Mid-sized firms and How to Adjust to the "New Normal"

There's been a lot of chatter over the last few years about the "new normal" for law firms, and what that might mean.  Yesterday, I was reading an interesting article at Above the Law, which addressed the idea that the new normal is a lot like the "old normal" (making the boom time an aberrance and not the other way around). 

While that part was enlightening (and I recommend reading the article in full), what I found most useful were the lessons that the author felt we'd learned over the past four years and advice for BigLaw firms in dealing with the new normal.  We all recognize that BigLaw and mid-sized firms are different, but in this case, the advice are very much the same for both. We've been hearing it again and again, so it's definitely time to start making some changes (if you haven't already), to remain competitive. 

 

Listen to Your Clients

As Above the Law says...

This sounds obvious, but you’d be surprised at how often firms don’t listen to their clients. For example, before undertaking an expansion into a new geographical region or practice area, a firm should assure itself that there’s actually demand from its clients for the new services." 

This applies to mid-sized firms too, who may be considering opening an additional office or starting a new practice group within the firm. How have you identified that this is what your clients want, and will serve their needs well? 

Rethink Your Business Model

Again, Above the Law says...

The advisory encourages firms to consider sending certain functions to outside providers or to less expensive parts of the country or the world; to provide transparent and responsible leadership; to pay attention to firm culture, using lateral hiring judiciously rather than indiscriminately; and to maintain a strong balance sheet. (Those last few items all sound like lessons learned from Dewey’s downfall.)."

This is something that Tim Corcoran spoke about at length during his webinar series for ILN members. He delved into the topic of outsourcing and contract lawyers with the help of Kevin Colangelo in his final webinar, the recaps for which can be found herehere and here. Using contract lawyers and outsourcing certain business functions isn't just for large firms; mid-sized firms can and should consider it too. 

Differentiate Yourself

It's no longer sufficient to say that you're a high quality law firm with talented lawyers - that's what gets you admission to the table these days. Above the Law says...

I talked about this a bit in my recent Bloomberg TV appearance. Firms need to figure out which areas to prioritize and which areas they’re going to stake their reputations on. The days of “pretty good” regional firms that get business just because they’re there are numbered; firms need to figure out what their marquee practices are going to be. Why should clients go to your firm as opposed to the one down the street?"

So it's no longer going to be enough to say, "We're a full-service law firm; we do everything well." What will you specialize in? Firms need to give their potential clients, and yes, even their current clients, a reason to hire their firm over all others. Everyone is hungry for business, so clients need to have a good reason to choose you over someone else. Differentiation isn't just about marketing and branding - it's about making a decision about the business model you're going to pursue as a law firm. 

As you're thinking about this, I recommend reading the recaps from Tim's webinar sessions if you missed them (or even if you read them the first time) - Tim does an excellent job of describing the difficulties we have adapting to the new normal, and how we can make the most of the current climate. Because as Above the Law points out, while it might be a painful truth...

So while the “old normal” was followed by a big boom, the “new normal” probably won’t be. Trends like technology and outsourcing are putting pressure on prices that is unlikely to abate, even if the larger economy improves (as some think it will in 2013)." 

 

ILN Webinar Series - Contract Lawyers & Outsourcing Part II

Yesterday, we began our recap of the Contract Lawyers & Outsourcing webinar with Tim Corcoran and Kevin Colangelo. Today, we continue the discussion. 

Who is Doing this Successfully, and How?

Tim said that one of the challenges he's heard from law firms about outsourcing is that their work is unique, their firm is unique, and as such, their work is hard to routinize and find a common way to deliver the services. So he asked Kevin to comment on how others who have done this have found that there are practices that can be improved through this approach - and not just the low-end, simple document reviews, but some high end work as well. 

Kevin said that they analyze the tasks going on within a law firm, legal department our sourcing department to see what can be disaggregated. Those that they've been able to disaggregate, they rebuild in a very process-heavy, documented environment. This extends outside of just outsourcing - firms can understand both how they get their work done and improve the way they're doing it with the people that they're using. This blends into not only the way that clients want their firms to do the work, but also how the firm itself wants to be operating. 

Kevin said that he worked with lawyers for many years who believed that everything that came across their desks was bespoke, as if someone wiped all knowledge from handling a matter as soon as it was completed. But truthfully, what they knew about something could be winnowed down to the core issues in about three or four hours, and it was taking them 14 hours. In a seller's market, that was easy. But in a buyer's market, it's very challenging to do this time after time if you want those clients to keep coming back. 

He went on to talk about some of the other models of outsourcing, beyond just that of sending work to a single company. There is also using temporary attorneys, people on flex schedules, and more. His overall message is that there is a strong movement, driven by clients and smart firms of all sizes, to rationalize the way that work is done across all specialties. 

