Legal Business Development

What every lawyer needs to know about project management (Part 2)

Is it possible to control the costs of legal matters?

While some lawyers have been working on a fixed price basis for years, others still believe that fixed fees simply cannot be applied to complex legal matters.  The cost of defending a suit may be very low if your opponent is willing to settle early in the process.  But if they engage in scorched earth tactics, the cost of defending the same matter will be much much higher.

While it is certainly true that total costs are impossible to predict, it is also true that some law firms are offering fixed fees for one phase of a case at a time.  This requires a “win some, lose some” mentality which many large firms now accept.  As the managing partner of a firm with over 1,300 lawyers put it:

Everybody in business plays the odds.  We’ve had situations in corporate deals where we’ve really gotten burned on something.  But if it’s a good client, they don’t say, “gotcha” and laugh about the fact that you made a bad deal. They say, “We’re going to do more deals,” and life goes on.  And you assume that you’ll make it up in volume with better situations.

These days, many clients want predictable legal costs, and they will do business only with law firms that offer them. 

One of the most interesting observations in my research was made by a senior executive at a 1,000-lawyer firm who had previously worked at a publicly-traded real estate company:

The two most important people we had in the company were the estimator and the project manager. Law firms historically have had no one play either of those roles. It’s very dangerous to move into a world of fixed fees if you don’t have somebody who’s capable of estimating and you don’t have somebody who’s capable of project managing.

The discipline of project management

Historians have traced the origins of project management to the pyramids, the Great Wall of China, and civil engineers in ancient Rome who oversaw the construction of a 53,000-mile network of roads, many of which are still in use today.  The modern discipline of project management developed in response to schedule pressures during and after World War II.  Admiral Hyman Rickover developed the Program Evaluation and Review Technique (PERT) to manage the Nautilus nuclear submarine program from 1951-1954. In 1957, DuPont began developing the Critical Path Method (CPM) to plan the complex process of opening multiple chemical plants. The Apollo program applied these methods and more to put a man on the Moon by 1969.    Since then, a number of professional associations have grown in influence, including the Project Management Institute, which now has “more than half a million members and credential holders in 185 countries.”  Some institutions of higher learning now offer master’s degrees in project management. 

These days, project management techniques are routinely applied many fields, including information technology, engineering and construction.

The argument has already started about exactly how much of this knowledge lawyers need.  We believe that less is more.  We’ve found that many lawyers can quickly find ways to save time and money simply by focusing on the low hanging fruit.

For example, we recently conducted a workshop at Warner Norcross & Judd in which senior partners quickly reviewed project management best practices and picked out the ones that best fit their needs.  After reviewing our list, one lawyer decided to focus on setting estimated hourly goals before beginning each task.  He noted that the firm already did this with law students in their summer programs.  When these interns were given a new assignment, they were asked to estimate how many hours it would take before they began.  If the estimate seemed out of line, the supervising lawyer discussed the task with the law student to see if he or she really understood what was required.  The lawyer from our workshop is now adapting this technique to working with his partners on alternative fee matters.

This series will continue next week.  For more information, see my new Legal Project Management Quick Reference Guide, a customized book used by clients in our project management workshops, webinars and in-house presentations.

What every lawyer needs to know about project management (Part 1)

This five-part series is an expanded version of an article I published last week on AmericanLawyer.com entitled “Teaching Lawyers How to Manage: Can It Improve the Bottom Line?”

When I interviewed AmLaw 100 chairmen, senior partners and C-level executives for a recent survey of alternative fees, many predicted dramatic changes in the legal profession.  The prediction that surprised me the most was a move to adapt project management techniques from other businesses. As the CFO of a firm with more than 1,000 lawyers succinctly put it, “If we teach our people to manage, we can make more money.”

Project management techniques can reduce costs and increase profitability for any type of legal billing arrangement.  The results are easiest to see with fixed fees.  When a law firm agrees to handle a certain matter for a flat rate, it must find a way to meet legal needs within a limited budget.  The less the firm spends, the more money it will make. But, as that CFO went on to explain:

A large number of lawyers do not know how to manage.  [In the past], the more hours that got charged, the more money [they] made.  And so they’ve never really had to manage [costs].

