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5 posts from April 2010

April 28, 2010

Legal Project Management (Part 6): Budget problems and solutions

Many lawyers believe that it is simply not possible to predict the costs of complex legal matters.  As the managing partner of a firm with more than 1,000 lawyers put it in The LegalBizDev Survey of Alternative Fees:

[Some] litigators say [a fixed fee] just doesn’t work at all, because who knows what’s going to happen. You hear all those stories about how you can get a fixed fee to build the Taj Mahal, and a litigator will say, well that’s true, but when you’re building the Taj Mahal, there isn’t somebody who’s paid to fend you off.  In a contentious engagement, that’s what’s going on.

It’s certainly true that the cost of defending a suit can vary widely depending on whether the other side is interested in settling, or determined to engage in scorched earth tactics.  However, it is interesting to note that the lawyer quoted above manages a firm that has signed a number of multimillion dollar fixed price litigation deals.  He believes that if you work with the right clients in the right ways, handle enough cases, and accept a “win some, lose some” mentality, fixed price work can be a very profitable strategy.

Some firms have been acting this way for years, and have done very well for themselves.  Consider, for example, Bartlit Beck, which The American Lawyer named “Litigation Boutique of the Year” in 2009.  As their web page explains:

Our approach to fees is unique, but simple.  We believe our interests should be aligned with our clients’.  To that end, we think we should get paid more if we win and less if we lose.  We do not bill by the hour.  Our fees depend on our success. We employ a variety of fee arrangements, including flat monthly fees, partial contingency fees, and similar alternatives.  In virtually every matter, some portion of our fee is based on the outcome of the case. This approach works for us because we leverage our experience and efficiency to get a positive result, rather than leveraging an army of associates to run up the hours.

In my series on alternative fees, I quoted the firm’s founder, Fred Bartlit, about estimating costs:

Almost NO ONE knows what tasks should cost done right. I usually ask at meetings of General Counsel and other inside lawyers, “What should it cost to prepare for and take the deposition of an economic expert in a $100 million antitrust case?” I get answers ranging from $30,000 to $500,000 in the same room.  So, to me, we have a dramatically atypical situation facing us: a huge market that is not competitive, that does not foster innovation in business processes, and has NO useful metrics for comparing efficiencies of different competitors or calculating roughly what various aspects of litigation SHOULD cost.

Do I think every litigator should follow Bartlit Beck’s lead and switch to 100% alternative billing?  Absolutely not.

Some clients are willing to accept financial risk in return for reassurance that their interests will be defended.  Others are sure to disagree, but I would never recommend switching those clients from hourly rates to fixed price.  Just the opposite: I would recommend that you should do everything possible to turn those clients into raving fans,and keep billing on an hourly basis for as long as they are willing to pay.

There will always be some clients who are willing to pay hourly rates in “bet the company” cases.  If I were accused of a white collar crime, I would not shop around for the lowest price or for a fixed fee.  I would look for the lawyer who was most likely to win my case, and pay whatever it cost.

But the world is changing, and the number of clients who are willing to “pay whatever it costs” is shrinking quickly, according to all the available evidence.

If you find that your clients demand fixed budgets, what exactly should you do?  There are many guides to budgeting, including the template “Six steps to better budgets” in our Legal Project Management Quick Reference Guide.

If you use these templates, can you eliminate the risk of underbidding?   Of course not.  As Nobel Prize winning physicist Niels Bohr famously said, “It is very hard to predict, especially the future.”

In my home town, the cost of Boston’s Big Dig was estimated in 1985 at $6 billion (adjusted for inflation).  By the time this project was finished in 2007, the actual cost was closer to $15 billion.  It’s not exactly a poster child for the accuracy of professional budget estimates.

No matter how good you get at budgeting, sometimes your predictions will be wrong.  But you can be right enough, often enough, to run a very profitable business, maybe even more profitable than it would be on hourly billing.  And these same project management skills can help you increase revenue with hourly matters as well.  Especially now, when so many clients want predictable legal costs and so few firms know how to offer them.

April 26, 2010

Former Associate General Counsel joins LegalBizDev team

Mike-egnatchikI am pleased to announce that Mike Egnatchik, former Associate General Counsel, International at Xerox Corporation, has joined our team.  He will help us meet the growing need for our proprietary “just in time, just enough” project management training programs.

