Bloomberg BNA: Tell us about your new book Client Value and Law Firm Profitability – what was your goal and who did you talk to?
Jim Hassett: In the last few years, millions of words have been written by law school professors and consultants about how the demands of the clients of major law firms are changing and what law firms should do about it.
The only thing that’s been missing from the conversation is statements by the people who actually run large law firms. These senior decision makers deal with these issues every day, and their very livelihood depends on coming up with the right answers. I wanted to hear their honest opinions about these highly sensitive issues but knew they could not speak openly if they were quoted by name, so I devised a research approach built around anonymity. I conducted every interview myself, and promised that while firm names would be listed in the report, the name of every individual I interviewed would remain confidential and no quote would be linked to a particular person or firm.
Leaders from 50 of the AmLaw 200 agreed to speak with me for this book. Forty-two percent were managing partners or chairs, and the remainder were senior partners and staff, including CEOs, COOs, and CFOs. They were indeed unusually frank in their responses, including the AmLaw 200 chairman who said that “Lawyers are about as dumb as you could possibly be about understanding how our product is made. The lawyers who understand how to make it and who can manage that process efficiently are going to be the winners.”
They also spoke freely about both problems and solutions, like the managing partner who noted that “I have a $10 million practice. But that could be a disaster for a firm, because it could cost them $11 million to get $10 million. But nobody ever talks about it that way.”
Bloomberg BNA: What was your most surprising finding?
Jim Hassett: While almost everyone agreed that client demands for greater value and lower fees have been putting pressure on law firm profits, firms were remarkably inconsistent about how they measure profits. When I asked, “If you compare profitability for two lawyers in your firm, is there a software program or formula used to calculate profitability or is the comparison more intuitive?” a surprising 26% said there was no such formula or program and that the answer was intuitive. For the other 74%, definitions and formulas varied widely, including total revenue, profits per equity partner, leverage, several different types of realization, and a variety of approaches to cost accounting.
To dig more deeply into this important issue, we conducted follow-up interviews with industry leaders from firms that sell software to analyze law firm profitability. Jeff Suhr, a VP at Intellistat/Data Fusion, reported that his company currently has 91 clients actively using their tools. How do they calculate profitability? Ninety-one different ways. The fundamentals are basically the same, but there are important differences in the assumptions and details. These differences can have significant implications for the way profitability is interpreted and can affect the way in which the figures are used to motivate lawyers to change their behavior so that they can better meet client needs in a way that can be sustained.
Bloomberg BNA: What are law firms doing to protect the bottom line?
Jim Hassett: They are trying lots of things, with mixed success. According to our data, the two most effective ways of protecting profitability are quite new to the legal profession: legal project management (LPM), and new staff positions in such areas as pricing, value, and LPM.
Other tactics have led to more mixed results, including relying on new technology, knowledge management (KM), and contract attorneys and outsourcing. The book includes many quotes from proponents saying that technology, KM, and outsourcing were the most valuable steps they took, and from others who said that they were a waste of time and money. These differences of opinion can be traced both to the different needs of different firms and to the details of how they tried to implement change in each of these areas.
Bloomberg BNA: Lots of people seem to agree that legal project management is important, but what exactly does it include?
Jim Hassett: That is an excellent question. The field is so new that experts disagree about what should be included and excluded from the concept. This has slowed progress, as seen in the remarks of one senior executive who noted: “We were just at a board meeting last week where we were talking about whether we should do formalized project management training. My answer to that is obviously yes, we absolutely should. But first we need to agree on what legal project management is.”
In my book Legal Project Management, Pricing and Alternative Fee Arrangements, I reviewed the short history of this movement and proposed the broad definition we use in our coaching, our training, and this research: “Legal project management adapts proven management techniques to the legal profession to help lawyers achieve their business goals, including increasing client value and protecting profitability.”
This broad definition includes everything from budgeting and communication to process improvement, knowledge management, and personal time management. We believe splitting hairs over what is and is not LPM is just another excuse to avoid action. Law firms need to move as quickly as possible to the real problem: What must we do today to meet client needs while remaining profitable and competitive?
Bloomberg BNA: Where is the pressure for LPM coming from?
Jim Hassett: From clients. One of the best sources of information about client demands is the Chief Legal Officer Survey which Altman Weil has been publishing for the last 15 years. (Full disclosure: LegalBizDev is a strategic alliance partner of Altman Weil.) One key question in the 2014 survey, which was released in November 2014, was, “Of the following service improvements and innovations, please select the three that you would most like to see from your outside counsel.” This year’s answers from 186 CLOs were greater cost reduction (58%), more efficient project management (57%), and improved budget forecasting (57%). Since LPM leads to cost reductions and to improved budget forecasting, you could say that the top three client requests were LPM, LPM, and more LPM.
In business, everything starts with meeting client needs. But lawyers who understand LPM and apply it to their practice are still a tiny minority. As one senior executive put it: “One of the problems that we have, and frankly that most firms have, is just teaching lawyers how to manage a project, getting them out of the habit of just automatically starting out with some rote process. Just because the client says, ‘I think I might have a lawsuit’ doesn’t mean you go off and conduct 40 depositions. Lawyers need to sit down and talk about what the client is trying to accomplish. It might turn out that we are able to accomplish the client’s end goal without taking any depositions.”
When I asked about which aspects of LPM were most critical to firms’ short-term success, it is interesting that the top two areas participants singled out were defining scope and managing client communication. These issues cannot effectively be addressed by the expensive software that so many firms see as a starting point. They require partners to change their behavior and become more efficient.
Adapted with permission from Corporate Counsel Weekly Newsletter Vol. 29, No. 48, December 10, 22014. Copyright 2014, The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com.