This series was adapted from my new book Client Value and Law Firm Profitability, which will be published in a few weeks.
This research was designed to help lawyers make the best possible decisions about how to adapt to a rapidly changing marketplace by providing insights into the actions and opinions of their peers. In the months preceding this book’s publication, a number of conferences have been held by law schools to discuss the challenges facing the legal profession. Countless articles and several books addressing these changes have also been written by law school and business school professors. And consultants have written far more – probably millions of words on how client demands are changing and what law firms should do about it.
The only thing that’s been missing from the conversation is public statements by the people who run large law firms. These senior decision makers rarely publish anything on their tactics and strategies, or even attend conferences. They are the ones who deal with these issues every day, and whose very livelihood depends on coming up with the right answers. What do they think?
To answer this question, I interviewed chairs, managing partners, executive committee members, CEOs, CFOs and other senior executives at 50 AmLaw 200 firms between June 2013 and January 2014.
Based on those confidential interviews, there can be no question thatclients are demanding more value than ever before. There is, however, much less agreement about the best way to remain competitive in an increasingly challenging environment.
There are many signs that as times get tighter, firms are paying more attention to profitability and to its role in compensation:
I think you’re going to see the pressure in law firms increase about how the pie is split. When things were going well, it was easier to take care of the worker bee partners, who are great lawyers. It’s going to be tougher now, because everybody’s strategy is through lateral hiring, and you don’t want the great brief writer. What you want is the person who has five to eight million dollars following him or her, or the group that’s going to bring 20 to 30 million dollars. – Senior executive
As the pressure goes up, the emphasis on total revenue is being replaced by an emphasis on profitable revenue:
Historically, virtually all law firms overweighted revenue. Often two partners who produce five million dollars each are treated equally for compensation, even if one of those partners used six and a half million dollars of resources to produce that revenue, and the other used three and a half million. – Senior executive
We merged a few years ago with a firm that principally focused on total dollars in the door and allowed billing attorneys to set their own rate exceptions without much oversight. We focused on those decision points that reduced realization, and the lack of profitability in a million dollars received that takes two million dollars of effort to generate. Consistently reinforcing these basic concepts through our BI tools and in the compensation system has resulted in significant margin improvement. – Senior executive
There are still far too many lawyers who respond to cost pressure by offering discounts, without understanding the implications:
Most of our partners have been doing things in a particular way for a long time. And the carpet is moving under them, because the market is changing. A lot of times, their reaction to competitive pressure is to just cut rates but not examine the way they deliver the service—not change the way they practice to be able to offer more value for the same price, or reduce the cost to deliver the same value at a lower price. Demand is down. Price pressure is up. So some lawyers will just say, “I don’t want to talk about value based billing arrangement. I’ll just give clients a big discount. They’ll be happy, I’ll be happy….” It’s really remarkable how few attorneys appreciate the economics of discounting. They just don’t get the math. They never had to before. – Senior partner
It is easy to make clients happy by just cutting the cost.Not enough lawyers have really embraced building a better mousetrap that makes clients happy while at the same time maintaining profitability. – Senior executive
Lawyers are proposing a 10% discounted deal or a 20% discounted deal, or a blended rate deal, but then they’re going to literally do everything the same way they’ve always done it. They don’t think about it in terms of profitability yet. So we’ve got a lot of catching up to do. However, at one recent conference I attended, it sounded like there are still a lot of firms that aren’t much ahead of us. – Senior executive
Many firms are working to fill this gap and develop new tools and approaches:
I’ve been with the firm a little over a year, and part of the reason that the firm brought me in was that we needed to look at our operational infrastructure and basically get caught up with the rest of the AmLaw 100. We didn’t have the ability to really measure profitability. We could just barely measure it at the firm level and at the office level, but not at the practice level, not at the client level, or matter level. About three months ago we finally started using a business intelligence platform that allows us to measure those things, and we’re still trying to make that part of the culture. – Senior executive
Life used to be so much easier. The world has changed, and I think in the new environment, to preserve and enhance existing client relationships and to get our nose in the door for new client relationships, we’ve had to be more flexible on pricing, particularly in the alternative fee context. I think we’re in a brave new world here, where we have to learn a lot of new sciences and employ a lot of new techniques. – Senior partner
Some firms are providing lawyers with very detailed reports, like these:
We developed a real-time report on our intranet that is role-based. For example, if you are a client attorney, then your report will show all the clients on which you have any client credit on any matter, and it will show you the components of profitability. The report shows you collected revenue, the costs associated with that revenue, the profit, and the profit margin. Then it shows you the number of hours that are in it, the revenue per hour, the cost per hour. Then it breaks down timing differences on billing and collecting time. And then it shows you the traditional measures of profitability such as realization rates at the various levels. You can click on a client and it drills down to the matter level, so you see it for every matter. And then you can click on every matter and it drops down to all the timekeepers, and you see it across the board for all timekeepers on each matter, all those same metrics. We built the database to go back 10 years. You can do it for time periods of year to date, rolling 12 months, from inception, or for any other time period. – Senior partner
Other firms are concerned that too much data can be counterproductive:
One of the traps you can fall into is giving people a lot of data but not giving them information. Simply revealing realization or matter profitability, just putting it out there, would not really advance the management goals of getting people to focus more on profitability. What you would engender is more questions about “How come she got paid more than I did?” That kind of stuff. – Chair
Merely sending canned reports to partners will not result in many partners changing the way they manage their practices to improve profitability. We need to better develop a process whereby partners with profitability challenges receive the help they need to improve profitability in a manner tailored to the issues presented by that partner’s specific practice. Otherwise they look at the report and say, “This is crap. It’s wrong.” – Senior executive
A pdf of this entire series can be downloaded from Altman Weil Direct, where it originally appeared.