Mike has been a practicing attorney for over 30 years, and earned his JD at Harvard Law.  Before he moved to Xerox, he worked in the New York and Paris offices of Shearman & Sterling. Mike has several decades of experience in worldwide legal project management and has earned a Lean Six Sigma Yellow Belt.  At Xerox, he managed and trained a network of in-house and outside counsel in over 100 countries, and had significant responsibility in the areas of international joint ventures, acquisitions and divestitures, compliance, arbitration and dispute resolution. 

Mike has been a member of the Association of Corporate Counsel since it was founded in 1982.  He is also a former US Air Force Officer, and a member of the State Bars of New York and California.

For more information about LegalBizDev project management workshops and presentations, contact us (at info@legalbizdev.com or 617-217-2578) or see our web page
 

April 21, 2010

Legal Project Management (Part 5): Six Sigma and Lean

When I started this series of posts, I thought it would have only five parts.  However, a significant amount of new information has been published on this topic since I started the series a few weeks ago, so I will continue with several additional posts.

When experts talk about increasing legal efficiency these days, the conversation often turns to Six Sigma and Lean. 

Six Sigma is a set of formal business methodologies designed to improve quality.  It was developed at Motorola in 1981 to improve manufacturing quality control, and the name comes from its original statistical goal of assuring that for every million manufactured parts, three or less would be defective.  (If you ever took a statistics course, you may remember that in a normal distribution three per million would be six standard deviations – or six sigma – from the mean.) 

Six Sigma has since been used by more than two-thirds of Fortune 500 companies to improve quality and reduce costs.  It is built around sophisticated tools and methodologies that force people to get to the heart of a problem and figure out how to re-engineer business processes.  But like TQM, the Republican Party, and Buddhism, Six Sigma has evolved and expanded in so many different directions over the years, that it is hard to characterize it as a single methodology. 

The reason the term comes up so often in discussions of legal efficiency can be traced to the well publicized success of a single firm: Seyfarth Shaw Several years ago, Seyfarth managing partner Steve Poor went out to dinner with DuPont General Counsel Tom Sager to discuss how to increase efficiency.  Sager’s advice on Six Sigma was crystal clear: you can have an enormous impact if you do this right, but you should not start down this path unless top management is 100% committed to making it work.

According to the book Six Sigma for Dummies(p. 10), the approach is “not for the faint of heart. It is intense and rigorous, and it entails a thorough inspection of the way everything is done.”    Would you guess that implementing an approach like this would be fast or cheap?  If you guessed no and no, you are getting warm.

An article which describes the evolution of Seyfarth’s program,quotes Carla Goldstein, Seyfarth’s director of strategic management, about the way lawyers reacted when the process started in 2006:

We were dying.  [The consultants] came in with these binders of jargon and statistics and numbers and the lawyers’ eyes were rolling around in their heads.

But Seyfarth stuck with it.  They collected and analyzed an enormous amount of data about past projects and necessary steps in such categories as M&A transactions, real estate acquisitions, real estate leasing, single plaintiff employment litigation, summary judgments, commercial litigation and more.  In each category, groups of up to 40 lawyers and staff held meetings over several months to define efficient processes, and establish guidelines for how long each step should take. 

This data analysis helped them to discover some interesting and counter-intuitive trends.  For example, many general counsel believe that longer negotiations tend to produce better settlements, because it pays to be tough.  In fact, when Seyfarth systematically analyzed data from past cases, just the opposite was true: the less time a case was open, the less clients typically paid in the settlement plus legal fees.

Seyfarth ultimately certified 75 lawyers and staff members (including every lawyer on the executive committee) as “Six Sigma Green Belts,” which “requires completion of an intensive four-month training program and the successful completion of two Six Sigma projects.” 

They’ve since trimmed the program, and renamed it SeyfarthLean based on the “Lean Six Sigma” approach that Seyfarth ultimately adopted.  That term can be traced back to the “lean production” movement to increase manufacturing efficiency, most famously in Toyota’s efforts to eliminate the “seven wastes” (excess inventory, excess processing, overproduction, transportation, motion, waiting, and defects).  Some of these translate to legal work better than others, but basically the lean approach implies looking at every process from the client’s point of view, analyzing whether each step adds value for the client, and eliminating the steps that don’t.
 
