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5 posts from August 2016

August 31, 2016

How pricing can affect legal practice

Guest post by Carl Herstein, Chief Value Partner, Honigman

Changes in pricing lead to changes in the way law is practiced. 

For example, the way contingency fee lawyers practice is different from the way most commercial full service business firms practice. At Honigman, we have a very big contingency fee segment of our practice in the real estate tax appeals area. So I’ve gotten to see how contingency practices work. They are enormously efficient. As a general rule, lawyers don’t do things until the last minute. That might be thought of as a vice, but call it “just-in-time management” and suddenly it becomes a virtue! 

Now, traditional commercial clients like to talk a lot about their cases, especially if they have in-house counsel. It’s their life, after all, and they are accountable for what happens in these cases. As a result, they often want frequent updates and strategy discussions. The biggest complaint one hears about contingency fee lawyers is “They don’t want to talk to me.”

That’s because for a lawyer on contingency, after communicating what is absolutely necessary, talking is a waste of time and therefore money. It’s a very different model: “We’ll tell you when we think you need to know something.” Now, I’m not suggesting that if you are on a contingency you shouldn’t talk to your clients, and I am exaggerating a bit for effect. But the point is that the billing arrangement changes the perception of the value of the interaction. If somebody wants to call you on the telephone and is willing to pay you $450 to $1,300 per hour to listen to them talk, you are happy to listen.  But, if it doesn’t make any difference to the fee you’re going to collect – or actually reduces it – maybe you will want to move that call along a little faster! 

Similarly, if you’ve got the billion-dollar case, it doesn’t matter how many interesting legal issues there are to chase down or how uncertain the law is. You’ll do the legwork, and the client will want you to. Otherwise, lawyers need to make judgments about what their clients can afford.

Clients will tell you, “Don’t bankrupt me by doing a perfect job,” which is really hard for the current generation of lawyers to deal with. Sometimes a client can talk to a lawyer and say, “We are going to have a problem with this case because fees are already $600,000, the most we can collect is a $1.8 million, and we haven’t even gotten to trial yet.”

And they’ll answer, “You’re not asking me to commit malpractice, are you?”

No one wants anyone to commit malpractice, but you have to make judgments. You can’t bankrupt your client while you worry about perfection. Younger lawyers are usually better able to grasp these dynamics. They are flexible and adaptable; they see the way the world is changing. People my age, my partners and many other lawyers whose world is different than it was when they were growing up – we’re the ones who have the hardest time with it.

This guest post is an excerpt from Carl Herstein’s thought provoking article “The Changing Legal Market: Some Thoughts for Law Students,” originally published in Of Counsel, Wolters Kluwer, August 2016.

August 24, 2016

Three causes of high legal fees:  Perfectionism isn’t the only challenge

Guest post by Carl Herstein, Chief Value Partner, Honigman

The AmLaw 200 and many smaller firms are in the early stages of trying to improve efficiency and provide higher quality at lower costs.  There are three major trends that have led to the ever-increasing costs of legal services and to the segmentation of the legal market:

1) Lawyers have to deal with the rapidly expanding size, scope, and complexity of American and international law. 

2) The impact of technology on the law.

3) The nature of the American legal system, with its emphasis on perfect procedure and perfect outcomes, is a decisive element. 

Those trends, in turn, have inspired a focus on improving the process of providing legal services, reducing costs, and improving quality.  The third point – perfectionism - is talked about a lot, but the first two have inspired far less discussion.

Why do I talk about the size, scope, and complexity of the law? Forty years ago, when I graduated from law school, at least it was a manageable proposition to try to do legal research. Nowadays, with the incredible number of cases, sources, and materials out there, it’s almost impossible in certain respects. Similarly, while there were statutes and regulations at the federal, state, local, and international levels, it was complicated but not overwhelming. In my judgment, it is now overwhelming. 

In 1976, when I left law school, there really was no environmental law. There was no healthcare law, no ERISA, and no significant practice in various other areas.  Now there are departments in each of the major law firms to deal with these things.  Law is more and more complex, so there’s more and more work for lawyers and law firms to handle. 

And of course we have a love-hate relationship with technology. Technology allows us to access all of these hundreds of thousands of cases. But the more you have, the more you have to encompass. Technology allows clients to preserve all sorts of data in the form of emails, voicemails, documents, notes, etc. Guess what: discovery in litigation matters is a herculean task. Again, new technology is helping us sort these things out, but every time it helps us solve a problem, it makes other problems more complex. 

When I started out, the typical commercial mortgage document was five to fifteen pages in part because it actually had to be typed. Now, it’s not surprising to get a 125- or 150-page commercial mortgage document. One of the resulting problems is that very few buyers can afford to have a lawyer read the whole thing. It takes five or six hours to read one of these documents and actually figure out whether it all makes sense. 

If you do read one of them, often you find that some of the provisions don’t jive; that, in attempting to address every potential problem in detail, people have just made terrible problems for themselves. So just a bit of gratuitous practical advice here: if you are writing documents, shorter and simpler is often better. 

