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4 posts from October 2010

October 27, 2010

Legal Project Management (Part 16): Work breakdown structures

If you’ve read about our “just in time, just enough” approach to training, you know that I am not a fan of teaching project management concepts and terminology in the abstract.  Instead, we prefer a “jump right in” approach, in which we coach each individual lawyer to find the action items that fit their immediate needs and ignore the rest. 

This week’s post is dedicated to our other clients, the ones who take our half-day “Legal Project Management 101” course because they prefer to start by mastering basic concepts.  For these folks, work breakdown structures may be the most important concept in the entire project management literature.

Whenever I write about topics like this, I always turn first to Eric Verzuh’s book, The Fast Forward MBA in Project Management.  I like this 462-page reference book so much that I buy a copy for each person who joins our team, no matter how much experience and training they’ve had in the past. The book does not mention lawyers a single time, but it does give a comprehensive overview of the strategies and tactics that have proven successful in other professions.  It defines today’s term very simply:

The work breakdown structure identifies all the tasks in a project; in fact, a WBS is sometimes referred to simply as a task list (p. 126)…This is the secret of successful project management: Break the project into small, meaningful, manageable units of work (p. 134).

Like playing golf or closing a sale, this is not as easy as it looks.  When I spoke at Bruce MacEwen’s recent workshop on alternative fee arrangements, one lawyer in the audience talked about his firm’s experience in trying to organize a complex litigation into simple tasks.  They wanted to create a Gannt chart/logical outline that reassured a large client that their cases were being handled efficiently.  But they ended up with a list that was so long and Byzantine that it made the client feel worse.

Verzuh explained the problem this way:

Because a good work breakdown structure is easy to read, people often assume that it’s also easy to write.  This, however, is a false assumption; there are large numbers of inaccurate and poorly developed work breakdown structures produced every year (p. 133).

The Wikipedia entry on work breakdown structure describes five common pitfalls and misconceptions for work breakdown structures, including:

It is considered poor practice to construct a project schedule (e.g. using project management software) before designing a proper WBS. This would be similar to scheduling the activities of home construction before completing the house design.

Wikipedia also has an entire section devoted to the question of “when to stop dividing work into smaller elements.”  This is especially challenging for detail-oriented lawyers – how much detail is enough?

Wikipedia’s advice on detail is similar to the advice I give in the Legal Project Management Quick Reference Guide:

Each activity should be budgeted for a manageable chunk of time (typically 8 to 40 hours) to give team members freedom to perform the task as they think best while still assuring accountability (page 9).

To be honest, the fine points of creating a work breakdown structure simply don’t matter to most lawyers.  Most of our clients make tremendous progress without ever hearing the term, often by focusing on such simple tactics as tracking spending in real time, staffing matters differently, and communicating more systematically with clients.

For the few lawyers who need a sophisticated work breakdown structure, like the litigators in the workshop I mentioned above, my advice is to hire a pro.  For all the rest, I say the next time a certified project manager asks you about your work breakdown structure, think of it as a very well-designed task list.

October 20, 2010

Alternative fee strategies (Part 3 of 3): Transparency and shadow billing

This three-part series is reproduced from the LegalBizDev Survey of Alternative Fees, a research report based on in-depth interviews with chairmen, senior partners and C-level executives at 37 of the largest law firms in the US.

One of the most fundamental issues that separates aggressive firms from more conservative ones is their attitude toward transparency, and especially towards “shadow billing,” in which law firms provide information about actual hourly costs on fixed price projects.  They believe that this openness and transparency will serve as the basis of a partnership.  If both parties see where things really stand, they can renegotiate in good faith if costs are either far higher or far lower than what both parties expected.

Meanwhile, more conservative firms think that shadow billing is inappropriate.  A fixed price deal is a fixed price deal, and the client should not get to look behind the curtain to see whether the firm has won or lost.  Below are comments from nine firms that subscribe to the conservative view:

When we agree to a fixed fee, we should not be submitting backup and time records and then having it run through some legal audit shop and reviewed through an e-billing system and so forth.

We don’t want our client to come back and ask what it will cost on an hourly basis. We don’t want the lower of one or the other, hourly versus alternative.

If we really want to get alternative fees into the psyche of both clients and lawyers, we need to stop clients from measuring how much more the firm made than their hourly rate, and we need to get lawyers away from thinking about how much they earned less than their hourly rate. Someone’s got to say “Look, I did a job for you. I collected five million dollars. Was it worth it?” Yes or no? “I did a job for you and I collected $50,000. That’s what you paid me. Was that worth it?” Yes or no?