According to an article in the April 2010 issue of The American Lawyer (
subscription required to read the article online):

Now every practice area at the firm uses the Six Sigma approach to varying degrees. And by the end of this year, all of the firm's more than 1,500 employees will be trained in SeyfarthLean.

What did all that cost?  Again according to the American Lawyer article:

Seyfarth has spent over $3 million to date administering and training workers on the philosophy, and budgets $200,000–$500,000 annually for these costs.

Was it worth it?  The article takes an agnostic position.  It’s titled “Leap of Faith” and subtitled “How much will Six Sigma pay off for Seyfarth Shaw?”  The article does note that about 15% of all work at Seyfarth Shaw is currently done wholly or partly based on Six Sigma, and that “the firm hopes to double the amount of revenue Six Sigma work brings in every year.”

In my opinion, there can be no question that Seyfarth has derived an enormous marketing benefit not just by offering greater efficiency and lower cost at the exact moment that clients started clamoring for it, but also from the publicity associated with being the first law firm to embrace this philosophy.

But now that Seyfarth has blazed this path, should your firm follow, and adopt Six Sigma?

We believe that in the current competitive environment, every law firm needs to work on ways to increase efficiency.  But there are many paths to greater efficiency, and every law firm must evaluate the relative return on investment of various options, including the required time investment by staff and by lawyers, the speed of deployment, the degree of impact on law firm operations, and the direct cost of each program.  When they do, we think that most firms will agree with us that the “just-in-time, just enough” project management training approachwill be much more cost-effective.  Any lawyer can try new tactics without changing firm-wide practices, and you can see the results right away.  When something works, lawyers can quickly do more.  When it doesn’t, they can try something else.  I’ll have more to say on this as the series continues over the next few weeks.

To download a .pdf summary of this series, see the white paper in the project management section of our web page.  It will be updated from time to time as the series continues.  Additional information appears in the Legal Project Management Quick Reference Guide.

April 14, 2010

What every lawyer needs to know about project management (Part 4)

It’s all about tradeoffs

If we lived in a perfect world with unlimited resources, no one would need project managers.  But here on Earth, resources are limited and managers are constantly forced to make difficult choices.  For example, when computer programmers develop a new product, no matter how good the product may be, someone can always think of a way to make it even better.  But each new feature requires time and money.  If software companies intend to stay in business, someone must decide which changes are worth making and which are not.  That’s why experts talk about the “project management triangle”: every project is constrained by scope, schedule, and budget.  If you change one, the others change too.

As project managers often put it, “Better is the enemy of good enough.”  The phrase can be traced back to Voltaire, and is not an endorsement of mediocrity.  It is an endorsement of pragmatism, of analyzing the cost of each action in advance, and proceeding only if that cost can be justified by its return. 

It is human nature to always seek a better solution and for each of us to add our own personal stamp.  It is the project manager’s job to keep human nature in check and thus assure that projects are completed on time and within budget. As a Deputy Division Chief at NASA put it in an article about the space program:

In our zeal to solve problems in new and innovative ways, project managers must be prudent not to allow requirements creep or design solutions to bankrupt the whole project.

Many lawyers have spent their entire careers with little motivation to deliver within budget.  The billable hour has implied that the more thorough lawyers were (and the longer things took), the more money they made.

A few years ago, after I gave a business development speech at a law firm retreat, one lawyer came up to me to ask how to handle a client problem.  He had recently completed an assignment for a real estate developer, and written what he called “the perfect lease.”  It was one of the proudest moments of his legal career, and his colleagues agreed that he had crafted language which would protect the client’s interests under any conceivable scenario.  There was just one problem: the client hated it.  Well, they didn’t hate the lease, they hated the bill.  They also refused to pay it, because they had been expecting a much lower cost.

So this lawyer asked me: How can I make my client understand that the perfect lease was worth the money?  My answer: You probably can’t.  If that’s not what the client wanted, it is not perfect.  What you need to do is go back to the client, ask a lot of probing questions, and listen.  Don’t argue, don’t talk, just listen.  When you understand what they wanted to buy, then you will be in a position to negotiate a price they will pay, and you can try to salvage the relationship so you will get more of their business in the future.

