February 15, 2017

Sample litigation statement of work: Early case assessment

By Mike Egnatchik, LegalBizDev, in collaboration with several clients

 

Hypothetical Facts

ClientCo acquired the assets of a company Carpart which manufactures high performance parts for cars. One product line was a battery that goes into fuel cells, which are sold and incorporated into engines of electric vehicles. The asset acquisition agreement (“agreement”) shows the acquisition was of assets only, and the liabilities were expressly not assumed. The agreement also contained representations and warranties that there were no warranty claims against the business. ClientCo paid $50,000,000 for Carpart’s assets, which has been distributed to Carpart’s shareholders.

After the sale, ClientCo also hired the bulk of Carpart’s employees. A customer of Carpart had been complaining to Carpart employees about failures in the fuel cells shortly before the sale. The employees continued to deal with Customer to help determine whether there was a defect in the batteries. Soon after the purchase, ClientCo discarded the battery business, preferring to focus on parts for gas and diesel engines. Nevertheless, some of the employees continued to work with Customer and discovered that the batteries were not compatible with the design of the fuel cells. The fuel cells are beginning to suffer catastrophic failures.

Customer has made warranty claims against Carpart and ClientCo. ClientCo never sold any of these batteries after acquiring the assets of the company. However, Customer had previously sold over 20,000 fuel cells to an electric car company, GreenCar, which installed the fuel cells in all of its 2010 models. When advised of the problem, GreenCar had already produced and sold 20,000 cars. The cost to recall vehicles and install a new fuel cell is $5,000 per vehicle.

 

Legal action

A complaint has been filed by GreenCar against Customer, ClientCo, and Carpart. The lawsuit seeks: (i) direct and consequential damages; and (ii) indemnity from car owner complaints.

ClientCo has asked you for a proposal to undertake this entire representation on a fixed fee basis to defeat all claims. All parties will file cross-claims against each other. While there are many different cross-claims, they will all be adjudicated in one proceeding.

You have explained to ClientCo that it is not possible to provide a meaningfully accurate fixed fee for the entire case at this time, but you have agreed on a fixed fee to perform an early case assessment.

 

Statement of work for early case assessment

In the early case assessment, we will prepare a written report to ClientCo covering:

  • Determination whether the case has merit
  • A cost/benefit analysis of possible legal strategies with likelihood of success for each
  • Cost estimates for recommended options and other phases of the case including:
    • Pleadings and motions
    • Court-mandated conferences
    • Discovery
    • Settlement/ADR options
    • Summary judgment
    • Trial
    • Post-trial motions

This statement of work will include fact investigation and development, review of key transactional documents, interview of key players, legal research regarding potential liability of all parties, initial review of warranty, and contract issues.

This phase will conclude with one or more meetings with ClientCo to review findings and recommended options contained in the report and decide on next steps.

 

Assumptions and exclusions

  • The representation will be limited to the complaint filed by GreenCar and related cross-claims of all parties
  • Specifically excluded are litigation holds for evidence preservation and insurance investigation and tender, which have already been performed
  • No more than 10 hours of interview will be required with key players
  • No more than 20 hours of legal research will be required
  • ClientCo will provide individuals with expertise who will orally summarize technical fact

 

Reproduced with permission. This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.

February 08, 2017

How to write a statement of work

By Mike Egnatchik and Jim Hassett, LegalBizDev

Legal cases and transactions can have unpredictable aspects, sometimes beyond the control of the best managers and planners. Therefore, flexibility is key. Legal project management is all about tradeoffs, and efficient project managers must be ready to adjust scope, time, and budget as the case or matter evolves. This factor underscores the importance of the primary task at the start of any project: setting your objectives and carefully defining the project scope with the client. Doing so will align mutual expectations and prepare the stage for developing an activity schedule and budget.