Similarly, a senior partner at a 500-lawyer firm said that:

For alternative billing to be successful for both the client and law firm, the partners have to re-think their approach and try to decide the most efficient way to approach matters.  For example, instead of sending an associate off to research 50 issues that could come up in a litigation case, you might focus strictly on the small number of issues that are likely to be most important.

The executive director of a third large firm said:

Lawyers are not known for being the greatest project management folks in the world.  If they are going to try alternative billing methods, they have to be able to deliver what they are offering.  This is a fundamental change in the industry, and lawyers will have to improve their project management skills in order to succeed in this area.

The pressure to reduce costs.

Of course, much of the momentum in the alternative fees movement is coming from clients’ needs to cut legal costs.  This pressure started long before the Great Recession, with companies like Dupont, Cisco, FMC Technologies, and Pfizer in the lead.  According to a recent survey from the Association of Corporate Counsel, 81% of in-house counsel are trying to reduce their legal spend.  The BTI Consulting Group has reported in its Premium Practices Forecast 2010 that spending on outside counsel dropped 10.8% last year.  They also predicted that it will decline another 4.3% in 2010.

But it is hard for lawyers to imagine doing more with less.  For their entire careers, they have been trained to leave no stone unturned in protecting clients’ interests.  If it happened to take a large number of hours to turn over some of those stones, the client would be better off and the firm would make more money.  As the American Bar Association’s Commission on Billable Hours summed it up in their 2002 final report (p. 8), “Hourly billing allows, indeed may encourage, profligate work habits. A cost-plus contract can degenerate into disregard for basic market discipline.”

But at a moment in history when no one can doubt that legal budgets are being cut, project management skills can help lawyers protect the profitability of hourly work.  If a client’s legal budget is reduced 10%, there are only two ways to keep the business: discount your hourly rates (and cut your profits) to save the 10%, or find a way to meet the client’s true need at standard rates, in fewer hours.  Project management will allow lawyers to deliver the second, more profitable, solution.

As a senior partner at another large firm put it:

More pressure on the lawyers managing the matter to be efficient and to staff the matter at the lowest possible level is a good thing.  It forces lawyers to take a hard look at costs and benefits.  Is it really necessary to proofread that agreement eight times?

Or, as a decision maker at a different firm said:

We really need to manage matters much more closely than we ever did before, make sure that they’re being staffed and handled efficiently.  Clients don’t want new lawyers working on their matters. Rather than have a first-year associate spend ten hours researching something, they’d rather have a senior partner spend half an hour and solve the problem.

This series will continue next week.  For more information, see my new Legal Project Management Quick Reference Guide, a customized book used by clients in our project management workshops, webinars and in-house presentations.

The lack of communication between law firms and their clients

Last week, I wrote about the lack of trust between in-house law departments and large law firms.  This week’s post is also from our national survey of alternative fees, and also reflects larger problems that have implications for both hourly and non-hourly work.

Many participants described how communication is vital to success, and how often it is lacking:

Everybody on both sides of the table must understand where the risks and rewards are in this type of relationship.

Some clients are really focused on, “Let’s all be open, let’s discuss things, and let’s find something that works for us and works for you.”  [But other] clients want us to almost bid in a black box world, and are very reluctant to share information.  It’s a little bit of a heads they win, tails we lose. 

[Some of our] clients have shared extensively with us their historic legal expenses. They’ve done it very openly. [But] other clients treat such information as if it’s an absolute trade secret.

Some felt that the entire RFP process works against the type of communication that is needed:

Getting down to the nitty gritty of what an alternative fee is going to look like requires an open and honest relationship and a frank discussion.  I just don’t know how you do that through an RFP. Maybe you can narrow the list of firms you want to talk to, and then have an open dialogue to design a really great alternative fee arrangement. But trying to do it through these formal or distant mechanisms is very difficult.

You inevitably have to get down to a much more detailed discussion, which requires some give and take, and which is hard to do in the RFP process.

The whole concept behind the current movement towards non-conventional billing is designed to create better relationships between clients and law firms, with law firms probably bearing more of the risk than they do now.  There also needs to be alignment of the firm and client interests.  Clients should understand that the law firms also want to make a profit, and [they should both] work together to come up with good arrangements.  This doesn’t call for a formula RFP; it calls for discussion. Just agreeing to whatever is in an RFP or bidding on a lowest cost basis doesn’t further that. If anything, it makes it worse.

