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September 25, 2013

Value and profitability: Confidential insights from the managing partner of an AmLaw 100 firm (Part 2 of 2)

See Part 1 of this post for background on this interview.

When I asked this AmLaw 100 managing partner how well individual partners understood which matters and relationships were profitable and which were not, he replied:

I would say we’ve got people that don’t understand it very well at all, like a 1, and we’ve got some who understand it very well, like a 10. Probably if you averaged all that out, we’d be 5 trending towards 6, or 6 trending towards 7. We’ve come a long way, but we still have a long way to go on that.

This led naturally to a question about how many lawyers have started changing their behavior to meet all these new challenges, and how many had completed the transition to the new normal. Since this particular firm has been so proactive, the numbers he quoted below were much higher than we have heard from other firms:

I think 100% of them have started to change the way they practice, because we make it such a feature in everything we do and everything we talk about that it’s sort of impossible for anybody to be here and not have changed somewhat. However, I think that very few have changed enough that they can fully meet clients’ needs. I think probably a few have, but less than 10%. There’s a lot of upside. The bad side of all this, the way I look at it is, it’s not going away. The good side of it is, we’re moving the needle, and yet there’s still a lot more upside if we can get better at a number of things.

I then asked a few questions about our eight key issues in LPM: defining scope, scheduling activities, managing teams, planning budgets, avoiding risks, managing quality, managing communications, and negotiating changes of scope. Which are most important and need the most improvement? The answers have varied from firm to firm. At this firm, one of the biggest issues is defining scope:

There’s no question that this is an art that needs to be developed further, because we find sometimes with clients that the people we work out the sale with aren’t the same people that we work out the delivery with. Whether the scope has been properly defined or not becomes a really big deal, and changes in scope needing to be negotiated depends upon how well you defined the scope in the first place. This is something law firms have not historically done well, compared to, say, contractors and others who are used to a fixed fee type environment. So there’s a lot of room for improvement.

Another possible area for improvement at this firm is team management:

Management is a skill that is not natural to lawyers. We’ve always been trained to get the case done well to win, but now we have to get the case done well to win, and also efficiently, whatever the arrangement has been. And that last piece is not part of the natural toolkit for most people, so that’s where the project management need for improvement is greatest.

Team management is particularly critical for this firm because when I asked about the most important steps this firm has taken to provide greater value, the managing partner replied:

I would say the biggest thing for us has been an increase in the non-hourly based pricing structures. Our non-hourly business is running at about one-third of our new business, and probably 25% of the fees collected last year. And that’s maybe a 20% increase from the prior year. So that’s a pretty steep curve… I think where we have the most need for improvement is where we have some big fixed fee projects where we haven’t been able to utilize the lower cost lawyers and where we have too many higher cost lawyers operating under the old business as usual model. The profitability or realization of that work is much lower than the average. That’s a function of the project management not yet fully taking hold on those big engagements.

Finally, I asked about whether clients needed to also change their ways to make the new normal work. In every single interview to date, the answer has been a resounding yes. Here are the suggestions from this managing partner:

Clients could get more out of their law firms if they fully embraced change and trusted it. For example, we have a client that does a lot of fixed fee work with us. They require almost every project to be a fixed fee, yet we still have to submit detailed time reports that they use to see how they’re doing. So I say to them, “Look, you basically use us to employ people and spend time preparing reports that you really don’t need, which makes the cost of our business higher. And if you’re comfortable with the deal that we’ve struck, you want us to be incentivized to find ways to do it more cheaply and be more profitable, so you can push us harder to cut the price more. But by requiring all the old fashioned reports as a belt and suspenders, you force us to keep our costs higher than they would be.” So I think clients can more fully embrace what they are starting to embrace, and that would incentivize the firm to really get greater alignment with the clients, and be even more efficient.

Given the pace of change and the difficulty of predicting the future, it is not surprising that other firms have provided different suggestions for changing both client behavior and their own. I will continue to post previews like this as the research continues, and a full report will be published next year, after we complete all the interviews and our analysis.

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