A statement of work must fix the boundaries of what is within the reasonably expected scope for the matter and what is not. This is particularly critical if the work is to be performed for a fixed price. The details of contents and format will vary depending on the circumstances, but could include:

  • The client’s objectives
  • Detailed deliverables such as the number of depositions
  • Deadlines or expected timelines
  • Teams and roles, if relevant
  • Assumptions and exclusions
  • Risks
  • Budget or fee as well as payment terms

The first draft of the SOW should be shared with both the client and the anticipated team members for their review and input. You need to understand the client’s goals and expectations and align them with the team’s approach, focusing on the business problem or dispute from which the matter arises and on acceptable outcomes and deadlines for the client.

As the team comes to an understanding of your client’s wants and needs, team members should keep in mind how much each want or need will cost, and whether there is any waste or excess in these expectations. These budgetary considerations may eventually affect the steps and actions taken to complete the matter. Of course the budget is extremely important, so you must be sure to carefully define in writing the anticipated assumptions of your budget and any “carve-outs,” that is, work that will not be included within the fixed price for the agreed scope. And, obviously, the SOW is simply a draft until the client approves it.

Some other helpful steps at this stage are common-sense items such as ensuring that every member of your team is familiar with the final project objective. It can be posted prominently on a bulletin board or online. Also, it does not hurt to remind team members of the client’s objective in regular memos and meetings.

The better your initial statement of work, the more likely you are to meet the client’s objectives. And if things change, the approved SOW will provide a solid basis for negotiating with key client decision-makers before performing work that may require additional funding.

However, remember that the SOW should be as short and simple as possible for managing the process. According to Michael Roster, steering committee co-chair of ACC’s Value Challenge, “When I was general counsel at Stanford, our multi-million dollar arrangements with law firms were covered by a two-page business letter combined with a one-page exhibit describing the carve-outs.”

The SOW is not a deposition or an adverse negotiation, so make sure you don’t over-lawyer it.

 

This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.

February 01, 2017

Tip of the month: Be sure to define the primary decision maker for each matter

In complex matters, especially with large organizations, there are few things that can waste more time and money than trying to satisfy multiple client stakeholders. In a large legal matter, the general counsel, staff attorney, senior corporate management, line manager, and others may have conflicting opinions and needs. It is tempting to try to keep them all happy, but that is sometimes impossible. It may take effort to pin clients down on who is the ultimate decision maker, especially regarding cost, since multiple parties may have differing agendas. But if you are able to establish a single point of contact as the primary decision maker, it will reduce cost and increase client satisfaction.

 

The first Wednesday of every month is devoted to a short and simple reminder like this to help lawyers increase efficiency, provide greater value to their clients and/or develop new business. This tip was adapted from the fourth edition of our Legal Project Management Quick Reference Guide.

January 25, 2017

Engagement letters and statements of work

At the beginning of a new matter, lawyers often specify its scope and fees in an engagement letter. The engagement letter is designed to clarify exactly what work and services are included, and excluded, from a particular matter.

Some states have specific requirements for what must be included in an engagement letter, and many firms have their own requirements as well. For example, in New York State, Part 1215 of the Joint Rules of the Appellate Division requires a letter of engagement in most matters, except for certain exceptions listed in the rule (i.e., an engagement letter is not required if the fee is expected to be $3,000 or less).

From a project management point of view, there is considerable room for improvement in many engagement letters. Consider, for example, this language from the sample letter of engagement published by New York State:

Scope of representation

A claim, dispute or dealings with relating to ______________.

All of our services in this matter will end, unless otherwise agreed upon in a writing signed by us, when there is a final agreement, settlement, decision or judgment by the court. Not included within the scope of our representation are appeals from any judgments or orders of the court. Appeals are subject to separate discussion and negotiation between our firm and you. Also not included in the scope of this agreement are services you may request of us in connection with any other matter, action, or proceeding.

The rest of New York’s two-page sample focuses on fees and client rights. Fee options for the sample include a flat fee, a contingency, or hourly rates.