Perhaps clients can get by with limited communication with hourly billing, but that is not the case here:

[Alternative fees] require more discussion between the client and the firm about what the billing is going to be, and more frequent checking in with each other. [Then], once you get into that dialogue, if something radically changes in the terms, you have a basis for a reasonable agreement rather than somebody getting stuck with holding the bag or getting a windfall of some kind.

There needs to be a built-in review process, [where client and firm say,] “Let’s meet in six months. Let’s sit down and see how we’re doing.” There needs to be good management at both ends. That’s the trick. The communication piece is critical.

One participant mentioned the importance of building meetings into the formal RFP process:

There should be a bidders’ meeting to sit down and talk, and [there] should be a more open dialogue than just, “I’m going to send this to the top 50 law firms and pick from the five who were the most creative at responding on this RFP.”

There needs to be a lot of up-front involvement.  Some [clients] have an RFP, then they come back [for discussion], and then you evolve your proposal as a result. And that works.

Another talked about a client that was doing things the right way:

The client, to their credit, has been very flexible throughout the course of this process. They’ve been willing to come back to the table and talk about exactly what’s working and what’s not working.  [They ask], “How do we adjust on the fly?  What needs to be done?”  It’s a benefit for the client too, to have stability in that relationship.

But some said that communication is not getting better, it’s getting worse:

One of the interesting phenomena in many of our practices is the changing role of inside counsel in the client/firm relationship. We have had big clients where we have gone from working directly with various business people in various units, to hearing everything through the inside counsel and never, ever once speaking to the business people. I’m sure that someone decided that this would be a better use of the business people’s time. In some fields it’s quite inefficient, because the inside lawyer probably doesn’t have expertise in whatever the subject matter is, so you have to keep asking the question six different ways to get the right answer.

 

This post was reproduced from The LegalBizDev Survey of Alternative Fees.  See our web page for a free executive summary, an order form, or to purchase the $395 complete report online.

In-house law departments and trust

When I published the results of our national survey of alternative fees, one of the most discouraging sections concerned the lack of trust between in-house law departments and the firms that serve them.  Although the interviews were focused on alternative fees, the findings also have implications for hourly work.

If you made a list of the most common characteristics of successful lawyers, would you put trust near the top of the list?  Me neither.  An inherent predisposition to be suspicious is a barrier to agreeing on alternative fees and to making them work:

In the past, where we have proposed unilaterally various fixed fee arrangements, the clients have turned them down because they think that if we proposed them, there must be something wrong with them.

We have proposed ten alternative fee arrangements for every one that is accepted.  Maybe in-house counsel are afraid that outside counsel will sandbag them by building inefficiencies and excess margins into the fixed fee quotes.

I think that people often spend a lot of time putting together an alternative fee arrangement and the in-house counsel ends up rejecting it because they have as great a fear about the risk as the outside counsel do.

The larger problem with RFPs and alternative fees in general is really the trust issue.

Law firms have gotten such bad reputations over the last several years, and I think that’s probably due to their bragging about how much money they make. So you really can tell that there is an uneasiness in dealing with in-house counsel that didn’t exist five years ago. And I suspect a lot of it is due to purchasing agents, CEOs and others saying, “These guys make way too much money.” So now you have a whole different situation.

Several participants mentioned the distrust they had seen in meetings they had attended as part of the Association of Corporate Counsel’s Value Challenge:

One of the interesting things I heard at the ACC meeting was [a message from GCs that] if you came to me with an alternative fee proposal, I would assume you had come up with it in a way to screw me. And if that’s where you start, it’s going to be really hard to do anything. So I think there’s got to be a suspension of distrust.  I was surprised at how much distrust was evident [at that meeting].

There are such low levels of trust out there between in-house counsel and their law firms. Whenever I’ve gone to ACC events, that’s the one thing that I see in spades. There are very low levels of trust.

Another participant compared alternative fee negotiations to playing poker:

When you see me pushing all my chips into the middle of the table in a very eager and active way, you have to form a reaction to that. And when I say to you, “Yeah, that’s great, we’ll absolutely do it for x,” you probably have a moment where you think, “Gosh darn it, maybe it won’t cost them x. Maybe it wouldn’t cost me x if I just had them count their hours carefully.”

Others made the same point in different ways:

These are risk-averse buyers.