There is, of course, the work at the top of the pyramid which will always be the "backbone" work - this can only be done by this attorney. And Kevin argues to his clients that they should pay a premium for this type of work, because that person or specialty is rare, the subject has all kinds of landmines you can't predict, and it's not the type of work that's subject to disaggregation. But that kind of work is only at the very top of the pyramid. 

As technology evolves, this portion of the pyramid is getting smaller, so firms need to focus their time on the vast majority of legal work that is getting done, which is work that is more appropriate to discuss from a process perspective. Tim agreed and said that it starts with understanding how firms deliver legal services and which of those are premium, versus those that are repeated multiple times. Find the commonalities in the steps, paths and ways to deliver those services. This might result in finding a third party to do that work at a lower cost, using your process, or it might be embracing that process improvement and finding different lifestyle lawyers at your own firm. 

Kevin said that the clients have the power, but they're not being jerks about it. They face significant pressures to do more with less, and they're trying to look to their trusted advisors to help guide them. He emphasized that it is happening, but he's heard from all of his clients that it's not happening fast enough, particularly at the largest law firms. There is the notion that firms are going to squeeze as much as they can out of this market before they're forced to move to phase three, and clients know this. But he suggested flipping it a little - when you show a client that you understand the way you do your own work, or you inquire about how they do their work, so that you can map your work processes to theirs, the word "commodity" isn't offensive - it's a weapon. 

When you look at core versus non-core work, core will always be at the top of the pyramid, and it's what keeps the firm chugging along. But the reason that firms have their clients and the way that they can expand their client base is using the entire pyramid - the work at the bottom of the pyramid might not be as profitable as it used to be, but if you can keep that non-core work in-house and show your clients that you're doing it in a way that's beneficial and provides value to them, they'll give you more of the top level work. 

Okay, I'm Sold. But How Do We Figure Out Which Practices are Amenable? 

Tim asked Kevin to comment on how to assess which law firm practices might be amenable to the outsourcing approach. Kevin said that there are number of ways, and when looking at the models out there, he draws a stark line between the law firm model and what is not a law firm. He uses the term "LPO" to define individual companies that are providing legal services in a very process- and technology-heavy environment, and that's one category of non-law firm outsourcing.

Another would be contract attorneys - they have been around for many years - and this is when an attorney sits in a room, is paid by the hour, and goes through and redacts volumes of documents. Kevin said that this model has been tested, and it's used by clients and law firms alike. 

One of the newer models is "flex time." He's seen some in the US, but there has been more press about them in the UK, where there are companies popping up who are bringing people back into the workforce. Technology enables them to provide valuable services using their experience at hours that are convenient to them. It's not a process-heavy model, and not a staffing model, but Kevin plans to keep his eye on this.  However, he also pointed out that they're not working in an environment designed to deliver the most efficient approach to legal services. 

In terms of analyzing the type of work that is most amenable to outsourcing, there is some history now in the LPO space (eight years) of seeing what in-house lawyers and law firms are buying from these discrete companies. It includes much of what we saw in the slide about the types of outsourcing - document review, privilege logs, etc. Kevin said that the software in used today is incredibly good. He asked the audience to think about the amount of data we're generating daily, versus even five years ago (mostly email) - the software goes through this and may pick 20,000 out of 1 million emails that need to have human eyes review them. This is down from 30,000 last year, and 40,000 the year before. 

At some point, you need to have smart, well-trained eyes reviewing these documents for particular issues in a very process-driven, documented, reliable manner, and that's well-suited for a process-driven company like an LPO. He said it's the same thing with due diligence - companies now realize that their contracts are asses and liabilities that they need to start managing. Good, reliable software has also been developed in this space over the last 5-6 years, so it's an analog to the document world. 

Kevin added that IP has been very routinized from the beginning, and this work has been outsourced for many years, going back to the 90's. The database of patents, particularly in the US, is very easy to search, and clean, third-party software has been developed for that, so that's also well-suited to outsourcing. 

Then, moving up the chain are things like compliance and actual contract drafting - these are more on the bespoke side of things, and is a result of almost a decade of these LPOs doing outsourcing work, understanding the cadence and the issues on the easiest, commoditized work, and starting to see patterns as they move up the value chain. Kevin said that one of his last roles in the LPO space was to train a team on corporate secretarial work - firms might argue that this is bespoke, but in reality, it's just jurisdiction-specific. Once you master a jurisdiction, it's very commoditized. There are a lot of phone calls required, but if you have people who are good on the phone, it's easy to do. Kevin sees this as where the future is going - he still sees significant value for law firms in the top 40% of the pyramid, where law firms can provide services you can't get anywhere else, but this is where the industry is going on front office outsourcing. 

Thinking about Outsourcing - What to Think About? 