If a law firm copied the New York State sample exactly and negotiated a fixed fee, they might end up being very sorry when the matter spiraled out of control. They would be better protected if the engagement letter specified timelines and deliverables, such as the maximum number of interviews, pleadings, interrogatories, opinions, and reports, the anticipated scope of travel and research, the use of outside consultants, and so on.

Could a lawyer possibly know in advance how many depositions would be required to settle or plead a particular case? Of course not. But he or she could specify the maximum number of depositions they expected and exactly what would be included within the fixed price.

This failure to provide sufficient detail is quite common. As the executive director of one AmLaw firm recently put it, “The scope of work often contained in our engagement letters is generally no more than one or two lines. Lawyers are missing an opportunity to clearly specify the scope of what is included in each matter and what is not.”

From the client perspective, better specifying the work up front could lead to more predictable costs and a more sophisticated understanding of what they are paying for. From the law firm’s point of view, it could reduce fee disputes, write-downs, and write-offs.

Entire textbooks have been written on how to develop what project managers call a statement of work (SOW), which specifies what a particular project includes and excludes. Lawyers may wish to adapt some of these ideas and write an SOW which could either be included in the engagement letter or be a separate document, depending on the nature of the matter, the lawyer-client relationship, and joint expectations.

 

This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.

January 18, 2017

How Agile is being used to increase legal marketing innovation at Fasken Martineau

Agile is a highly flexible approach to project management which law firms are just starting to use. I’ve written several posts in this blog about how Agile works and how some lawyers are applying it to improve legal efficiency by focusing on two key questions:

  • How can we deliver value more quickly to our clients?
  • How should we measure our progress?

So when I heard recently that one of our clients was using Agile techniques to increase innovation in their marketing and business development department, I immediately scheduled an interview with Brenda Plowman, the Chief Marketing Officer (CMO) at Fasken Martineau, an international business law and litigation firm with more than 700 lawyers.

The Fasken Martineau marketing and business development department includes people operating from eight offices, six in Canada, one in the UK, and one in South Africa. Plowman has worked in the department for more than 10 years. When she was promoted to the CMO position in July 2015, she noted that:

Over my history here I’d seen many underutilized talents with the potential to help us transform and offer better services to our lawyers. I wanted to reinvent our group. But how could I get people to change when I was coming to work at the same place and with the same people I’ve known for a long time?

We did a survey of the marketing and business development team because we wanted to see what they were thinking. One of the responses was, "The firm doesn’t ask us to innovate enough. It doesn’t expect us to be creative." People didn’t feel that they could bring their ideas forward and they felt that, frankly, they weren’t expected to bring their best game.

Plowman decided to start by adapting two Agile-related concepts: hackathons to creatively generate ideas for improvement and scrum to deliver them and “make sure we were actually accomplishing what we had set out to do.”

Hackathons originated in the software development world and consist of intense meetings in which groups of programmers and others collaborate intensively to solve a particular problem. With the help of a consultant, Plowman adapted the hackathon concept to legal marketing, and in June of 2016 they held their first three-hour hackathon with the team (two sessions with multiple locations involved in each) aimed at coming up with creative ideas to improve marketing efficiency and results on a specific topic. Candidly she admitted that:

At first people were saying, "I don’t know why I’m here." But when a second session was held in October, there was much more engagement and people began to focus on, "How can we go faster and get more done in the limited time we have?”

They created a list of key areas “in which we wanted to improve what we had been providing previously and increase the value we were delivering to lawyers.”

One of the unique aspects of these hackathons is that they were led by the Manager group. Historically, real opportunities for leadership and development were only handled by the Senior Marketing Team (the Director level). That team was committed to developing their Managers and creating opportunity for their growth and development. The Managers were empowered and did a great job working with the teams and bringing the recommendations forward to the Senior Marketing Team (SMT). This aspect is key in Plowman’s vision to leverage the talent on her team.