After we’ve submitted an RFP, the discussion often turns to, “Well, we’d still like to see hours and rates for people who are going to be employed on this matter, even though we’ve agreed to a fixed fee. I know what’s behind that, [because] I used to be a huge consumer of legal services as a client.  [Sometimes] a million five [will] sound right for a piece of litigation, but if [the firm does] it for a million one, [the client doesn’t] want to give [the firm] a windfall. [The client] wants some of that benefit.

To the extent [that] GCs want to use shadow billing and other techniques to eliminate the ability of the law firm to cover its costs and earn a margin, fixed fees will not work.

I understand it from the general counsel’s perspective. There’s internal accountability.  Did they get a good deal out of the firm?  How do they know they got a good deal if it’s a flat fee or a fixed fee, unless they have some benchmarks against which to measure that from other providers who do the work on an hourly basis? From the client’s perspective, the marketplace hasn’t evolved as far as a lot of the hype we have been hearing in the trade press. I don’t think it’s evolved as far as it needs to in terms of making this a potential for a win-win.

If a firm agrees to a fixed fee to provide predictability to the client, the firm is taking a risk that it may cost more to do the work than the agreed fee. In return, the fixed fee should be paid promptly, and backup time records shouldn’t be reviewed in a time-consuming process which delays payment and requires large administrative overhead.

We have talked with some clients about doing deals on the defense side, where we would get a percentage of the amount that we saved below a target verdict or a target settlement.  We’ve done a couple of those arrangements over the years. But if you tell clients at the end of the process that you earned 200% of your hourly rate, they want to come back and renegotiate that.  Clients really don’t like you to do that.

And what happens is, that’s not being allowed.  In some cases, what’s happening is that even when there’s an agreement that the fixed fee is going to be allowed, the client wants to reconcile the time that’s put into it and see if they got a good deal or a bad deal. And as long as that’s the kind of relationship it is, it really isn’t an alternative billing arrangement. “Did I do better or worse than under the old system?” If general counsel really want to get rid of the billable hour system for billing, then you can’t have all these post-audit questions about it. If you agree on something, and there’s value, and we found a way to staff it differently, we should benefit from those efforts.

Aggressive firms see it differently.  Many of the deals they described included shadow billing, and some argued that it is absolutely necessary:

If we hide things like [hours], it’s not going to work.  We’re interested in this from a partnership perspective.  There has to be mutual trust.  If [clients] think we’re just doing this and reaping in additional money, it’s not going to work. So what we actually had in that situation was an annual in which we went through all the cases and looked at where we were in the numbers.

Several aggressive firms also used the informal accounting term “true-up” to refer to a process in which they compared actual hourly costs with fixed prices from time to time, in order to bring the two in line:

[In one deal, clients] pay us [a certain] amount a month, and then after an agreed amount of time, there’s a true-up based on actual internal costs, perceived value, [and other variables].

Finding a meaningful true-up, with objective benchmarks that are fair and predictable, is the Holy Grail.  With true-ups you can have a second chance in case something goes haywire.

October 13, 2010

Alternative fee strategies (Part 2 of 3): Conservative risk avoidance

This three-part series is reproduced from the LegalBizDev Survey of Alternative Fees, a research report based on in-depth interviews with chairmen, senior partners and C-level executives at 37 of the largest law firms in the US.

More conservative firms are trying to plan bids so that every deal is profitable on its own merits.  In its most extreme form, this leads firms to seek and accept relatively little alternative fee work.  One participant explained his firm’s philosophy this way:

Our firm is large enough to take some risks, but we’re very fiscally conservative. We set aside a relatively low percentage of the accrual revenue of the department each year, [to] devote to these kinds of [alternative] arrangements.  That way, we could tell the stewards of the firm – the executive committee, the chairman and anybody else who wanted to know – that we weren’t going hog wild.

Traditionally, many law firms have expected to be paid a premium to assume risk.  Of course, that drives up the price of fixed fee work and can scare clients off, as in this example:

Several years ago, a general counsel of a real estate company sent out RFPs to 50 law firms to solicit fixed fee bids in the areas of work that [the firms] regularly performed for the company.  After analyzing the responses, he concluded that the fixed fee approach would actually cost the company 30% more than the traditional hourly rate approach.  The likely reason for that result was that the law firms didn’t have an accurate way of estimating potential costs (lack of data), and they did not want to take a risk.  As a result, most estimates were 30%, or more, higher than the client perceived necessary or appropriate.

Some survey respondents continue to believe that such premiums are necessary and appropriate in the current economic environment.  Said one:

If a law firm prepares a fixed price bid carefully and correctly, the client will often end up with a higher fee, since the law firm is taking additional risk.  Businesses expect to be rewarded for taking risks.  When law firms take risks and also offer a lower price, that is a bad deal for the firm. This happens to law firms all the time because they don’t have enough experience yet.

Another explained that since alternative fees are often higher than hourly fees, then, “if you prepare a bid correctly, the client will often say, ‘You know, I think I’ll go with an hourly approach.’”