Tim asked Kevin to discuss what he should be thinking about if he's a law firm ready to embrace outsourcing.  Kevin said that the first thing is to think about the market - onshore versus offshore. The market is primarily offshore, both labor/arbitrage and process. So one of the first decisions is where should we go with this, if we're going to go offshore. Kevin offered his criteria to consider: 

  • English language legal system
  • British common law legal system and training 
  • Capitalist economy
  • Democracy
  • Infrastructure & commitment to capital investment
  • Advanced technology - secure, encrypted, redundancies, etc. 
  • Government commitment to growth
  • Comfort with foreign business and investment
  • History of commerce with the West
  • Entrepreneurial spirit
  • Labor cost savings
  • Scalability (both in terms of lawyers and business factors) 

The first two are the most important, along with a commitment at the right level of management. He said that it's the same reason you're in the law firm that you're with - you've made a commitment to practice and you like what you see at that firm. It comes down to some common sense considerations. 

Kevin said that he's asked about the human resources side a lot - when he first started with his LPO company, it wasn't really known whether or not Indian lawyers could do the work that US lawyer do, and that's one of the reasons he encourages firms to look at the first two criteria. The Indian legal system is based on British common law, so the way that Indian lawyers learn contracts and the principles of law are the same, and it's just that the execution is different. This is true of other former British colonies as well. 

At the end of the day, there is a large pool of very talented, motivated professionals who understand the way that work needs to get done, and the legal principles. Wrap this around the right technology and the right leadership, and you're in good shape. Kevin emphasized the importance of understanding the backgrounds of the people who put the operation together, along with the people who will be your primary point of contact. He added that you shouldn't rely on references alone, but instead, be very comfortable with the day to day interface. 

Additionally, you'll want to make sure that your provider will be around from year to year - Kevin said that we've passed the danger point of that phase with the LPO, but the challenge when you talk about other kinds of outsourcing outside of LPOs is still there, so it's important to be careful. 

Tim suggested that firms do their due diligence as they would with any other service provider, and said that some of the myths and fears about the capabilities of lawyers in other jurisdictions will be dispelled by meeting these criteria. 

Tomorrow, we'll delve into the final part of the webinar! 

ILN Webinar Series - Alternative Fee Arrangements Part II

Yesterday, we began with the first part of Tim Corcoran's webinar on the strategic role of alternative fee arrangements. After Tim's elephant analogy, he gave the attendees a short economics lesson. Using a graph with two parallel arrows, Tim said that essentially, we charge a rate that is higher than our cost to deliver. Price needs to be higher than the cost, and profit is derived from the difference between the cost and the price. 

But law firms do a poor job of calculating costs - other than their overhead and real estate, they don't know the cost of the delivery of their legal services. 

So the challenge is, as we saw in the recent downturn when there was downward price pressure, because we haven't fundamentally changed our delivery costs, our profit turns to loss. In the first part of the webinar, Tim had talked about the inevitable movement from premium and strategic to commodity, meaning that clients will pay less for something over time. That's what we're seeing - clients are refusing to pay for work that they believe doesn't have the same value it once had, but law firms who have not adapted their cost structure for this are experiencing loss. 

In the short term, firms can maintain profits by lowering overhead - they can reduce associates, limit travel, eliminate memberships, get rid of free soda and coffee - but they haven't fundamentally addressed the cost of delivery. So there is still the risk of loss, unless clients decide to pay a lot more for tasks and services that they know don't have that level of value. So what do most businesses do?

Most businesses incorporate a learning curve. Tim showed us that simply diagrammed, a learning curve is when you strive to lower your cost of delivery, you will always maintain profits even when revenues decline. If a client says that you've done the same task twenty times, and wants to know why they're paying even more for the twentieth time, when the firm still can't tell them what it costs in advance. Tim challenged everyone to imagine a world in which the lawyer says that they will charge the client less for this twentieth matter, and the firm will be more profitable because it's learned from its experience and can manage the delivery of those legal services in a way that reduces inefficiency. 

He said that this works whether the firm is billing by the hour, or embracing alternative fees. The concept is that profits are derived from lowering the cost of delivery at a rate greater than the revenue decline. However, revenue doesn't always decline - imagine that it picks up. Imagine that other law firms are desperately waiting for clients to pay more and that's the way that they'll generate profits again. But we've lowered our costs and continue to do so, so as revenues rise, profits are greater. 

These are simple economic concepts, and there is no shame in having a profitable enterprise. Clients want profitable, thriving partners - they want their outside counsel to do well, because they fear that when they're struggling, their work product suffers. But for law firms to thrive, it shouldn't be a zero-sum game - clients should also win. 

Tim shared some quotes from law firms: 

We've done more alternative fee proposals in the last four months than in the history of the firm."

