Legal Business Development

Legal project management: Which benefit is most important?

Legal project management is growing rapidly, due to the fact that it can help law firms: 

• Protect business with current clients
• Increase new business
• Increase the predictability of fees and costs
• Minimize or eliminate surprises
• Improve communication with clients
• Manage risk
• Increase profitability
• Improve realization
• Improve financial reporting
• Deliver greater value to clients

I’ve written this list into so many proposals that I could recite it in my sleep.

But three recent events have made me step back and ask myself: Which of these benefits is the most important?

The first event was a speech by Mike Roster, co-chair of the ACC Value Challenge committee, when he kicked off the Lex Mundi roundtable I discussed last week.  Mike has a unique perspective on the current changes in the profession.  In his work as a practicing lawyer, he managed large legal teams from both sides of the table, as former General Counsel at Stanford University and Stanford Medical Center, and as the Managing Partner of Morrison & Foerster’s Los Angeles office.

Mike’s talk was titled “Facing Realities” and his key slide listed three targets that law firms must meet to stay competitive in today’s increasingly challenging environment:

1. Reduce clients’ total legal costs (either compared to recent experience or to an industry benchmark)
2. Provide high predictability
3. Improve outcomes (for example, reduce the average cost of verdicts and settlements for specific types of cases or reduce the number of workplace disputes that arise in the first place by some target percentage)

One slide summarized his advice about these three targets: “You’ve got to provide at least one to stay in the game.  You will need to provide all three to win.”  In Mike’s view, LPM is most effective when both sides agree on at least one of these goals in advance so that it is being used to achieve something specific. 

The second event was working with LegalBizDev Principal Mike Egnatchik on a presentation he’ll be giving next week in California at the Legal Edge 2012 Law Firm Risk Management Conference on “How Legal Project Management Helps Reduce Risk.”  The conference was organized by McGriff, Seibels & Williams and Paragon International Insurance Brokers, whom we have worked with in the past.  As Mike and I wrote a few months ago in this blog, LPM can reduce professional liability risk by helping lawyers control quality, meet critical deadlines, avoid or quickly resolve fee disputes with clients, and  maintain active, open and timely communications with clients on all aspects of every engagement.  In some cases, this may lead to a reduction in their malpractice insurance premiums.

The third event that had me thinking about LPM benefits was the release last month of a survey titled Speaking Different Languages: Alternative Fee Arrangements (AFAs) for Law Firms and Legal Departments.  The research was sponsored by LexisNexis and conducted by ALM Legal Intelligence.  It is based on an April survey of 141 law departments and 194 large law firms, and is the best data I’ve seen on how and why AFAs are growing.

Note that I do not mean to imply that LPM is more important in AFAs than in hourly work.  The vast majority of legal revenue still comes from hourly work (about 84% in the latest survey that asked for this figure, ALM’s 2010 Law Firm Leaders survey), so the revenue impact of LPM is likely to be far larger on the hourly side.  But lawyers need a reason to be interested in LPM, and the simplest and most common reason we’ve seen is that a firm has committed to a fixed fee.  Nothing gets a lawyer’s attention better than knowing that if they go over budget, they will have to pay for it themselves.

There are also some interesting parallels between the benefits of AFAs and the benefits of LPM.

When the survey asked law departments – the buyers – to rate the major benefits of using AFAs, the top three answers were cost predictability/transparency (87%), cost savings (68%), and increased efficiency – e.g. quality and value for legal service (44%).  These survey results are quite consistent with Mike Roster’s list.

When they asked law firms – the sellers – the same question, the top three benefits were quite different: attracting or maintaining clients (91%), simplified billing and operations (50%), and increased billing realization (43%).

The first benefit – attracting and maintaining clients – was named by more than nine out of ten firms, and far outdistanced the others.  Based on off the record discussions, I think some lawyers would phrase this motivation another way: “We are offering AFAs because we have to.” 

This is such an important topic that I’ve just written an article for Bloomberg Law Reports with Jonathan Groner entitled “Using Alternative Fee Arrangements to Increase New Business.”  In a few weeks, after Bloomberg publishes it, I will reproduce it in this blog, so that you can see what we learned about AFA marketing strategies at seven large and mid-sized firms: Adams & Reese, Butler Snow, Crowell & Moring, K&L Gates, Perkins Coie, Tucker Ellis, and Warner Norcross. 

