Midsize Firms Grew in 2007 - Were there better options?

Law.com reports that midsize firms in Pennsylvania saw significant increases in revenue, staffing and clientele. Much of this growth can be attributed to those firms raising their rates.

Managing partner Kevin McKeegan also pointed to increasingly ambitious asking prices as a major source of new income.

“We were less shy about [raising our rates],” he said, adding that the majority of his firm’s business comes from word of mouth and referrals. “We came to the realization that if national and international law firms could continue to do it, we could do it as well and still be a very good value for the client at the same time.”

The midsize firms interviewed noted that the price hikes were justified and necessary because they are competing for the same attorneys as the large firms, who can offer bigger salaries. Raising your rates when the larger firms raise theirs isn’t necessarily a bad idea (especially when it works, as it apparently did in 2007). That being said, smaller firms have at least two other options to increase their revenue.

It appears that all of the firms interviewed in this article used billable hours. The first options small and midsize firms have is to implement a flat fee model. There may be a risk that you’ll occasionally under-bill clients, but with careful planning that risk can be minimized. The beauty of the flat fee model is that it takes into account your expertise and knowledge, whereas hourly rates only bring in revenue based on time.

Flat fee pricing allows firms to capitalize on something akin to research and development costs. Consider it this way: when you buy that new iPhone or laptop, you’re not just paying for the labor and materials; you’re paying a small chunk of the millions invested to make that product a reality. The same is true for pharmaceuticals and many other industries. Expertise and knowledge breed efficiency and that efficiency is not compensated under an hourly billing model. Just because a particular matter only takes 10 hours to complete doesn’t mean that it’s only worth 10 hours of labor.

The flat fee model also has the advantage of being attractive to many clients. It’s not a secret that bringing new clients into the firm increases revenue and overall growth.

The second option small and midsize firms have is outsourcing their work. I mentioned in another post that Pittsburgh-based firm Delta Law Group relied on a network of around 20 solo practitioners to complete its work. This addresses the problem of having to compete with large law firms for talented attorneys. As technology advances, business is shifting from a competitive to a collaborative model. Outsourcing work to specialist solo practitioners is an excellent way for small and midsize firms to capitalize on this trend.

Using a network of solos works because the solos will potentially receive more compensation (proportionately) than they would as associates for a large law firm. At the same time, the firm eliminates a significant amount of overhead by reducing its salaried staff. The end result is a lean business and client satisfaction (because their legal services are being provided by dedicated professionals with a stake in the venture rather than disgruntled associates).

All of this is not to say that small and midsize firms shouldn’t raise their rates when the large firms do. This may often be a prudent business decision. It is, however, dangerous for small and midsize firms to constantly look to Big Law for guidance. Doing that reduces the competitive advantage, agility and adaptability that small and midsize firms enjoy.