It's difficult for clients to budget legal fees. In the past year, there's been an increased demand for flat fees. Hourly rates have too many variables in them."

We (law firms) have to get better at budgeting. Clients aren't looking for us to cut our fee or give them a 10% discount. What they really want is predictability." 

So how does a law firm embrace this learning curve? One way is to proactively pursue alternative fees - finding ways to lower the cost of delivery by figuring out what it costs to do different things, and matching that with the clients' expectations for value. 

Tim drew on a couple of slides from a study done by the American Lawyer Media Legal Intelligence team, commissioned by LexisNexis and CounselLink on alternative fees for law firms and law departments. He first acknowledged the obvious, that there's been an increase in alternative fees in recent years. They're finding that so many law firms have embraced these at a greater rate that it's become a meaningful part of their billings. 

Alternative Fees

Though Tim didn't delve too deeply into the various types of alternative fees, he did offer a slide that broke them down: 

 

  • Blended rate - sets an agreed-upon hourly rate that applies to all lawyers working on a matter, regardless of their seniority. Encourages firms to staff matter efficiently.
     
  • Capped fee - Limits the total cost of an agreed-upon amount of work. It is often used in conjunction with an hourly rate arrangement. Provides a degree of predictability to clients who are otherwise comfortable with hourly billing. 
     
  • Contingency - specifies that a firm will be paid only if it achieves a financial recovery or other agreed-upon result for the client. Typically, the firm receives a percentage of a total recovery. Provides protection from a bad result for clients who are willing to forgo a large portion of a positive result. 
     
  • Defense contingency - establishes an expected outcome for a defendant in a monetary claim and specifies that if the firm obtains a better-than-expected result, it will receive a portion of the savings. Encourages the firm to limit damages. 
     
  • Flat fee - sets an agreed-upon sum of money for a discrete amount of work. The firm, not the client, assumes the risk of cost overruns. Encourages firms to perform distinct pieces of work efficiently.
     
  • Flat fee with shared savings - sets a flat fee for a matter while allowing the firm to track the work on an hourly basis. If, at the conclusion of the matter, the hourly fee is lower than the flat fee, the client and the firm share the difference. Provides a guarantee of a low cost to clients who are otherwise comfortable with hourly billing. 
     
  • Holdback - specifies that the client will withhold an agreed-upon portion of the total fee unless the firm obtains a particular result. Encourages both the firm and the client to measure successes quantifiably. 
     
  • Partial contingency (or success fee) - sets a bonus that the firm receives in addition to its hourly, flat or capped-fee arrangement if the result meets agreed-upon criteria. Encourages the firm to obtain a positive result for the client. 
     
  • Phased fee - sets agreed-upon fees, perhaps using differing structures, for discrete phases of a matter. Gives maximum flexibility to both the firm and the client. 

 

Tim pointed out that there are disparate views about what it means to be an alternative fee. The blended rate, and even the capped fee, are based on an hourly rate, so by the strictest definitions, they are not alternative fees. An alternative fee ties the value of the services delivered to what the client is willing to pay and their budget - it has nothing to do with the cost of delivery. 

Lawyers on the plaintiff side have embraced contingency fees for years, and have been successful at it, and many defense firms have also embraced contingency fees over the years for certain matters - they were popular during the tech boom, for example. But we're seeing some others now, such as holdbacks, success fees, or partial contingencies. Tim said that he could spend a lot of time digging into these, but he wanted to illustrate that there are a lot of different models. As to which AFAs are optimal for your organization, it's a function of your client base, along with your firm's culture and practice area base. 

Benefits and Challenges of AFAs

There are benefits and challenges to alternative fees. As Tim talked about in the first webinar, the number one rule in business is "no surprises." So to the extent that AFAs position your firm as the firm that not only delivers quality legal work, but embraces the notion that predictability trumps almost anything else, then that's a differentiator that the procurement people can score you on, and this will trump other more subjective factors. 

There are downsides to AFAs as well, including perceived and actual risks. It boils down to a comfort level - using the elephant example again, Tim said that if we can overcome our tendencies and habits to embrace the norm, we will find that the benefits outweigh the risks. He added that he's not opposed to the hourly rate - it has its place and there are benefits to it. The challenges involve looking at the cost of production as a proxy of the value of the services delivered. If the client is happy with the number on the invoice, because it matches their expectations of the value delivered, then they are less concerned with the mechanics of the invoice. If you can find a number that's commensurate with the value they perceive, it doesn't matter which method you use.

However, alternative fees provide a much stronger ability to embrace predictability, and to tie value between the clients' perception and the law firm's perception. Tim showed a slide that emphasized that alternative fees are here to stay. 

R.U.L.E.S. Versus Learning Curve

Tim noted that under the R.U.L.E.S. model: 

  • Size matters: the more timekeepers we have, the more money we make.
     