The third AFA benefit named in the survey is also quite relevant to LPM: increased billing realization.

Anyone who has been involved with law firm finances knows the importance of the realization rate, the percentage of billable time that is actually paid for by clients.  Unpaid hours come straight out of the bottom line, and the problem has been growing. 

According to the Thomson Reuters 2012 Q2 Peer Monitor Index Report, which was released last month, “Realization has now been falling fairly steadily for more than three years…Realization reached another new all-time low, with net collected realizations falling just below 84%.” 

This is a very important problem.  If a firm with annual revenues of $200 million could increase realization by just 1%, it would immediately increase profits by $2 million.  LPM can accomplish this in a number of ways, including reducing cost disputes through improved communication and budget management. 

The most interesting approach to improved realization which I have seen was developed by Stacy Ballin at Squire Sanders.  In her role as the Litigation Group Business Partner, Stacy is responsible for approving discretionary litigation write-downs for this 1,300-lawyer global firm.  As part of our Certified Legal Project Manager® program, Stacy reviewed all 2010 litigation write-downs over $10K, identified a few partners with high write-down rates, and interviewed them about the reasons.  She then used these findings to coach these lawyers and others with similar write down patterns, and found that coaching did indeed improve their realization rates. 

 “I am finding that building awareness of the need for better project management is best achieved through coaching individual by individual,” Stacy recently told me.  “While that may seem less efficient with respect to time, it works much better than global education.” 

Given these recent observations, what do I think is the most important benefit of LPM to law firms?  Is it increased realization?  Increased new business? Reduced risk?  Something else?

You tell me.  The answer depends on what you are trying to achieve.

Why is legal project management so controversial?

A few weeks ago, when I gave a speech at a Lex Mundi roundtable in Denver on AFAs, I heard many different opinions about the value of legal project management (LPM). 

Some believe, as I do, that LPM reflects an essential change in the way lawyers must do business in a changing world, and that it is valuable not just for AFAs but also for hourly matters. Some said that LPM’s value is more limited.  It can be quite helpful on certain types of matters, such as large complex litigations, but it is irrelevant on others.  A few think that LPM is just another fad, and that it will ultimately go the way of pet rocks and TQM.  I even heard that one well-known consultant is telling his clients that he “has never seen LPM work in any law firm.” 

I spend a lot of my time talking to lawyers who are trying to decide what to do about LPM, and hear that same range of opinions every day.

Why is the value of LPM so controversial?  I believe it is because we are in a time of transition where people are still figuring out what works, and they don’t yet agree even about what LPM is, or how the phrase should be defined. 

There are a lot of law firms out there experimenting with different ways to increase value and profitability.  Some firms are hiring project management staff, some are building tools, some are buying software, some are investing in Six Sigma and process improvement, some are coaching senior partners, some are training every associate, and some are trying other things.  All of them are using the term LPM to refer to these very different approaches.  When some of these experiments succeed and others fail, people draw the global conclusion that LPM works, or that it does not.  But they are talking about different things.

In June 2011, I wrote a post describing the confusion and controversy about exactly what LPM is, and how law firms should use it.  Today, this problem seems much more serious than it did a year ago, because more firms have made some type of initial effort and positions are hardening.

I hate to spend time debating definitions.  But until people agree on what LPM is, they can’t possibly agree on whether it is valuable and important. 

We recommend a slightly modified version of the definition I proposed in last year’s post: Legal project management adapts proven management techniques to the legal profession to help lawyers achieve their business goals, such as increasing client value and protecting profitability.

Note that this is a very broad umbrella definition, which includes developing tools, hiring staff, coaching lawyers, process improvement, and all the other approaches listed above.  It also includes a wide range of other more modest changes that are related to the eight key issues described in my Legal Project Management Quick Reference Guide:

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 to the schedule and budget
6. Manage quality
7. Manage client communication and expectations
8. Negotiate change orders

When you define LPM this broadly, it is clear that in one sense there is nothing new about LPM.  Any lawyer who has ever planned a budget or managed an associate has already practiced LPM.  But in another sense, the LPM movement is quite new because lawyers are taking a more systematic and disciplined approach to these issues.  They are studying best practices from other firms and other professions, and they are getting better at providing value and protecting profitability.

To succeed in any business, you just need to be a little better than the people you compete with.  If your competitors become sophisticated about LPM before you do, they will offer your clients greater value, and you may lose some clients.