Here are more statements from firms with a conservative profile:

Law firms don’t want to bear the entire risk; they want a shared risk. Most law firms like ours would like to better understand the potential upside.  [It benefits everybody if] the general counsel can be clearer as to both the upside in terms of dollars and in terms of a guaranteed amount of work.

An awful lot of times, when I see that a client wants us to absorb all the risk, there is no upside. We’ve done some of those [and] lost some of those.  It’s troubling, because too many clients seem to be willing to shift that risk entirely to their legal services provider. I understand it because of the economics, but in a true partnering relationship, they should want a win-win out of this with some risk-sharing and some reward-sharing.

There may be instances in which the law firm is willing to assume a greater proportion of the risk if it obtains a greater proportion of the reward. The contingency fee is a classic example of that. If you do a full contingency case, the law firm is essentially assuming all the risk, but it’s taking a significant portion of the upside reward as well.

To be successful, any partnership must be a win-win, where everyone is taking risks and sharing rewards.  If it’s too one-sided, [then] it’s not a partnership.

When I asked one firm what percent of the risk his firm was willing to bear, he said that, “law firms shouldn’t take [more than] 50% of the risk. I think that’s too high.”

Some conservative firms feel that even in alternative arrangements, if their costs go up, the client should pay more:

In these arrangements, the law firm will want the ability to get out and accept no additional work if things change.  If salaries and costs go up, we need to be able to renegotiate to assure sustainability.

The price pressures caused by the down economy are making it difficult to win work with the conservative model:

We see a bidding war going on.  Clients are just beating down the price on this stuff to [the point] where we look around and ask if we even want the work, [since] there’s no way we could come out ahead on it. And yet other firms are taking that work. Why would I as a client want to put a law firm into that position? We aren’t going to cheerfully say [that it’s okay] to lose $300,000 on a million dollar matter.

This is a little bit like what the insurance companies do in insurance defense. They want the lowest cost lawyers [and] they don’t really care about the quality of the result that much. We’ll do what we have to do and grind away on the case at a $200-an-hour partner rate. Why [would anyone] expect to get the best out of that kind of arrangement? I don’t think people are going to get the best out of these flat fees [or] these highly competitive bids. Firms can do that on truly the highest-commoditized levels of work, which is the lowest level of work in terms of expertise, but not where it’s IP litigation or complex commercial litigation. In the long term [it doesn’t] benefit clients; there has to be risk-sharing and reward-sharing [at a reasonable] price.

October 06, 2010

Alternative fee strategies (Part 1 of 3): Aggressive risk-taking

This three-part series is reproduced from the LegalBizDev Survey of Alternative Fees, a research report based on in-depth interviews with chairmen, senior partners and C-level executives at 37 of the largest law firms in the US.

Over the course of these interviews, it became clear that different law firms are taking very different approaches to [alternative fee arrangements].  While some are aggressively cutting prices and assuming more risk, others are sticking to a more conservative approach.

Many aggressive firms believe in the long-term benefits of building alternative fee business, and are willing to reduce profits and take some risks to get there.  In the LegalBizDev Guide to Alternative Fees, I quoted lawyers from a number of boutiques and large firms in this category, including Womble Carlyle partner Rob Fields, who believes that “the client needs to win on every fee, every time, even though at larger law firms it’s difficult to wrap our minds around this” (Third Edition, p. 20).

Many survey participants echo this aggressive philosophy:

Some special fee arrangements are loss leaders, used to build relationships.  In that case, firms are really looking down the road at the next project, not the current one.

I used to work in a venture capital firm, and I enjoy taking an entrepreneurial approach to betting on alternative fees.  It’s a portfolio; I don’t need to win every one.  If I make 20 bets and five are disastrous but three are home runs, I will do very well.  If I try to engineer these arrangements so I can’t lose, I’ll never win the big ones.

Aggressive firms stress the value of building long-term relationships with key clients:

It’s okay if we lose a little bit of money compared to our normal hourly rate as long as we are communicating well with the client.

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 that we’ll do more deals [in the future] and life goes on, and we assume that we’ll make it up in volume by being engaged in better situations.

Aggressive firms are also actively jumping in to do more alternative fee deals, even when it means they must pay a price to learn by doing:

One way [to deal with the current uncertainty] is to wait until all of the questions are answered and then act when and if the sea change occurs.  The other way, which is what our firm is doing, is to “just do it,” proactively seeking engagements from clients with value-based alternative fee arrangements even when it’s hard to quantify costs.  We plan to step out there and take the risk so that the process of working in a different way (managing costs against a hard budget with implications) will actually facilitate our creating an information database. [This database] will ultimately be necessary, the tools and processes will be necessary, and the training will be necessary [so that] our attorneys [can] really work in a different, more cost-effective way.