  • Inexperience matters: the more we can bill, the more money we make.
     
  • Client satisfaction is incidental to profitability: firms aren't opposed to it, but somewhere in their analytics, they believe that for a client to be happy, they need to pay less, and for a law firm to be happy, they need to charge more. 
     
  • Realization is a lagging indicator: firms only find out afterwards what a client's perception of value is, because their realization suffers. 
     
  • Silo approach: firms are content under the traditional model - it's about feeding billables.
     
  • Rainmakers matter most. 

But under the new model: 

  • Efficiency matters: firms are more profitable when they're efficient.
     
  • Experience matters: firms are more profitable when they embrace their experience. 
     
  • Client satisfaction is critical for profitability: now it's about client retention and the long-term value of a client. 
     
  • Realization is a leading indicator: firms know in advance - they have a predictable AFA in place, and clients can pay at the beginning of the month, because they know what the numbers are. 
     
  • Team approach: efficiency requires lawyers to learn from each other, so they can't work in isolation. 
     
  • Clients matter most. 

Tim finished up with a Venn diagram, showing that business people are looking for business performance, the legal function to be in step with the business, managed risk and predictable costs. The legal department is looking for the legal function to be an adviser to the business, managed risk and predictable costs, while outside counsel are looking to be a trusted adviser, have managed risk and predictable revenue.  Where these overlap, loyalty is created and AFAs are a way to embrace these concepts. 

Questions

There were two questions after the presentation: 

How can we handle multiple clients with multiple billing formats and ebilling?"

Tim said that this is the challenge of being a service provider. There are multiple platforms, every client has their own version, and the challenge is to incorporate this into your systems. So firms should embrace a mindset that every matter should be conducted as if it's an alternative fee or ebilling matter - don't wait for the client to demand it. Operate as if you need consistent descriptions and task codes, act as if it will be analyzed and aggregated. Take on some of the tools that clients use and firms will find that they have the easy ability to export content into multiple billing formats because they've already embraced that. Doing it on an ad hoc basis can be challenging - if it's been adopted firmwide in advance, it's easier to adapt. 

Who should take the lead within the firm on establishing AFAs? 

This will differ by firm - Tim referenced an article from a few weeks ago about the increasing role of strategic pricing in law firms. The essence of the article was that law firm accounting and finance people are well-equipped with the traditional model, but they are not experts at strategic pricing. So there is a function growing in many firms, where they're bringing in someone whose job is to lead the charge to help the partners learn how to make better strategic pricing decisions. Tim said that firms don't necessarily have to get a pricing director to do this, but there is a big difference between the AFA committee of old, where a group of partners would sit down and talk about an AFA as an investment. Now they have a gating mechanism, and the partners who ask for an AFA have a rigorous process that they go through with their clients. This can be adopted by firms without hiring anyone specifically, but it does involve everyone in the firm getting on board. 

This afternoon, we'll be talking about contract lawyers and outsourcing, so keep an eye out for that recap to come! 

ILN Webinar Series - Alternative Fee Arrangements Part I

Part II of our Business of Law webinar series with Tim Corcoran took place in November, but things have been so hectic with travel and hurricanes and holidays that I'm only just getting to the recap! So without further ado...

The topic of the second webinar was the strategic role of alternative fee arrangements, which was a natural sequel to the first session on legal project management. Tim re-emphasized that the industry has changed, and we need to adapt to the changing times. 

He shared some results from Altman Weil's Chief Legal Officer Study, the one prior to the most recently released iteration, which shows that the top concerns for clients continue to be outside legal costs, lack of predictability, and the inefficiency of the hourly billing system. The difference between in-house counsel perceptions and outside counsel perceptions can be pretty great - outside counsel tend to think that the quality of legal work should rank more highly for in-house counsel. However, in-house counsels' perspective is that the quality of work is a given, so they're measuring their firms on additional factors. 

Tim delved into a recap of the first webinar, discussing client and law firm reactions to the economic downturn, budgeting and legal project management. For a full explanation, check out my part I and part II blog posts. 

Commoditization: Shift Happens

The word "commodity" has taken on a touch connotation within the legal industry - but in the pyramid of legal services, there are a set of tasks that are repetitive in nature. Using the pyramid to illustrate, Tim showed these repetitive tasks on the bottom. 

Following them are important tasks, which clients are willing to pay more for, but they're not necessarily looking for the best or most expensive law firm. Then, there are the strategic tasks, or the "bet the firm" work - and those are where the real opportunity is. That's what firms all seek, and they often plot their firm's course straddling somewhere between these strategic and important tasks.