It all goes back to the best practice mentioned above: hold difficult conversations before money is spent, not after. 

To download a .pdf summary of this series, see the white paper in the project management section of our web page.  It will be updated from time to time as the series continues.  Additional information appears in the Legal Project Management Quick Reference Guide.

April 07, 2010

What every lawyer needs to know about project management (Part 3)

How to reduce write-offs

Another best practice discussed in our project management workshop at Warner Norcross & Judd was just as simple and even more likely to quickly impact the bottom line: “Hold difficult conversations before money is spent, not after.”

Anyone who has been involved with law firm finances knows the importance of the realization rate, the percentage of billable time that is paid for by clients.  The precise definition of which hours are included and excluded from the realization rate varies a bit from firm to firm.  The calculation typically includes work that was completed but never billed (such as a junior associate running wild on a research assignment; the relationship partner might never bill the client for that work), and expenses that were billed but not paid.  Unpaid bills may be classified as post-facto discounts, write offs, or bad debts.  But whatever you call them, they reflect lost income, which could have gone directly to the bottom line.

There are many reasons write-offs occur, but poor communication is frequently the key. Consider this scenario from a senior partner of an 800-lawyer firm in our survey:

[The client asks] “What’s it going to cost?” and [the lawyer] says “Oh, I can’t tell you, we don’t have enough facts. But normally a deal of this size would run $120K-$150K.”  The client hears, “You’ve promised me $120K.” And then that’s it. That’s your fixed fee. And you don’t know that, of course, because you thought what you did was say, “This is what it costs on average,” and at the end the client would say, “Gee, this cost $200K, how is that possible?” And you think, “Well, you know, your CEO got fired in the middle of the deal. The deal dragged on for three years. It turned out you got sued. Yeah, it cost $200K.”

In the same interview, the COO of the firm commented that:

You can’t wait until the end to talk about all the change orders. You really have to not be afraid to address these issues. A lot of partners don’t want to do that.

If the lawyer in this scenario had discussed the issues with the client early in the process, she might have gotten a larger payment, or perhaps she could have satisfied the client’s true need with fewer billable hours.

Unsatisfactory realization rates have always been a problem for law firms, and they are getting worse.  Hildebrandt Baker Robbins tracks data on billing realization and collection realization rates in their Peer Monitor survey of 40 AmLaw 100 firms, 35 AmLaw 101-200 firms, and 52 additional firms.  As noted in their 2010 Client Advisory, in 2007 both rates were around 95%.  By the end of 2009, billing had declined to about 93% and collections to about 90%.  Project management tactics offer the potential to improve those rates, and they have a huge impact on the bottom line.

Eight key issues

Now, you don’t need a master’s degree in project management or a professional certification to discuss ideas like “estimate hours in advance” or “have difficult conversations before you spend, not after.”   With lawyers, it is easy to find ways to reduce costs.  The hard part is getting them to do it.

The difficulty of getting from knowledge to action is the core challenge of all adult training programs, and it is one that my company has been working on for 25 years.  (Before we started working exclusively with lawyers and changed the company name to LegalBizDev, we had worked for nearly two decades developing custom training programs for financial services firms, government agencies, and others.)  

One key way that training experts maximize follow-up is to let each individual focus on the topics that interest them the most, rather than trying to force everyone in a group to review the same general concepts.  When lawyers participate in our project management workshops, they use a customized version of my Legal Project Management Quick Reference Guide, which lists dozens of best practices organized in terms of eight key issues:

1. Set objectives and define scope
2. Identify and schedule activities
3. Assign tasks and manage the team
4. Plan and manage the budget
5. Assess risks
6. Manage quality
7. Manage client communication and expectations
8. Negotiate changes of scope

Getting lawyers to act on the items they select requires an understanding of how lawyers operate at large firms, and how to effectively communicate with them.  The bad news is that an effective program requires professional training techniques, politics, psychology, and unrelenting follow-up.  The good news is it works.  And it starts by getting lawyers to buy into the concept of tradeoffs.

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.