
  • Ensuring that fixed-fee work is appropriately staffed and supervised
  • Encourage fee earners to think like business owners
According to the PwC survey, the UK’s top 100 law firms are prioritising a number of these areas for business support this year, with improving working capital performance ranking at the top of the priority list for these firms, followed by standardising and centralising business processes and ways of working, as well as using data analytics to make informed and timely decisions.

Cost awareness as a risk management strategy

Getting the calculation wrong when it comes to client cost – or simply not giving it the attention it requires – can have a ripple effect of challenging consequences for a firm. The legal services pricing consultancy Validatum says that when a law firm’s pricing strategy is mismanaged or falls out of alignment with its strategic objectives, the firm risks damaging its brand, reputation and financial strength. Specifically, the consultancy says, “If the firm positions itself towards the premium end of the spectrum but then allows individuals or practice groups to engage in pricing behaviour that is more akin to the budget end of the spectrum, that behaviour will over time inflict considerable damage on the firm.”[2]
This makes it especially important to include comprehensive and accurate calculations of client cost in a firm’s risk management practices.
“As firms look to profit in a shifting and increasingly competitive landscape, analysing overall costs with greater precision can place them on stronger footing for managing the costs they are less able to predict,” said Glynn. “It frees them to focus on building strong relationships with clients and providing a solid value – factors that go far in helping firms attract and retain the business that generates the greatest benefits for them, which in turn should also help improve their risk profile.”
The information provided is intended for use as a guideline and is not intended as, nor does it constitute, legal or professional advice. In no event will The Travelers Companies, Inc. or any of its subsidiaries or affiliates be liable in tort or in contract to anyone who has access to or uses this information.