The challenge is that in the last few years, clients have determined that even the most critical "bet the company" work has in itself some components that are tactical or repetitive in nature. And over time, there will always be a shift from the strategic to the routine - what we were doing ten years ago, we're not doing anymore because it's become a commodity task, and clients are no longer willing to pay premium rates. 

It's a simple face of business nature - and legal services are not any more immune to this than any other industry.  As Tim noted on his slide, "There is an inevitable and inexorable migration of products and services from leading edge to common place, whether the provider likes it or not."

Along with this, clients are involving additional people in the conversation, those Tim called the "arbiters of commoditization." He referred to a recent study by Dr. Silvia Hodges, who looked at the role of procurement in the selection of outside counsel. Although procurement has always been on the scene, in recent years, there has been an increased in involving them in the selection of outside counsel. Dr. Hodges study revealed that 41% of the budget for outside legal counsel is influenced by procurement. 

Law firms fear that when procurement is involved that they are not sophisticated enough to understand the subtle or even massive distinctions between law firms, and they're only concerned with finding the lowest cost provider. For the most part, however, a good procurement person is focused on finding the right provider to meet specific demands for a specific use case - this doesn't necessarily mean the cheapest. Procurement is always looking for other factors upon which to measure providers - not just price. Unfortunately, law firms do a poor job of differentiating on these other factors. 

Asynchronous Information

Tim used an example to illustrate the concept of asynchronous information. Not knowing much about wine, when attending a dinner party, he would be likely to choose an expensive bottle of wine, thinking that price is a proxy for quality. His point is that there are certain markets where only one party has the information about where the value lies. In the law firm business, the shift from a sellers market to a buyers market means that the law firm used to have the information about the value of services delivered, but now the buyer has as much, if not more, information. This is why alternative fees have become so important. 

Clients are using companies such as TyMetrix to quantify the role of their outside counsel.  Tim showed a few examples of what these scorecards and analytics might look like, and said that the challenge today is knowing that the client has a relative sense of what they're willing to pay, and the value of certain services, but not knowing what they know. 

Tim showed a rate analyzer, provided by a company that has collected, aggregated and anonymized e-billing data over multiple years. They can now produce reports for in-house counsel that show for certain SIC codes, industries, practices, timekeepers, etc. the various ranges for billing data so that they can make benchmark comparisons against the proposals they're receiving. This will inform their tolerance for their budget, and have a downstream impact on law firms. 

In-house counsel will also be able to compare law firms over various rates, look at the trends over time, and make assessments, not only about which firms are more or less expensive, but their relative value. Clients know that an hourly rate is not an indicator that should challenge them - they're willing to pay a high rate if they can get a good value, which is why the trending information, coupled with other analytics, is so helpful. 

All of this shows that clients now have as good, if not better, information about the value of services that law firms deliver - so how do firms collaborate with them to make sure that they maintain their profitability as a law firm?  Tim added that firms have every right to be a profitable enterprise, but that they need to look at their practices that are commoditized versus those that aren't, to get a greater understanding of the value of those services. By using hourly billing for everything, firms don't necessarily have that level of precision. 

R.U.L.E.S.

This acronym stands for Realization, Utilization, Leverage, Expense and Speed (or Speed of Collection). Tim said that these are the things that law firms grew up with - they understood that profits are a function of these elements. If we have timekeepers that are busy, and we capture that and invoice their time, and clients pay those invoices, that's realization. On each matter that we perform, if we have the right ratio of timekeepers, that's our leverage, and we can manage profitability.

If we manage our overhead (expenses) and keep these low, and if we bill and collect in a timely manner (speed), those factors will all reduce to that profits per partner or equity partner that firms strive for at the end of each year. 

Tim likened this to our belief that home values would always rise - law firm partners grew up under a model where they believed that the only way to achieve profitability was through these metrics. However, the rest of the world embraced a different concept - the "learning curve." This is where if you're good at something, you can continually lower your cost of delivery and achieve profits, even when revenues are flat or declining.

Tim asked the attendees to think about the challenges at a law firm - when lawyers become an expert at something, they charge a higher and higher rate. However, a client is saying that if the lawyer has done something multiple times, they should be charging a lower and lower rate. Tim suggested that it would be nice if we could reconcile these two views, and say that we're going to be more profitable by leveraging our experience, rather than our inefficiency. 

There is an anecdote about training a young elephant not to run away - if you tie its leg to a stake with a rope, the elephant will learn that no amount of pulling will free him.  So then as an adult, he's conditioned to not even try to pull the rope, and the same small rope and stake can be used to secure him. The point behind this is that if lawyers break out of the mold of how they learned that law firms make profits, they can achieve higher profitability through these methods.  

Tomorrow, we'll continue the discussion of alternative fees, and we're also hosting our third and final webinar on contract lawyers and outsourcing, so I'll be recapping that in the coming weeks as well! 

