11 Jul The monthly retainer – perfect arrangement or profit brake?

Would you like more monthly retainer in your revenue stream?

For many solicitors – particularly solo practitioners or micro-practices, the inconsistent rollercoaster – feast or famine – of work is an ongoing challenge.

There is a natural instinct to try and manage or balance this uncertainty with steady work; work you can bank on and that provides a base for bigger, more profitable projects. When it works right, retainers are great: steady work, reliable income, low stress – and the opportunity to add value by really understanding your clients and building trust.

Monthly retainer – traps and challenges

The appeal of a monthly retainer is obvious, but unfortunately I often see them being used the wrong way, resulting in low productivity, weaker client relationships and lower revenue and profit.

Let’s start by looking at the two basic types of retainers:

• Pay for work: where either the work is defined, often but not always in terms of inputs (hours) rather than outputs (value)
• Pay for access: where there are no specific deliverables, or hours, but the client pays to have you on call – for priority service and responsiveness as and when they need you.

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Looking at these arrangements, the first thing to note is that ‘pay for access’ retainers are increasingly rare nowadays. Clients know they can find another lawyer if needed, so why pay for something when there is a good chance you won’t need it? Pay for access retainers are based on the perception of a unique service and deep trust: difficult at the best of times but now that clients are increasingly sophisticated, favour a more transactional approach and pick advisors on a best of breed basis, the pay for access model is dying out.

So that leaves the ‘pay for work’ model – and the basic deal here is that a client gets a preferential rate in return for volume and certainty (lock-in) of work. Essentially the ‘sell’ for the client is cheaper rates which for me is where the problems can start. Is this how you want to be seen: as the cheaper option? Wouldn’t it be better to win clients on the basis of some other positive differentiator such as superior service or unique expertise? If you are good enough, and can sell your value, clients would be willing to pay your full rate and keep coming back voluntarily without any longer term arrangement.

Other things being equal, clients value flexibility and would prefer to avoid ‘lock-in’ or long term commitments unless there is a significant value payback. This payback often comes in the form of a fees discount of 20-40% which is more than enough to write-off any real profit for the solicitor. Try to hold clients too tight too early can also scare them off!

With these retainers, I find that very quickly, one side or the other starts to feel that they are getting the raw end of the deal. If the volume or value of work is below expectations, the client questions the deal. If the volume of work is higher than expectations, the law practice should be thinking again. The whole arrangement risks raising tensions between lawyer and client. Yes, you can be flexible etc. but that takes you back towards a more traditional billable hours approach.

The arrangements often start well because the client prioritises the most important or high value work – and is normally able to extract good value from the lawyer, whose personal productivity dives because much of their time can’t be recovered. But after 6 months, the perception changes as the client struggles to find enough work to justify the retainer. The arrangements falls over and the risk is the client doesn’t come back.

At it’s worst, I have seen law firms trapped in a high number of low to no profit retainer arrangements where the client relationship slowly deteriorates, low value work gets done and resentments grow on both sides until a glorious release. The time-intensive and unproductive nature of the work also robs the solicitor of discretionary time that would otherwise be spent on business development that would bring in more profitable work – leading to an increasing reliance on these low-profit retainers.

Making the monthly retainer work

So, can the monthly retainer be made to work? Yes. Here are my tips:

Differentiate

Give the client a clear strong reason to work with you other than just price (or value for money). If you lack any positive differentiator, you will have no leverage in any negotiation and you will be beaten down on price to an uprofitable level. Build the client’s perception of your value to them by focusing on unique expertise, service, personal rapport and trust: anything to move away from a transactional perspective where the client is solely motivated by getting a good $/hr deal.

Don’t propose on the first date

Never try and start a relationship with a retainer arrangement. The client’s risk and anxiety about being locked into a commitment will inevitably be reflected in lower fees. Get your foot in the door, build trust and demonstrate some expertise with some work on a discrete project first. If this goes well, you will not only be in a better position to negotiate a better deal, you will also have learnt something about the client that will help you sell the longer term commitment.

Sell value, not hours

The best retainer arrangements are based on trust and value recognition rather than any transactional trade-off. Defining the work you deliver in terms of hours will only force the client into a transactional $/hr mindset with the focus on cost rather than value.

Retainer arrangements have to be sold on the basis of value. This means developing and demonstrating real sales skills in terms of building rapport and trust – and demonstrating your superior understanding of client needs. Then you should always try to define your work in terms of outputs and deliverables rather than hours. ‘Productise’ your work with a schedule of work you will deliver over the time period.

Selectivity and balance

A retainer arrangement should never be offered as a default offering to everyone. Successful retainer arrangements depend on trust, mutual understanding of the work and clear expectation management. Offering retainer arrangements where these elements are lacking will only lead to the problems described above.

Law firms should have a clear idea of how many retainer arrangements they want in their practice. There is certainly value in having a certain amount of work ‘locked in’ but this shouldn’t come at the expense of more profitable work. Set a limit to how much revenue and how much time should be spent on lower-profit retainer arrangements. You need to allow yourself some time for business development to seek more profitable clients. Believe in your ability to get and retain high volume work without having to offer the discounts built into retainer arrangements. Effective risk management requires belief and confidence.

Consider alternative volume arrangements

Retainer agreements aren’t the only way of rewarding clients for their loyalty. More innovative practices are now offering clients volume discounts so the rate goes down as the volume of work goes up.

The psychology of this approach is so much better and more attractive than with retainer arrangements. The client feels valued and rewarded for their loyalty rather than trapped – and the work keeps coming through through positive incentives, trust, relationship and quality work rather than contractual arrangements.

What are your views on the monthly retainer? How have you made it work?

www.gileswatson.com.au