Commercial Awareness Update – W/C 1st April 2024
April 1, 2024
Recruiter Corner: Karen Manu, Graduate Recruiter Assistant at Reed Smith
April 3, 2024
Article by Jaspreet Bassi
A law firm is a business, and it needs to generate revenue to continue providing services to its clients.
This article will explore the different ways that law firms make money.
Clients
The primary way that law firms make money is by charging clients for the time that they spend working on their particular matter.
Fee earners such as partners and associates can provide different pricing mechanisms to their clients.
The most common pricing mechanism used by fee earners is charging clients based on a billable hour model. The billable hour model is made up of units, and these are six-minute intervals. A fee earner records their time to note how long they spend working on a task for their client. The rate a fee earner charges will depend on the fee earner’s position. For example, a partner will have a higher charge-out rate than an associate.
The billable hour model has been criticised by clients and this has led to other pricing mechanisms being used by law firms. For example, it has been argued that it incentivises lawyers to be inefficient with their time. This is because if a lawyer spends more time working on a matter, the more money the law firm makes using the billable hour model. In addition to this, clients argue that when work is charged per hour, it results in them being unsure about what the cost of the case will be and may result in higher fees than they originally thought. As a result of these criticisms, in-house teams request alternative pricing mechanisms such as fixed fee arrangements.
A fixed fee arrangement is where a client pays a law firm a fixed fee to work on their matter. This arrangement is good for clients because they know how much they will be charged from the outset. Despite this, fixed fees may not be suitable for certain areas of work. For example, in an M&A transaction or a litigation matter, the nature of the work and transaction means it is difficult to precisely state how much the fee should be at the beginning.
Other Services
Another way that law firms make money is by providing other services to clients. For example, some law firms offer services like consultancy. Additionally, law firms often run webinars that keep their clients updated on news that is happening within their clients’ industries, and sometimes, they may charge a fee for their clients to attend the webinar.