ILN Webinar Series - An Introduction to Legal Project Management Part II

Last week, we had the first part of our recap from Tim Corcoran's excellent webinar on Legal Project Management. Today, I bring you the second half, which covers: 

  • Legal Project Management (LPM): Concepts - should they be embraced or avoided? Is LPM a friend, an enemy or a frenemy?
  • Process improvement versus LPM: Two different disciplines, though they are related.
  • LPM 2.0: The advanced level of LPM. 

 

To illustrate the LPM process, Tim used a pictorial - a client will call up with an issue, and explain what they need (picture of a tree, with a tree swing that has three wooden seats one on top of the other, and two ropes tied to the same branch). The partner who answers the call takes notes and understands the client's needs to be a tree swing with one seat, the two ropes tied to separate branches. 

They call in an associate to explain the process to them, and the associate designs the swing as a wooden swing with the middle of the tree cut out, the two ropes tied to two branches, which are held up by additional branches. 

The firm then delivers something even more inconsistent with the original request - a tree swing with the seat lying on the ground and the two ropes tied around the trunk. They're a premium law firm, so they charge accordingly (shows a theme park), though what the client really needed was a tire swing. 

Tim said that as the audience looks at these images, they should think about realization rates, an the conversations they have with their clients only during and after an engagement when they get specific about what they want or don't want. How much "woodworking" was done in the creation of the tire swing - if you add up the lost realization, those things that the client simply won't pay for - and you add it up over the course of all of the engagements for all of the lawyers in the firm, on a yearly basis, you can see the extraordinary cost and inefficiency.

This is what LPM is designed to address. It's a process used by businesses to help improve predictability. Tim said that firms may have heard from their corporate clients that the number one rule in business is "no surprises." Firms can make mistakes and even repeat those mistakes, but the one thing that they can't repeat and expect to continue to receive work is to continually surprise the company. 

Tim added that this works both ways - sometimes it's when a firm surprises the business by costing them money, while other times it's bringing in more money than they anticipated - if they're trying to invest capital and they don't know about revenue coming in, this can be as great a challenge as not having enough capital to invest. 

Stages of LPM

Tim then went through the stages of LPM: 

  1. Define Objective: Tim advised thinking long and hard about the objective that the client is seeking, noting that in the earlier example with the swing, the end result of a tire swing could have been identified much earlier with this step. 
     
  2. Define Scope and Constraints, eg budget and timeline: Tim said that every time he speaks with lawyers at a firm retreat, they all say that they address budget with their clients, but when he speaks with the clients, they all say that none of them have that conversation. 
     
  3. Establish the project plan: Understand what the clients wants to accomplish and the constraints, and then use this to put together the plan and staff the plan.
     
  4. Execute the plan
     
  5. Continuously monitor the performance, change management: LPM expects change, and there is a process for dealing with this. 
     
  6. Review and improve. 

Tim paused here to see if there were any audience questions, and Alan said that someone asked who should be the project manager, whether it should be a partner or associate, or whether a dedicated project manager needs to be brought in. 

Tim answered that he's seen all types. In some firms, they believe they're best served by hiring professionals with project management certifications from other fields. In other firms, they delegate this role to associates or junior partners, and in still other firms, they think it should be a partner's responsibility.

It's a function of the firm's culture, but we're talking about a business mindset. So while there may be paths and steps that can be delegated, at the end of the day, it's about having partners who understand these principles and can apply them to improve communication and better manage plans. 

Tim then delved into each of the LPM steps a bit further, and offered a point of differentiation for each. 

Define Objective

This step is about finding out what constitutes a win for the client, and gives attorneys the opportunity to serve as a counselor. They can help the client understand what they really want from this process, and the consequences of various outcomes. 

Additionally, there are sometimes differences between legal outcomes versus business outcomes, and the goal might depend on what the business professionals want - this could be different from what the legal team at the client wants. 

Point of differentiation - your competitors assume quite a lot. The more you assume, the more it factors into lost realization before you're done. 

Define Scope and Constraints

Tim said that what's "out of scope" is defined by what's "in scope." He talked about engagement letters and said that these are typically vague, and in recent years have pages of carve outs and stipulations. He said that defining scope is not like that. Instead, it's about looking at how we incorporate the things we have to deal with as we're pursuing this matter, such as budget, timeline, who we're accountable (who are the stakeholders), and reporting requirements. Typically, the most important of these is budget. 

Point of differentiation - your competitors allow the client to define the scope by writing down legal invoices. 

Tim then addressed why lawyers avoid discussing budget - that's because they believe that what they want to invoice will be far greater than what the client is willing to spend. There is an assumption that the client is always looking for the cheapest rate. They are business people, so they are often looking for lower costs, but budgets in a corporate setting are more about predictability. So at times, a firm can be premium-priced in the services that it offers and still win work over lower cost providers, if they can do a better job offering predictability and minimizing surprise.