Once lawyers buy in to this broad definition, they can stop arguing about whether it is useful.  Whatever works to improve budgets or quality or communication is useful by definition.  This allows people to proceed to the practical question: how should we implement LPM? 

The answer is “it depends.”  What works best varies from firm to firm, from practice group to practice group, and from lawyer to lawyer depending on clients, goals, the firm’s culture and the individual personalities involved.

But we do have one piece of advice which is the same for every client: You won’t get a second chance to make a first impression, so you’d better make sure your first legal project management program is well designed and executed.  If it fails, you are going to have a tough time building support for the second one. 

We recommend starting with a small group of motivated lawyers who are open to new ideas and who have something to gain.  That could be the key partners who are responsible for new alternative fee arrangements.  It could be relationship partners who are worried about protecting business with key clients looking for greater efficiency.  It could be an entire practice group that is considering new checklists, templates and processes to improve its competitive position.

The exact individuals and groups will vary from firm to firm.  But in every case, the best lawyers to start with are those who are open-minded about change, in a position to benefit when it works, and influential enough to quickly spread the word of their success.

If you don’t accept our definition of LPM, please feel free to use a different term to refer to efforts to increase value and profitability.  But in the current environment, whatever term you use, lawyers need to run their businesses better.  Individuals, practice groups, and entire firms need to change behavior to better serve their clients and to protect their livelihood.  So whatever you decide to call it, you would be wise to get started soon.

If you accept our broad definition, it is clear that LPM is scalable, and is needed every day in every matter by almost every lawyer.  The only exceptions would be lawyers who are already perfect, so there is absolutely nothing more they could do to improve client value or profitability.

Unless you are one of the lawyers who is already perfect, we suggest you follow the LPM advice of Camden Webb (a partner at Williams Mullen and one of our clients): “Don't hold a series of committee meetings for a year and then do a top-down analysis. Just do something.”

 

Partner profits, client perceptions, and the Litigation Investment Model (Part 2 of 2)

This post was written by Jim Hassett and Matt Hassett.

Last week, we noted that there are good business reasons for law firms to be reluctant to embrace the Litigation Investment Model.  To see one reason why, consider the math for a hypothetical case handled by a three lawyer firm, with two associates and one partner.  Assume that the firm accepted the case on the Litigation Investment Model, and used the assumptions from the article that  partner profits are 38%, and that 30% of revenue should be invested in the outcome of the case.

Here are some rounded figures showing what compensation for this firm might have looked like on a standard “bill as you go” agreement:

 

Partner compensation  (“profits per partner”)	38%	$380,000 ($300,000 salary plus 26.67% tax and benefits)
Overhead including rent and salaries of associates and staff	62%	$620,000
Total	100%	$1,000,000

 

Here is what happens to the partner’s short term pay if 30% is withheld until the end of the matter:

 

Profit invested in the case, paid or not paid at the end of the matter, depending on its outcome	30%	$300,000
Short-term partner compensation	8%	$80,000 ($63,200 salary plus approximately 26.67% tax and benefits)
Overhead including rent and salaries of associates and staff	62%	$620,000
Total		$1,000,000

 

In other words, the partner’s short-term salary was reduced from $300,000 to $63,200.  There are not a lot of lawyers who could easily take this kind of reduction and still pay their mortgage.

The thought that in the long term their salary could go back up to $300,000 if the case settled, or could double if they won the case, would take some of the sting out of the salary reduction.  But they might still have trouble paying their bills in the short term.  And if they lost the case, they would never recover the difference.

Of course, this type of salary reduction would not be necessary in a firm with 100 or 1,000 lawyers, because one lawyer’s shortfall in income could be made up from the billings of other attorneys, just as they are in contingency cases.  In essence, however, these larger firms would be robbing Peter to pay Paul. 

The truth is, given thousands of simultaneous matters at a large firm, with different fee structures, time frames, payment schedules and realization rates, many firms have traditionally found it difficult to track the profitability of individual matters.  According to the 2012 Altman Weil Law Firms in Transition Survey, 17% of firms are “not sure” whether their AFAs are more or less profitable than hourly matters on the average.  So they certainly don’t know how individual matters are doing.

Under the Litigation Investment Model, many lawyers will make less money. 