In addition, the marketing and business development team has started a significant transformation with many changes in place. The Directors have taken on pieces of this transformation and are leading this change with Plowman. There are a lot of moving parts and demands on the team. This led Plowman to adapt another Agile software development technique: scrum. Initially she provided the Directors (the SMT) a copy of the book Scrum: The Art of Doing Twice the Work in Half the Time as part of the “book club” for this group. After the SMT read it and met on it during an in-person meeting, they then expanded to the Managers as a part of their development and a way to encourage them to innovate and drive their project forward. (This book is an excellent resource for law firms and I will write a separate blog soon describing its key concepts.)

This has now evolved into a 30-minute weekly telecon held every Monday by this group to discuss four substantial projects and several other key initiatives that the team is working on (including digital transformation and social media), in which Fasken’s marketing and business development department is concentrating its efforts to become best-in-class:

The group is using some of the techniques from the scrum book to establish and measure specific goals for the next 30, 60, and 90 days. The Monday meetings are organized around three key questions familiar to anyone who has ever been involved with scrum:

  1. What did we accomplish last week?
  2. What is planned for this week?
  3. Are there any obstacles to progress?

One result of the Monday meetings is that, “People collaborate to identify obstacles. It’s also been really helpful for me as the leader of the group because I learn how I can expedite what needs to get done this week.”

This initiative is very much a work-in-progress, but participants in the weekly meetings have already produced results. “Scrum has helped us to go faster, do more, and get obstacles out of our way. It’s increased transparency, which drives efficiency and effectiveness. And it’s created cultural change within our team. The learning is coming faster and faster.”

Plowman and her team would like to expand the program in the coming year to include lawyers. She predicts that the next steps will be even more exciting “when we get to working with our lawyers and going through the process together with them.”

January 11, 2017

Case Study: LPM Certification at Davis Wright Tremaine

By Jim Hassett and Jonathan Groner

Since our Certified Legal Project Manager® program began in 2010, we have written several case studies describing participant results, most recently a few months ago.

This post summarizes the long-term experience of Judith Droz Keyes, a partner at Davis Wright Tremaine in San Francisco who completed the program in 2014. Judith specializes in labor and employment law. Her practice includes extensive counseling as well as experience in the courtroom and before mediators.

Judith first signed up for the program when a number of clients asked her about LPM, especially in connection with RFPs. At the time, she frankly wasn’t sure exactly how LPM worked, so she asked her practice group leader whether it made sense for her to get certified. The program was approved and the firm paid for it.

This program is offered via distance learning, conducted by phone and email, and organized into two modules. In Module One, participants review over 300 pages of readings from 10 project management textbooks and answer 18 essay questions about how these concepts apply to their practice. One of Judith’s Module One answers was so interesting that we ended up including it in the recently published fourth edition of our Legal Project Management Quick Reference Guide. (See page 90 for the section entitled “Process improvement to improve associate and paralegal time entries.”)

In Module 2, participants apply the concepts in their practice. Judith developed an “Employment law task list for a pre-complaint demand” (which is also reproduced in the Legal Project Management Quick Reference Guide on page 63). Her short-term goal – to take a more systematic approach to a case she was working on – was met. Her long-term goal – to simplify these task codes and get them adopted firmwide to improve client satisfaction, budget predictions, and profitability – has proven to be more elusive than she originally hoped.

One of the challenges Judith faced in getting other lawyers to accept her approach was the elephant in the room for all attempts to increase efficiency: compensation. As long as lawyers are paid more for billing more hours, efficiency is a two-edged sword. While reducing hours is often essential to make work profitable for the firm, it is almost impossible to motivate lawyers to spend fewer hours if they will be paid less as a result.

A few years ago, Jackson Lewis made headlines by announcing that associate pay would be tied to measures of client satisfaction and efficiency rather than the number of hours billed. In our view, this is the wave of the future for successful firms. But until firms make this transition, some aspects of the quest for efficiency will face resistance.

