This week, we kicked off our three-part webinar series with Tim Corcoran, of the Corcoran Consulting Group. Tim's first webinar addressed an Introduction to Legal Project Management, which is a fascinating topic, which I'll recap in two parts.
Tim offered his best practices, based on years of experience, and condensed what is normally a half day session into an hour - so there's a lot of information in this webinar!
The themes for the part of the session covered in today's recap:
- What happened to our ecosystem? The wonderful world where clients paid handsomely for good legal work is gone - something changed, and now clients are pushing back more on rates, talking about whether they'll pay by the hour or not, the kinds of attorneys that will service various matters, and alternative providers of services. There is also competition from other sized firms, including big firms that are becoming more savvy about pricing.
- Our reactions: the good, the bad and the ugly: How did law firms react and how did clients react to the downturn?
- Budgets: Costs and predictability
Tim referenced the book "Who Moved My Cheese," which talks about our ability to adapt to change. Not surprisingly, some people adapt well, and some less so - the legal profession, as a category, tends to avoid change or move slowly. However, the economic downturn forced lawyers to address some fundamental changes in the profession, which they're still working through today. What firms did before, how they operated, how they won clients, how they marketed - all of this changed almost overnight. Clients are now selecting different law firms for work, and longstanding relationships were severed.
Firms hoped that the recession would be like others, and would fix itself in about a year or so, but while things have improved somewhat, it's been five or six years and it's unlikely that we'll return to the old model.
So what can firms do about this? Well first, they have to look at what their clients want. Tim said that there are many client satisfaction surveys out there, and they all pretty much come up with the same top three concerns for clients:
- Outside counsel costs
- Lack of predictability
- Ineffeciency of the hourly billing system
Tim commented that there has been a lot of time vilifying hourly billing, but at its core, it's no worse or better than another method of billing would be. Essentially, when a client finds equilibrium between the services rendered and what he or she is paying, they care less about the mechanics of how the invoice is generated. So hourly billing isn't the problem - it's just the connection to value.
So what are firms doing about these client concerns? The legal world has turned upside down - most of those in the profession grew up in a generation of near unlimited legal demand. Although there were some regions or practices that ebbed and flowered, by and large there was always a countercyclical practice that allowed firms to thrive. This put lawyers at the top of the pyramid - they were the sought-after adviser who help people move through these tough legal issues.
These lawyers are accountable to general counsel (Tim used this term to represent in-house legal departments, individual GCs or those business professionals who make the legal buying decisions at their companies). Then at the bottom of the pyramid is the business executive - many lawyers who have practiced in this seller's marketplace spent little time talking to the business executive because they're talking to the general counsel instead. In this seller's market, the law firm had the opportunity to set the pricing, to decide what services would be offered, and the clients were somewhat subject to this.
Now, however, it's a buyer's market, and what drives everything else is what the corporation is trying to accomplish. The business executive is at the top, and they put pressure and influence on the general counsel, which moves downhill to the lawyer at the bottom. Tim said that at the moment, as provocative as it may sound, in a typical corporation, a typical business executive has no more understanding or interest in the law firm name than the providers who mow their law, handle their cafeteria services, do their accounting or any of the other providers who provide necessary, valuable and even critical services. They just want to accomplish their business objectives, and this shows in what they're willing to spend.
Tim noted that clients had several reactions to the economic downturn:
- Freeze rates: when the downturn hit, the clients reacted and some of them overreacted. Many of them froze rates and firms adapted to that.
- Bring more work in-house: some clients brought more work in house to be handled by their robust legal departments.
- More convergence: this term is one that most lawyers will equate with the last twenty years of efficiency - corporations narrowing down the firms that they work with. It wasn't pursued as rigorously as it has been in recent years - initially, they may have trimmed down to fifty law firms, but now they're down to twelve or twenty. Those firms may have an improved book of business, but it's a challenge to get on that short list.
- Sever long-standing relationships: we also saw a weakening of loyalty - clients have been severing longstanding relationships. They may have been working with a firm for twenty years, and be deeply embedded with them, but overnight, they've said that they value cost more than the relationship.
- Bill review/increased scrutiny: not only are clients scrutinizing dollar amounts, but they're also looking at the explanations - what do various things mean, and how do they benefit the client? They push back, which manifests itself in realization rates - Tim said that he doubted many on the call would have 100% realization rates, because the clients look at the invoices and at some level, they find fault either with the services or the rates charged.
- Matter management and e-billing systems: these are more popular than they once were, particularly those e-billing systems that force attorneys to code their tasks and submit them electronically. This allows clients to start harvesting and reviewing and analyzing various services across regions and providers to give them a sense of their buying power and the going rate for various services. Tim commented that we'll see more and more of that.