Now some clients may think that is perfectly appropriate and even a good thing.  As Susan Hackett noted in a recent post in the ABA Journal:

Surveys… usually confirm that the average in-house counsel who hires outside firms makes only slightly north of what a bonused first- or second-year associate in a big law firm makes. There are a few hundred large law department top leaders who haul in comparable returns for their work – usually through non-salary comp – but nowhere near the number or percentage of highly compensated partners that we find in the ranks at big firms where entire equity partnerships pull in hundreds of thousands or over $1 million a year in profit per partner.

The average in-house lawyer is well aware that he shares with those high-profiting partners the same schooling, sophisticated law firm background, and top-flight experience on his resumé. He’s made his choice, but please remember that he will more likely identify with the ‘99 percent’ – and not the partnership – when he’s assessing who’s getting coal this Christmas.

Could lawyers protect their profitability by delivering the same quality for 30% fewer hours (at the same average rate)? 

They might well be able to do so in some cases, but the answer depends on the actual total price.  If the winning bid was calculated based on the fees charged several years ago, some lawyers could apply project management techniques and reduce the total hourly billings by that much, while still producing a similar result.  But if the 100% price was based on a fiercely competitive bid, or a reverse auction, firms may have trouble breaking even with 100% of the price, much less with 70% of it. 

In November 2009, the ABA Journal published a piece about our LegalBizDev Survey of Alternative Fees with the headline “Law Firm Price Wars Break Out as Some Try ‘Loss Leader’ Bids for Work.” Since then, price wars and loss leaders have become a standard way of doing business in some practice areas. 

At the end of the day, is the Litigation Investment Model a good way to compensate law firms?

According to Toby Brown, Director of Strategic Pricing and Analytics at Akin Gump, “Law firm profitability is so difficult to define that you could not really use it to calculate what you were willing to invest.”  More importantly, he continued, “This model assumes that risk sharing is the motivation behind alternative fees, and for many clients it is not.”  Toby’s claim is supported by the results of a recent survey of ALM Legal Intelligence.  When 141 law departments were asked to identify the benefits of AFAs, only 35% named risk sharing.  This came in fourth behind cost predictability/transparency (87%), cost savings (68%) and increased efficiency (44%).

Chris Ende, Senior Manager of Project Management and Pricing at Goodwin Procter, also noted that even if risk sharing is the goal, “it shouldn’t matter whether the fee structure is based on profit. Clients who want to align their interests with the law firms they engage should focus on what value the law firms provide – not just based on efficiency, but also on results. You can do a great job of pushing down legal fees, but if you end up having to pay out $10 million in damages, you lost.”

Despite these objections, some in-house lawyers may find the Litigation Investment Model very attractive.

The General Counsel who uses it could begin earning points with his management on day one by tying payment to success.  It certainly pleased the CEO quoted by Hartmann and Mordan in their article:  “I only get a bonus if I win in the marketplace.  The same rules should apply to your law firms.”   

Even if the law firm is ultimately paid exactly 100% what it would have gotten when it billed hourly, 30% is paid at the end, so the client has much better cash flow at the law firm’s expense. If the client pays more than 100%, it will usually because they saved more than that based on the outcome of the case.    

From the law firm’s point of view, the picture is less clear.  The downside is certainly significant, and each firm will have to decide what cases make business sense at what prices.  To do so, they will first need a much better understanding of their own costs, and the organizational discipline to avoid accepting cases that will benefit individual lawyers by keeping them working on billable matters, but reduce the average earnings of the rest.

From the profession’s point of view, is this a sustainable way of doing business?  Over the next few years, we may find out.

 

Partner profits, client perceptions, and the Litigation Investment Model (Part 1 of 2)

This post was written by Jim Hassett and Matt Hassett.

In the May 2012 issue of ACC Docket, Markus Hartman and Bill Mordan describe a new approach to billing called the Litigation Investment Model.

 “The concept is very simple,” the authors say. “The law firm agrees to deduct a fixed percentage from their invoice — the same amount they would have earned as profit — and treat the deduction as an investment in the litigation. In return for that ongoing investment of their profit, the firm can earn a bonus depending on the total amount invested and the outcome of the case.”

The article includes several examples, all of which “require flat-rate billing across each major segment of the case.” In the simplest, a firm is paid 70% of its normal fee as the case proceeds.  The other 30%, representing the firm’s potential profit, is invested in the outcome.  