We have a quest for perfection in America. This virtue is also a vice. We have wonderful procedural protections. We have tremendous appellate rights. If you have a claim, in many respects you have all the time in the world to prosecute it to a conclusion. Unfortunately, it makes the cost of dealing with a legal matter almost incalculable in many situations.

As a result of these factors driving ever-higher legal costs, the marketplace has segmented. Let’s say that you work in a 100-plus person law firm. A relatively modest commercial case comes in the door with a mere $1 million at stake. Since yours is not a mega-firm, but just a good regional firm like some here in Detroit, your clients are only going to be paying a mere $400 or $500 per hour for an experienced partner’s services. They are going to get billed $300 per hour for the second lawyer; perhaps $175 per hour for a legal assistant. You’ll have to hire an expert with similar costs, perhaps several. You’ll need a firm to help you with the electronic discovery simply because we have a few hundred thousand documents to review. 

Figure a seven-10 day trial could cost you a mere $150,000. It then probably costs $200,000 to get up to the trial with a complaint, motion practice, and discovery.  Now you’ve got a $350,000 budget for your million dollar case. No wonder clients think costs are out of control! 

Imagine you’re the defendant in that case. You think you have been wronged, not the other way around, yet the plaintiff is demanding $1 million from you. Your lawyers tell you they are going to charge $350,000 to vindicate you in a situation where you think your liability is zero.

 

This guest post is an excerpt from Carl Herstein’s thought provoking article “The Changing Legal Market: Some Thoughts for Law Students,” originally published in Of Counsel, Wolters Kluwer, August 2016.

August 17, 2016

Tracking and controlling costs (Part 2 of 2)

By Steve Barrett and Jim Hassett

 

Step 3:  Compare planned spending against actual spending at regular intervals

If the firm does have timely information going into the system, the next step is to get it out.

Whatever accounting package your firm uses -- whether it is Elite, Aderant, Juris, Rippe Kingston, or another -- it already has a number of built in features to assist budget tracking.  The exact details vary not just from one program to another, but also depend on the version your firm is running, and any add-ons they purchased.  Since features are also constantly being updated and enhanced by software vendors, the best way to find out exactly what your firm’s software can do is to talk to your finance staff.

There is no one best solution for tracking.  The best answer for you will depend on client needs, the way you like to work, the features of the software your firm already owns, and how much time is required and available for assistance from finance personnel.  (Depending on your software, your finance department may simply not have enough staff available to implement a solution which is technically possible but time consuming to set up or administer.)

The need to talk to appropriate personnel is especially strong if you work at one of the many firms that has developed, or is in the process of developing, its own individual custom applications to track and report spending.

During your discussion, you may want to talk about how practical it is to set up features in advance such as: 

  • Initial budgets for a matter, phases, tasks within phases and/or work in progress (WIP) on individual tasks by each timekeeper.
  • A set of specific tasks and phases (whether the standard UTBMS set or a custom developed set).
  • A standard set of prose descriptions to identify tasks, with uniform nomenclature. (In many packages, you can enter a task name in the pre-designated user-defined task field, typically with a 60- or 80-character field text limit.)
  • The ability to limit which timekeepers are allowed, or not allowed, to bill time to a particular matter.

Then you should discuss the most practical way for you to review the data, such as:

  • Summary reports by matter – The finance department may be able to set up a simple report that can automatically be generated every week, every month, or at whatever reporting interval you specify.
  • Summary reports by client – It may be practical to track and report on overall client charges (by percent, absolute amount, retainer or credit limits), as well as the phase, task or individual timekeeper reports.
  • Excel spreadsheets – If you like to work in Excel, reports can often be delivered in this format at your request (e.g. simply showing three columns: the initial budget, actual spending to date, and remaining budget).
  • Alarms or flags can be set to warn you – via computer-generated automatic e-mails – if a matter is running beyond its budget for a period, or any time a certain number of dollars have been spent, or whenever a matter has spent any pre-defined percentage of its budget. For example, you could request that emails be sent to you automatically when you reach 25%, 50%, 75%, 90%, and 100% of spending).

In addition to the features in standard accounting packages, and the custom programs some firms have developed, there are a number of related software tools that firms use to track and analyze financial metrics, such as Redwood Analytics and DataFusion’s Intelliquest family of analytic tools.  In the last few years, legal project management software has also started to emerge as a new category, including Prosperoware’s Umbria, the Cael™ app suite from Elevate, and Randy Steere’s Budget Manager.  A few years ago, Engage was the leading software in this space, but late in 2014 Thomson Reuters announced that they would stop supporting the product in 2017.

In summary, there are so many options and variations in this area, and they are changing so rapidly, that if you want to know the most practical way to track budgets in your firm, you will need to talk to the appropriate staff.

