Negotiating fees in a professional services firm

Negotiating fees in a professional services firm

The topic of negotiating fees in a professional services firm is an age old conundrum. It’s importance has significantly increased because the use of technology now has the ability to improve profits by reducing labour costs, whilst at the same time placing services at the finger tips of clients and thereby commoditising what was previously considered to be advice driven specialisms.


The world of professional services is facing all kinds of challenges and those firms who survive are those who modernise and professionalise. With the arrival of multiple new business models, pricing structures, distribution channels and marketing strategies driven by this explosion of new technologies, the professional service industry, and legal sector in particular, is becoming ever more competitive.


To survive, and indeed thrive, firms will need to be flexible and professional in all areas of their business. If not, the danger is that the rapidly changing marketplace will leave them behind. As we highlight in our book, the Firm Principles, those who do not raise the anchor and address these issues face, well risk, being left behind!


So, what is the best approach to use when negotiating fees in a professional services firm?


Problems with hourly billing


Historically, firms have charged by the hour – a simple, if blunt tool, but in this new environment, new tools are needed for the toolkit; clients are demanding it, competitors are providing fixed prices on web based platforms which make costs transparent and comparable. The good news is that the firm that rethinks their approach will find it produces lots of opportunity to create happy clients whilst simultaneously boosting revenue and profits.


The main problem with hourly billing is that there are only two variables involved – time and cost per hour – which do not allow much leeway in negotiation. Consequently, it often ends with an upset client (thinking they’ve paid too much) or an upset lawyer (believing their hard work was unrecognised and underpaid) or, frequently, both.


Invoices raised on ‘value’, i.e. based on how much the client has been saved (money wise or by avoiding hassle or costly mistakes) are much easier to sell at a higher value.


As a lawyer once said to my friend when they were preparing their pre-nup before getting remarried, “Isn’t a few thousand spent now worth the risk of potentially having to give away a few million in the future?”


Or even the accountant working with a client to submit their capital allowances claim – “Without my advice you’ll have a bill for “X” – with my expertise I can reduce it to ‘Y”, and potentially, the solid reputation of my firm means your claim will sale through unchallenged, saving you further hassle and cost in the future.”


Both client’s never raised the cost of fees again!


Is value billing the answer?


With a more flexible strategy, however, there are greater possibilities for aligning  the interests of both client and adviser, and resources more efficiently, making negotiating fees in a professional services firm much easier in a solution where both parties are happy.


The key is to find where the real value is for the client and then price accordingly. It could be many things: increasing recovery, reducing pay-outs, reducing risk, protecting reputation or a host of other possibilities.  Once you have identified this, you can find a suitable price structure.


There are many structures now being commonly used: fixed fee, capped fee, blended fee, contingency fee, value based fee, tiered rates, portfolio fee and many more, including combinations of the different models. Finding the right structure allows the client to achieve their outcome at a price they are prepared to pay whilst simultaneously allowing the law firm to operate on a profitable basis.


Our small print……..


However, there are three things to consider in order to make this approach work.

  1. The adviser needs to fully understand where the value is for the client. The advisers ‘value’ is their knowledge and skills to enable the client to achieve their goals.  Too frequently we see complaints because the adviser focused too much on the knowledge and skills aspects, rather than explaining how this advice will help the client achieve their goals. The adviser has to shift their emphasis to achieving the client’s goals first or, at least, be more explicit about the fact that their advice is what will help them achieve this goal. The client first mentality!
  2. Successful pricing is built on project planning to understand workflow and timing of available resources.  This will enable you to know what you can and what you can’t do whilst remaining profitable. Astute planning will help you find efficiencies to boost your margins.
  3. Timely project execution has not always been a traditional strength of professional services firms because hourly billing means time can be spent but not billed. Consequently, working to a fixed fee based on the value you are adding, can very very rapidly reduce profits if the execution is not managed effectively.


Negotiating fees in a professional services firm


If you are able to find the right pricing model for a given situation, you will be in a position to:


  • Win the work, particularly in competitive pitches
  • Reduce the need to discount fees because any negotiation will be on the structure rather than the rate
  • Build a profitable practice with happy clients and confident negotiators!


Our business simulation modelling and negotiation skills workshops will help your specialists become better advisors and negotiators. To find out more please contact us on 01892 610060.