- Benchmarking: Most corporations in many services areas look at legal services and want to know what the rate of legal costs should be per dollar of revenue. Even absent an understanding of the issues that they face, they'll look at this on paper and say that it seems that for a company like theirs, they're spending way too much on legal services and they will want to cut their budget.
- Alternative Fee Arrangements: these are being requested by clients who want to share more risk.
At this point, Tim paused for questions, and there was one from the audience. Someone said that their rates are competitive and they're not seeing a lot of AFA requests, so they're wondering why legal process management would matter to them? Tim said that a lot of people on the phone may be wondering this, but it's really about managing expectations, improving client satisfaction and improving communications, so these concepts will work equally well whether an attorney is billing by the hour or alternatively.
Law Firm Reactions
Tim described three phases for law firm reactions to the economic downturn.
Phase 1 assumed that this would be like other recessions, so the first thing that firms did was to reduce administrative staff, what they considered to be non-essential staff. They also cut expenses in a short term effort to maintain profits during the downturn. For the most part, the action in Phase 1 was to hide our heads in the sand.
Tim said that he hoped the audience members presence on the call meant that they're not of this mindset, but added that he still talks to firms weekly who think that the economy will turn around at any minute. Unfortunately, this isn't true.
In Phase 2, firms started reducing operating costs - they took a look at how they operate to figure out how to do something different. They outsourced a lot of business processes, and Tim noted that he's seen a number of UK law firms outsource their entire IT staffs. It's about growing topline revenue.
Phase 2 was also about lawyers talking to clients and figuring out what pleases them, what challenges they have and how they can address their needs - this has resulted in more business development training for lawyers.
They've also started digging through the tough questions of lawyer staffing. We've seen the de-equitization of partners, lower hiring rates for new associates and a pickup in the lateral market for those attorneys willing to transfer their book of business.
This phase also saw reactive alternative fees - clients would call upon their firm with a request for fees that were different to hourly billing, and firms would reactively put these together. Many firms are still in Phase 2, and they're starting to think about how they'll operate differently if the economy doesn't pick up. But some firms have moved into Phase 3.
Phase 3 is about understanding that the firm is both a business as well as a collection of professionals with noble ideals. This phase involves thinking about the business process of a law firm - how do firms deliver legal services - both the back office as well as how lawyers operate. This is where Legal Project Management comes in, and using alternative fees strategically and practically, not just when forced to.
This is what LPOs do - Legal Process Outsourcing - Tim said that there are a number of organizations that look like law firms, and have lawyers working for them, but they're not law firms. Clients are turning to them increasingly to have them do the type of work that can be done by lawyers who aren't in big cities or big offices, at high rates.
We're also seeing a great increase in the number of firms that recognize that their leaders are not equipped to manage their businesses as businesses, so we're seeing a change in practice group leadership in particular to address these changes. And finally, Phase 3 is also seeing a greater client focus.
Tim said that he could dive right into the stages of LPM, but spoke first about the corporate budget process to give everyone an understanding of how clients operate. He said that although there are obviously differences, the themes are fairly universal whether it's a publicly-traded corporation or a privately-owned business - everyone has a budget and is worried about predictability.
So sometime before the end of the year, if, as an example, his company's fiscal year ends in December, it's very likely that he'll start thinking about the budget for the coming year - probably in July or August. He'll start distributing worksheets to the various managers, whose job is to take a look at their expenses and roll them up. These are then submitted to the senior executives, who may roll theirs up with other divisions and submit to a parent company or board.
Then, there is a negotiation that takes place, and this usually takes about four to six weeks to run its course. This normally results in two demands from the senior executives:
- Lower your costs
- Increase your revenues
The process of going through a budget is to accomplish a couple of things - the business executives are trying to reduce their uncertainty and identify their capital for investment. In some cases, they will also need to identify shareholder return. So building a budget is a complex task - it used to be that a company could look at the previous year's budget and build on that, but we're seeing more zero-based budgets, where managers have to justify every expense every year.
They do that starting with fixed expenses, which make up the largest portion - these are expenses that are known. The next group is variable expenses - these are fairly predictable, but may change due to a price increase or the like. Then, there are volatile expenses - Tim used the example of having to predict gas prices 18 months out - this is not something we have control over.
The objective is to carve out the volatile expenses and have as little exposure as possible - Tim showed a picture of a pyramid with the bulk of the budget made up of fixed expenses, and the volatile expenses the smallest part at the top.
They then do the same thing with their revenue budgets. Since it's not possible to eliminate surprise completely, companies just try to contain it, and so they reforecast throughout the year. So they essentially go through the budgeting process many times a year. It used to be done quarterly, but many companies are doing it monthly now. So you can see why predictability is critical - and this is the underlying theme for everything to do with project management.
Tomorrow, we'll look at LPM concepts, process improvement versus LPM and LPM 2.0!