Step 4:  Define a plan in advance to address critical gaps between planned spending and actual costs

We’ve discussed this critical step before in several blog posts.  For example, see the guest post by Stacy Ballin, a partner and General Counsel at Squire Patton Boggs, entitled “Scope changes in litigation.”  Another related post in this blog is entitled “How to track legal work that is out of scope” and describes how some firms are using special task codes for out of scope work to make lawyers more aware of the issue.  The fourth edition of our Legal Project Management Quick Reference Guide, which will come out in October, includes some new resources on this topic, notably an article by JT Stuart Dodds, the Director, Global Pricing and Legal Project Management at Baker & McKenzie, entitled “Establishing a change control process.”

At the end of the day, the details of the system you use to address gaps is less important than the simple fact that you have set some rules in advance.

August 10, 2016

Tracking and controlling costs (Part 1 of 2)

By Steve Barrett and Jim Hassett

Tracking and controlling legal costs is one of those topics that would require an entire book of its own to do it justice.  This short overview is designed to outline a framework for an effective system.  The practical details of how budget tracking works in your firm will depend on the approach of your finance department, and the tools they use. 

In many firms, this is an area that is evolving rapidly as clients demand more timely and sophisticated information about spending.  If you are not already familiar with the latest budget tracking procedures in your firm, our single most important piece of advice is to stop reading this post and instead talk to your finance or practice development staff about the tools and techniques that are currently available to you, and what is planned for the future.

This two part series provides a brief overview of four major steps in tracking and controlling costs.

Step 1:  Define a baseline budget before the matter begins

If you have no idea what the total cost should be at the end of a matter, it’s pretty obvious that it will be hard to know where you stand.  Yet we continue to be amazed at the number of lawyers we see who operate without sensible budgets.

If you need to improve in this area, you may want to see the posts from this blog on Six steps to better budgets”.  For important matters, you should ideally develop what we called a “high detail” budget in that series, in which you have estimated the cost for each phase. For example, in litigation you could have separate budget estimates for case assessment, pre-trial pleadings, discovery, trial preparation and trial, and appeal.  (As noted in our recent series of posts on task codes, high level phases generally work better than detailed tasks for this, because it is so difficult to get lawyers to accurately code their time entries by tasks.)  Many firms now require high detail budgets for all matters over a certain dollar threshold, even if clients do not request them.  The threshold may be as low as $50,000 or less, or as high as $250,000 or more, depending on the size of the firm and the amount of financial control that is desired and practical.

Step 2:  Obtain accurate and timely information about spending as the matter proceeds

In order to evaluate the financial status of a matter, you need to know how much has been spent to date.  In coaching lawyers in LPM over the last several years, timekeeping practices is probably the area where we have seen the most change.  Years ago, the standard at most firms was for lawyers to submit timesheets at the end of the month, which occasionally became an exercise in “creative writing.”  And if a partner submitted a time sheet a month or two late, no one got too excited.  Until the day that time was submitted on a matter after the final bill went out, and the firm had to write off the difference.  There are still firms that live with this system, but the number goes down every year.

At the other extreme, there are now practice groups and entire firms that require lawyers to submit their time electronically at the end of every day.  The next morning, the relationship partner can get a real time view of exactly how much has been spent.

Most firms fall somewhere in the middle and many are still struggling with systems to encourage timesheets to be submitted promptly.  We have seen many approaches used by firms to induce compliance with prompt time entry practices, both “carrots” and “sticks.”  The “stick” ranges from continually nagging and cajoling, to systems of either financial penalties (e.g. $50 per end-of week or end-of-month tardy time release) or evaluation penalties (e.g. reduction in the offender’s year-end evaluation for bonuses).  The “carrot” systems offer evaluation or dollar awards for compliance. 

One of the more creative systems we’ve come across was the CEO of an AmLaw 100 firm who suspended direct deposit on pay day for anyone whose timesheet was late.  The individual had to then come to the CEO’s office to pick up a physical pay check.  Another creative firm created a contest among administrative assistants, with cash rewards for those whose groups had the best record for meeting timesheet deadlines.

Regardless of the state of timesheet practices at your firm, if you are responsible for keeping a matter within budget, you will need to find a way to get complete and timely information on hours billed to your project.  Without it, any subsequent analysis will simply be a matter of “garbage in, garbage out.”

This series was adapted from the fourth edition of the Legal Project Management Quick Reference Guide which will be published in October.

 

August 03, 2016

Tip of the month:  Adapt your reporting style to each client

Under-reporting of the status and results of legal matters can result in surprises to the client and unpaid bills.  But over-reporting can make clients think that you are insecure or even lack competence.  The trick is that different clients draw the line at different places, so whether your reporting consists of weekly phone calls or short monthly reports or something else will vary from client to client.  Success starts by talking with each client about what they want.

The first Wednesday of every month is devoted to a short and simple reminder like this to help lawyers increase efficiency, provide greater value to their clients and/or develop new business. For more about this tip, see our Legal Project Management Quick Reference Guide.