Another barrier to widespread adoption is that many lawyers believe that they are already LPM experts. After all, they’ve been planning budgets, scheduling tasks, managing teams, and communicating with clients for their entire careers. While it is certainly true that they have been doing these things well enough to succeed in the past, it does not mean that the same techniques will lead to success in the future.

Almost everyone agrees that the legal profession is changing. Clients are becoming more demanding, and competitors are improving LPM to meet client needs. These days, to retain current clients and win new ones, law firms must apply a new and more systematic approach to LPM. Those who fail to do so will be left behind.

Judith says that in the two years since her program concluded, she has continued to apply many of the lessons she learned in both in her litigation and non-litigation matters. For example, she now develops comprehensive project plans in advance of starting work on any major matter. This change has helped increase client satisfaction and profitability, especially on her fixed fee matters. She’s also learned not to worry about all the possible ups and downs and the unexpected events that can happen during a matter, such as colleagues taking leave or new people joining the firm.

These days, Judith also devotes more energy to communication issues: “Who needs to communicate what to whom and when?” When something as drastic as a final deadline for a court filing changed in the past, there was not always consistent communication about that deadline and how to work toward it. One thing she has done as a result of her LPM training is to plan ahead more consistently regarding all deadlines, communicating very clearly about who is responsible for the completion of each task, whether it’s a partner, associate, paralegal, or in-house lawyer for the client.

Nobody ever said LPM would be easy, and it would be a gross exaggeration to say that certifying a single lawyer will ever change the culture of an entire firm. But it has made a significant difference in the way Judith and some of her colleagues practice law at Davis Wright Tremaine.

January 04, 2017

Tip of the month: Develop a defensive marketing plan for 2017

I’ve said it before and I’ll say it again: As legal competition continues to get tougher, it’s more important than ever to focus on protecting relationships with the clients you already have. What will you do in 2017 to protect your top client relationships? In the current competitive environment, no client can be taken for granted, no matter how long you have worked for them. If they are already happy with your service, what could you do to make them even happier? If you’re not sure, ask them. And then do it.

The first Wednesday of every month is devoted to a short and simple reminder like this to help lawyers increase efficiency, provide greater value to their clients, and/or develop new business.

December 28, 2016

Pricing legal matters (Part 4 of 4)

In the fifth edition of The Strategy and Tactics of Pricing, one of the most widely respected texts in this field, Thomas Nagle, John Hogan, and Joseph Zale noted that:

In many business-to-business markets, where high-volume repeat purchasers negotiate their purchases, buyers are ahead of sellers in thinking strategically…. Buyers have goals and a long-term strategy for driving down acquisition costs, while suppliers rarely have comparable long-term strategies for raising or at least preserving margins (p. 98).

The problem of salespeople discounting too deeply in order to close deals is also common in other businesses:

Customer satisfaction can usually be bought by a combination of over-delivering on value and underpricing products… The purpose of strategic pricing is to price more profitably by capturing more value, not necessarily by making more sales (p. 4).

Nagle’s text goes on to describe five basic concepts that can be used in any profession, including the law, to improve the way prices are set:

1. Differentiate. You may have heard legal marketers use this word quite a bit, and it is just as important to pricing experts. The features of a law firm that add differentiating value must be communicated to the client. Are you different because your legal project management expertise makes you more efficient than others or because you communicate progress better? Let the client know.

2. Communicate value. According to Nagle:

In our research, we have found that business managers rated “communicating value and price” as the most important capability necessary to enable their pricing strategies (p. 72).

Nagle makes special note of the value of an endorsement from a client known to be discriminating. For example, in the health field, Kaiser Permanente has an excellent reputation for being an informed buyer. As a result, “When other hospitals and health maintenance organizations (HMOs) learn that Kaiser Permanente has adopted a more expensive product or service, they assume that its price premium is cost-justified” (p. 75).

