Bananas and legal services
21/04/19 - 13:55 Filed in: Procurement
The Australian Bureau of Statistics publishes Producer Price Indices for a variety of categories. Here's how the ABS defines Producer Price Indices (PPI):
The Producer Price Indexes measure price changes, over time, in selected industries of the Australian economy. Transactions for each of these industries may cover purchase and sales of thousands of different products at a wide variety of prices. The sheer volume and complexity of these transactions mean that a non–probability sampling method is more practicable and efficient than probability sampling methods. A non–probability sampling method involves choosing producers based on the relative importance of the products they sell or buy, who they sell to or buy from and the nature of their pricing policies.
My chart is for Legal Services, and what is remarkable (at least in my opinion) is the 'stepped' pattern of rate increases that seems to happen in the September quarter each year. Have a look at the peaks in the red line (the % change from the previous quarter) in the chart below and note the quarter when the PPI moves up by the largest amount.
t is September, isn't it?
The 'so what' is:
legal services pricing appears to follow a seasonal pattern
legal practices appear to raise rates in July, August and September
the volatility in PPI appears to be reducing, with lower peaks and shallower troughs
the start of the calendar year appears to be the best time to buy legal services
March 2018 saw PPI increase in the first quarter for the first time since 2013
Having written about the difference between a facility with Excel and strategic sourcing, I taught myself how to 'de-seasonalise' data using 'centred moving averages' and undertake trend and regression analysis using Excel. Watching the videos took 45 minutes, and creating the charts another 15 minutes. But that hour of investment allowed me to forecast what the PPI is likely to be in the next quarters:
It will be interesting to see if I'm right! The point about analytics is that analysis is not an end in itself, it is only meaningful if it helps reveal patterns and build understanding.
So what do you think drives seasonality in pricing of legal services?
"It is obvious, numpty" I hear you say. "Legal practices raise their rates in July each year!"
But how does that explain what happened in March in 2012. Or March 2014. Or March 2016? Rates were decreased in each of these quarters. If your theory was correct, presumably legal practices all cut rates in March every year? That is not true, so we need to interpret why rates are seasonal and why they rise and fall following a pattern.
So I obtained some data from the ABS on sales levels in the relevant sub-category (Professional, Scientific and Technical). It is true to say that the category is broader than just legal services, but it is the best proxy measure that we have. I correlated sales levels in each quarter with the PPI in the next quarter, and the r value is 0.65 and the r-squared value is 42%. Hardly earth-shattering, but a reasonable hypothesis;
Sales in the last quarter have a direct impact upon pricing in the next quarter
To test my ground-breaking theory that legal practices vary rates with utilisation levels, let's examine some recent quarters
In the quarter ending in June 2016 sales went up nearly 15%.
The next quarter rates went up because the practices were busy and didn't need the work
In the quarter ending in September 2016 sales levels went down.
In the next quarter rates still went up, but by a tiny percentage
Sales levels in the quarter ending in December were up
In the next quarter, rates stayed the same
In the quarter ending in March sales were down
In the next quarter, rates were held at the previous rates.
In the quarter ending in June 2017 sales were up again
In the next quarter, rates went up again!
So it appears that:
sales volumes for legal practices are volatile
sales volumes for legal practices are seasonal
Q1 (in the calendar year) is quiet, and rates are either stable or cut to win work to drive utilisation. Q2 is usually busier
Rates are routinely increased in July, August and September when there is an annual rate review
Q3 is usually quiet, and things pick up again in Q4
Pricing for legal services is dynamic. Rate cards may be set annually, but pricing varies with utilisation levels
Utilisation levels vary throughout the year. The start of the calendar year appears to be quieter for legal practices
Inviting annual rates from legal practices (for example 'ceiling rates') requires the legal practice to estimate utilisation levels
If you must fix pricing for 12 months, the best time to invite pricing is between January and March.
Pricing for legal services is becoming less volatile
Rates are still increased when the practice is busy, but rate reductions to chase business appear to be less popular with legal practices
There appears to be an industry-wide change in pricing practice. happening.
This may be related to the rise of panel arrangements for legal services, and the increasing role of procurement in this category
So what do bananas and legal services have in common?
When retailers have lots of bananas to shift, they cut the rates. At least bananas can be stored for another day. A day of no utilisation for a legal practitioner is lost forever. The key to acquiring legal services would appear to be understanding utilisation levels.
And a calendar