When law firms say, “The alternative fee basis on which you are proposing that we do this work is fully acceptable to us.  When can we start?” there is some sense on the part of the client, “Wait a minute, maybe that’s not the best way for me to go if there is so much interest on the law firm’s part in doing it.”

In the end, alternative fees will work best in long term relationships where there is an atmosphere of trust:

If you understand and believe that the relationship is long-term, you don’t get obsessed with short-term fluctuations that may be below or above what you anticipated in any given year.

These kinds of strategies work a whole lot better if you’re working with clients with whom you have a deep, trusting, long-term relationship, so that neither one of you wants the other party to be adversely affected by the arrangement and both of you understand that it’s a bit of an experiment. And with experiments, you may have to have change orders. You may have to make the client whole if it turns out that it didn’t cost nearly as much as you thought it would, or they may have to make you whole if it costs way more than had been anticipated. This doesn’t work so well with a client with whom you have a limited relationship.

Alternative fees work best with existing clients where we share a history of trust.  However, sometimes it makes sense to take a chance on a fixed fee with a new client.  You may win or lose on these, [and] anybody can get screwed if an agreement applies to just a single year.  If that happens, the firm upholds its end of the bargain, then fires the client.
In all of these alternative fee arrangements, we work in a quarterly review where we sit down with [the client] and look at [the arrangement] and make sure it’s fair. All of these agreements have a provision that provides for that. If one side’s getting killed, we’re going to do something about it on a quarterly basis. [In order] to do these things with big clients and big matters, you’ve got to have a relationship you can depend on.

These situations don’t always work out perfectly, but if clients and firms are willing to work things out when they go wrong, then their relationships will grow stronger.

This post was reproduced from The LegalBizDev Survey of Alternative Fees.  See our web page for a free executive summary, an order form, or to purchase the $395 complete report online.

Risk collars: A great way to start offering alternative billing

Whenever I give speeches about alternative fees, lawyers who are just starting to consider this approach are fascinated by the idea of risk collars.  These arrangements are essentially the same as hourly billing, with one giant exception: risk collars align the interests of lawyers and clients.  If work goes over budget, both sides lose.  And if it can be completed under budget, both sides win.  This selection from our national survey of alternative fees provides some details.

Lawyers use the term "risk collar" to refer to an hourly billing arrangement built around an estimated budget for a particular matter.  The client pays a bonus if work is completed under budget and/or gets a discount if the work goes over the budget.

Like a fee cap, this is really just a variation on hourly work, but unlike a fee cap it may align interests and offer incentives to both clients and law firms:

For people who are fearful about how big a risk they are taking on, I typically propose attempting to reach some accommodation on a collared arrangement. [Then] there are some limits to the upside, but there is also a limit on the risk [and] the downside for both the in-house and the outside counsel.

I think [risk collars are] helpful in situations where, because of the unknowns and the risks, both the lawyer and the client are a little bit tentative about venturing into the alternative fees waters.

If we bid two million dollars to do [a project, but] we come in at a million six, we get a percentage of that efficiency savings. That gives us an incentive to be efficient, because that’s gravy to us. It also means [that] clients don’t overpay.

Here are two examples from different firms:

Recently, we’ve offered incentive budgets to some clients for handling all their cases in certain areas.  We represented one large financial services firm that had been sued in class actions across the US.  About 3,000 people opted out, and some had formidable cases.  We negotiated a fixed budget to handle all 3,000 cases.  Both sides recognized that the cost of individual cases could vary wildly, so we negotiated a risk collar.  If we exceeded the initial budget, we would discount our hourly rates on the overrun.  If we could conclude all the cases below the original estimate, we would get a premium.  We got the premium, and both sides benefited because our interests were aligned.  It also helped the client substantially by providing predictable costs.

There is a situation with one of our large clients where there’s a portfolio of state court cases.  We give them a budget for a year [where] we take everything into account. We keep them updated monthly [and] revise the budget quarterly. If we exceed the original budget, we get paid for the excess hours, but then we’ve got to write them a check back for 25% of what the excess hours were. If we do the work for less than the budget, they write us a check for 75% of the hours not spent.

The actual discounts and bonuses vary widely.  See the complete report for a table with six examples of actual deals described by survey participants.

For more details on how risk collars work, and on other common types of alternative fees see The LegalBizDev Survey of Alternative Fees.  Our web page includes a free executive summary, and an order form to purchase the complete report online (for $395).