3. Have a clear and consistent pricing policy. It is important to have a clear and consistent pricing policy and to avoid commonly granting price exceptions. Discounting to win business creates client expectations of future discounts. In setting up your policies it is important to keep in mind that people are more affected by perceived losses than perceived gains, and you should frame your pricing with this in mind. If the client is offered a service package, it is better to have a policy that allows a reduction in cost if a service is dropped (a perceived gain) than a policy that requires an extra fee to get that service (a perceived loss).

4. Know your market segments. Clients are not all the same; they fall into different market segments. The Strategy and Tactics of Pricing gives an example of a company selling a scientific device to be used in DNA analysis. The device is a great improvement over existing competitor products and the company estimated the differentiation value in order to set a price. However, the company sold to two different market segments—the industrial market and the academic/government market. The differentiation value was not the same in industry and universities, so the ultimate pricing strategy involved different pricing policies in the two segments. As long as this policy is clearly stated it does not violate consistency requirements. Airlines do this all the time when they distinguish between refundable fares for business travelers and nonrefundable fares for vacationers with flexible schedules.

5. Know your client types. Within a given market segment there may be different classes of clients, and knowing their classification may help you to deal more intelligently with each group. The Strategy and Tactics of Pricing divides clients into four categories:

a. Value-driven clients have sophisticated analysis strategies for studying value-added, and you will need to work to establish your value-added for them.

b. Brand buyers (also known as relationship buyers)—For this group, the cost of analyzing value-added is perceived as too high. This “buyer will buy a brand that is well-known for delivering a good product with good service without considering cheaper but riskier alternatives” (p. 105). This is an easier client to deal with so long as you do not disappoint them.

c. Price buyers are looking for a specified service at the lowest possible price. Here you will need to “strip out any and every cost that is not required to meet the minimum specification” (p. 107). It is also important to fence off this job so that more lucrative clients who receive a higher level of service understand that this lower-priced work is at a different level.

d. Convenience buyers “don’t compare prices; they just buy from the easiest source of supply” (p. 108). They know that they are paying a premium for immediate convenience and will not complain.

But whatever price strategy a law firm uses, the simple fact that they are paying more attention to this area will have positive effects. In their book, Law Firm Pricing: Strategies, Roles, and Responsibilities, Toby Brown and Vince Cordo give this example:

Lawyers live in a reputation world, and [financial] monitoring exposes that reputation to risk. Once lawyers realize that others in their firm can see their financial performance on matters, their behavior often changes. In one example, a lawyer was losing money on the first phase of a fixed fee arrangement. Once a monitoring program was put in place, performance on the second phase dramatically changed, leading to a reasonably profitable result (p. 39).

This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.

December 21, 2016

Pricing legal matters (Part 3 of 4)

If law firm management has trouble defining profitability, it can hardly be surprising that lawyers are confused by the concept. Several of the AmLaw 200 firm leaders I interviewed for my book, Client Value and Law Firm Profitability, expressed frustration with the implications, including these two:

Lawyers don’t understand what profitability means or how they can influence that number. So it’s a case of sometimes being focused on revenue, but not necessarily the right revenue, because they don’t understand the profit trade-off. They say they’ve got an account that’s giving two million dollars a year. Well that’s fine. But if you’re getting a three-percent profit margin, stay in bed.

We’re still struggling with trying to communicate to our billing attorneys that when you agree to a 10% discount or a 20% discount, you’ve probably given away 100% of your margin. They don’t get that. They say, “It’s only a 10% discount.”

In the interest of improving understanding, Stuart J T Dodds, the director of global pricing and legal project management at Baker & McKenzie, has proposed in his book, Smarter Pricing, Smarter Profit, that when lawyers price matters, they focus on his simple 1-3-4 Rule™:

For every one percent improvement in price, the potential increase to profitability is three percent. To get the same level of improvement in profitability without increasing price, you would need to work four percent more billable time (p. 36).