He advised not avoiding the cost discussion, but instead embracing it. Tim commented that he often hears that  it's off-putting to bring up budget, but said that talking about budget for a legal matter isn't embarrassing to the business person because they think about budgets all the time. They may not know what the matter is worth to them, but they know how much is in their budget, so it's helpful to have the conversation and can ferret out those clients who might not have the budget to pay your rates. Tim offered some questions to get started: 

  • What would you like it to cost? - use a little humor. 
     
  • It looks to use like the work might cost in the range of $x. How does this compare with what you were expecting. For example, if you say you think it will cost $75,000, and they think it's a $30,000 matter, ask why. 
     
  • What factors have shaped your budget expectations? Discuss this, and ask whether they've considered certain factors, based on your experience in these matters. When you lay out your understanding of how the matter might flow in a way that demonstrates your expertise, it helps to differentiate you from your competitors who are just offering a low rate to win the work. 
     
  • What's the cost to your business if you don't resolve the issue? Clients need to understand what the cost is of doing nothing. So many firms believe that they're hired for really critical work where price is not an object, when in reality, to most businesses, there is a cost to addressing their concerns, and a point at which they're willing to accept some risk. It might not be worth it to them, so it's helpful to know that because you might get more pushback on invoices in those situations. 

Point of differentiation - your competitors are afraid to discuss budgets. 

Design the Project Plan

Tim identified the pieces in this step as: 

  • Basic template: you've identified the standard, variable and volatile tasks, and can put a price tag on the various courses. You may say that you can't know for certain where it will go until you get closer, but you've tried to identify some of the uncertainty.
     
  • Estalish task timelines and budgets: once you know what steps are necessary, talk to the firm's finance team to figure out what you traditionally bill for those services. Break down the process and understand what they cost. 
     
  • Critical Path: This is the process of going through and understanding what steps are absolutely necessary to achieve the outcome, and which steps are nice to have. This is where we have the quality question - some lawyers will leave no stone unturned, but for the client, they may not be willing to pay for that level of thoroughness. As long as work isn't being compromised, the client should have some say in what steps are necessary. 
     
  • What resources are necessary? This might include a project manager, or may just be carving out time for doing more and having better client communication. 
     
  • Review, revise: The project plan is a moving target because things change, so the plan should be constantly revised. 

Tim talked a little bit about Gantt charts, which are used worldwide in managing projects. He said that these can help to establish where you are in the process - major and minor steps, how much it will cost, how long it will take - and can help business people and the legal team at the client understand the legal process in the same way that they think about their investments. This is another opportunity to differentiate your services. 

He added that project plans are effective in all practices - sooner or later, he inevitably gets the question that says that a lawyer's practice is unique and different and can't be reduced to a series of common steps. LPM addresses this though, and is for all types of matters - it's about improving communication and reducing surprise. When we break down our legal work product into its various tasks, we may find a lot of redundancy and inefficiency. 

Point of differentiation - clients hire lawyers who learn from experience, not treat every matter as original. 

Execute the Plan

  • Commence billing legal work.
  • Use the project plan to guide all efforts.
  • Disseminate updates as needed.
  • Track efforts, time, budget, and results.

Point of differentiation - your competitors leap ahead to this step. 

Continuously Monitor Performance

  • Regular communication is critical. 
  • Continuous feedback loop.
  • What's going well?
  • What can we improve?
  • Are we on time and on budget? If not, why not - how can we adjust? The project plan can help with this. 

Managing expectations is critical - no surprises. Tim said that lawyers should tell their clients what they need to know, and not what they think they want to hear. Risk sharing requires two-way trust and communication - this is most likely a learning experience for both parties. 

Point of differentiation - your competitors avoid communication until asked or until they have the "answer." 

Tim talked a little bit about what happens when things change in a project - there are four possible scenarios that result: 

  • Up "Scope Creek" without a paddle - the scope changes, the law firm absorbs the overage, and no one is happy. 
  • The client increases the budget and/or timeline. 
  • The client maintains the budget and timeline, but changes the requirements. 
  • The client accepts the risk of staying the course. 

Point of differentiation - your competitors either absorb most overages or try to negotiate overages at the end of the engagement. Monitoring performance is a critical part of management, because that way, firms can address change to avoid this. 

End of Project Review

  • Learning organizations focus on improvement over time. 
  • Old law firm math versus new law firm math: Tim said he would address this in more detail in the next webinar. There are different ways to generate profitability. Lower delivery costs can improve profitability, improve predictability and quaality - every business outside of professional services relies on this. 
  • What did we do well? What can we improve for next time? 

After such a great session, I can't wait for Tim's next webinar on alternative fee arrangements!