Their Figure 2 shows a case with an initial discovery phase that would have been billed at $500,000 if it were performed for a flat fee.  Of this, only $350,000 (70%) would be paid when the work is performed. The other $150,000 (30%) would be held back. At the end of the case, if the firm won, they would be paid double the hold back ($300,000).  If they settled, they would be paid the exact amount that was held back ($150,000).  If they lost, they would be paid nothing.

The actual multipliers are negotiated at the beginning of each case, based on a joint assessment of the facts of the case.  Figure 4 in their article illustrates a more complex case with six possible outcomes, each with a different multiplier ranging from 0 to 2.5 (for an “exceptional case finding and award of attorney fees pursuant to 35 U.S.C 285”).

According to the authors, the key difference from other alternative fee arrangements is that “while standard hold back agreements and success fees focus on the client’s savings, the Litigation Investment Model focuses on something far more relevant: the firm’s profit.”  In essence, they argue that law firms should only make a profit if they succeed in meeting the client’s objectives.

From the in-house client’s point of view, all this sounds quite reasonable. In most businesses, profit is a kind of bonus.  It is what is left over after all expenses have been paid, the revenue a company receives over and above its breakeven point, money they “don’t really need.”  In theory, companies could stay in business if they never made a profit and simply broke even forever. 

The Merriam Webster dictionary defines profit as “the difference between the amount earned and the amount spent in buying, operating, or producing something.”  If that’s the way law firms defined profit, this model might seem not only simple but also fair and reasonable.  But, as we noted in a recent white paper, law firm definitions of profit are far more complex and confusing.

In the 2012 Global Partner Compensation System Survey, Ed Wesemann and Nick Jarrett-Kerr reported an analysis of 263 large law firms in the United States, the United Kingdom, Europe, and Australia.  They classified compensation systems into seven categories:  lockstep, equal distribution, modified lockstep, formula, combination, subjective, and corporate.  The last of these, corporate, would make it easy to calculate profits since “partners receive a salary and bonus based on performance and then are paid dividends based on the profitability of the firm.”  There’s just one problem: This corporate compensation system is “rarely seen in the US or Canada.”

In the six systems which are widely used to compensate partners, the line between cost and profit ranges from fuzzy to non-existent. 

In other businesses, when the finance department considers the price they should charge for a product, they pay special attention to the break-even point, the amount they must charge to cover their expenses before profit.  When lawyers decide what to charge, most are blissfully unaware of their firm’s break-even point.  The CFO, the managing partner and other leaders probably have a good idea of the break-even point, but even that is not as unambiguous as in other businesses, because it is based on assumptions about what partners expect to be paid. 

When Hartmann and Mordan used an estimated profit of 30% in their example, they explained in a footnote that they got this figure from the American Lawyer’s widely publicized concept of “profits per partner,” used in its annual rankings of the AmLaw 200.  “Thanks to law firm bravado and their own published data,” they said,” we have a pretty good idea of how much profit a large firm makes: about 38 percent, based on the published results of the top 200 firms in the United States.” 

Unfortunately, the American Lawyer’s definition of profit -- “net operating income for the firm divided by the number of equity partners” -- differs from both the dictionary definition and the normal usage of the word profit in other businesses.  Net operating income is calculated by subtracting all of a firm’s expenses from revenue excluding partner compensation.  To put it another way, partners may get 100% of their pay from the pool of “profits per partner.” They may also pay taxes and benefits from this pool.  If those “profits” were permanently withheld, partners would be paid little or nothing for their work, and would certainly not consider themselves to be breaking even. 

When Hartman and Mordan describe the Litigation Investment Model, it seems they recognize it is a bit one-sided when they call it “beneficial to the client and more comfortable to the law firm.”  They also note than when in-house lawyers negotiate these agreements, they should “expect an equity partner to be squeamish and uncertain.”

Next week’s post will include the math behind the concept for a hypothetical case at a three lawyer firm.  The numbers will show why some firms have good reason to be squeamish and uncertain about this model.

 

Pricing tip of the month: To bid a fixed price, focus on future costs, not past costs

As fixed fee arrangements become more common, some firms have tried to improve their bids by making enormous investments in data mining to analyze what they have charged in the past for various types of matters.  But as the Association of Corporate Counsel noted in their ACC Value-Based Fee Primer (p. 31): “Reference to just historical data will likely include junk data and sub-optimal billing practices.”  To win work in an increasingly competitive marketplace, lawyers must plan future budgets in a new way, with the right people doing the right work to deliver the quality that clients need at a lower cost.

 

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