Dodds goes on to explain that these numbers are an approximation and that the precise relationship depends on the firm’s margin (p. 38). He even provides a table showing exactly how discounts from 1% to 20% reduce margin for firms whose margin before discount ranged from 20% to 50%.

But for the vast majority of lawyers, the 1-3-4 Rule™ will be enough and will be a great way to simplify a mathematically complex relationship.

Smarter Pricing, Smarter Profit goes step by step through everything lawyers need to know to survive and prosper in today’s rapidly changing marketplace. It is divided into four main sections: set the price, get the price, manage to the price, and review the price. So setting an initial price is just the start of the process. LPM is vital for actually living within that price and collecting profit. Dodds notes that:

When getting started on a project or matter, there are three important themes it is important to address at the outset… better communication, greater clarity, and easier review. These break down into 10 key steps for those responsible for leading a matter:

  1. Confirm what the client wants and expects
  2. Group the work into the main areas
  3. Agree how to address changes of scope up front
  4. Develop and agree on the matter plan
  5. Agree on the fee and fee approach
  6. Agree on the engagement letter and share with the team
  7. Agree on the reporting format and schedule
  8. Establish your matter phases and tasks
  9. Approve new timekeepers
  10. Staff the core team and agree on client responsibilities (p. 222)

Taken together, all of the observations in this discussion of pricing could be interpreted as reflecting a glass half-empty (so much remains to be learned) or half-full (firms are moving quickly to focus more on the pricing function). It may make you feel better to know that the law is not the only profession that could greatly improve its pricing strategies.

This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.

December 14, 2016

Pricing legal matters (Part 2 of 4)

There are many challenges in defining law firm profitability and then managing the firm to become more profitable. For my book, Client Value and Law Firm Profitability, I conducted in-depth interviews with managing partners and other leaders of 50 firms from the AmLaw 200. One question I asked was, “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?” (p. 52). Seventy-four percent said profitability in that case was defined by a program or formula, but 26% said it was more intuitive.

As one senior executive put it:

We don’t calculate profitability by formula. It’s really seat of the pants.

The managing partner at another firm put it this way:

Profitability is to some extent in the eye of the beholder. We’re still looking for good tools to evaluate what is profitable and what is not.

Other evidence suggests that even the firms that have formulas are measuring profitability in a variety of different ways. A growing number of software programs are available to handle the calculations. The two long-time leaders in the field—Intellistat Analytics from Data Fusion Technologies and Redwood Analytics from Aderant—have been providing sophisticated tools to quantify law firm profitability for several decades. But to use these tools one must make a series of assumptions, and that’s where the trouble lies.

At the LMA P3 conference a few years ago, Jeff Suhr, senior vice president of products at Data Fusion Technologies, noted that his company then had 91 clients actively using their tools, including 10 of the top 35 AmLaw firms. Exactly how did these 91 clients calculate profitability? Ninety-one different ways. The fundamentals were the same but there were important differences in the details, which can have significant implications for the way profitability is interpreted and used to motivate changes in behavior.

Suhr distinguished between the relatively straightforward science of calculating profitability and the art of determining the exact methods that best fit the needs of each firm. He also discussed the different challenges of “macro strategies” for analyzing profits for a firm, an office, or a practice group vs. “micro strategies” for analyzing a book of business or a particular matter. These sometimes require different assumptions and different approaches.

As Suhr summed it up:

The right way to measure profitability is one that is accepted in your firm. The art is to measure it in a way that keeps everybody happy.

In an email exchange, Donald Ware, chair of Foley Hoag’s Intellectual Property Department, summed up the state of the art more critically:

I’ve never heard of a law firm that has a good way to measure matter profitability. Many say they do, but when you push on the details it becomes clear that they really don’t.

This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.