Legal Business Development

Legal pricing (Part 8 of 8): Predicting the future

In the first seven posts in this series, we have seen that legal pricing is changing as a result of the increasing use of AFAs, and client pressures for efficiency on both hourly and non-hourly matters.

So what does this mean for the future? Nobody knows.  

As Toby Brown recently wrote in his blog entitled Staying Relevant: 

We have reached a point in human history where predicting the future beyond a few years is quite a challenge. A perfect example is that of Facebook, which grew from zero to 100 million users in less than two years. What things will look like in five to ten years is anyone’s guess. So the best we can do now is keep a vigilant eye on the storm and stay prepared to constantly alter course.

While we don’t know exactly how things will turn out, it does seem safe to predict that changes in pricing will be driven by several key trends:

1. Alternative fees will continue to increase. According to Altman Weil’s 2011 Chief Legal Officer survey, 14% of fees are currently non-hourly.  This percentage has gradually been increasing.  Conservative clients often require a long time to take the leap to try non-hourly fees, but this particular change is a one way street.  Tucker Ellis was one of the first mid-sized firms to derive more than half of its revenue from non-hourly fees, and managing partner Joe Morford, has noted that “Once we started working for a client with AFAs, not a single one has ever wanted to go back to hourly.”
 
2. Lawyers will develop new metrics that measure value. Sophisticated clients want to measure what they are paying for, and a sophisticated law firm should be able to measure its own results. Part 6 of this series gave an extended example of the challenge of one past attempt to define value metrics.  For an interesting discussion of why there is resistance to this idea, see Paul Lippe’s blog post entitled What If Someone Could Measure What Lawyers Do?, and the comments written by various lawyers at the end of that piece.   
 
3. Leading firms and clients will place increasing emphasis on aligning their interests. One key to success for AFAs is creating a genuine sense of partnership by aligning interests. As one AmLaw 100 decision maker put it in our LegalBizDev Survey of Alternate Fees (page 47):

   The firm and the client must have a very transparent conversation about the process. [It is important to discuss] how [the fee structure] will be mapped out and who will do what. [It is vital] to look at the delivery of services holistically, and to look at how the team in-house and the team outside can work together to deliver value for your shared client. That’s a real challenge, because it is tricky to transition from a negotiation process to a collaborative process. If you can get into a collaborative discussion, you can get good results that work for both organizations.

   This requires some sharing of risk.  Another participant in our survey put it this way (page 48):

   GCs should be thinking about what kind of risks they are willing to take early on in the life of a particular matter.  Right now , they want firms to take all the risk and they are reluctant to take risks themselves.

 
4. The distinction between bet the company, important and commodity work will be reflected in different pricing strategies.  In The Essential Little Book of Great Lawyering, Jim Durham estimated that about 5% of legal work fell into the “bet the company” category, 65-70% was “important” and 25-30% commodity work.  There is every indication that the percentage of commodity work is going up, and the other two categories are shrinking. To be price competitive, it will be crucial to keep up with the process improvement and outsourcing alternatives for commodity work.  As Toby Brown noted in his blog series Staying Relevant:

   An emerging and compelling reason for lawyers to make different business decisions is coming from new breeds of competitors. One example is the Legal Process Outsourcer (LPO) market. These companies started as off-shore (typically India) based providers for first document review in litigation. They hire English speaking, American law trained candidates in other, lower wage countries. These much lower-costing, well-enough trained lawyers were appropriately suited for this level of work. So well-matched to the tasks, that in very short order, these document reviewers became viable competitors. Most lawyers glossed over this market encroachment, seeing it as commodity level work no longer worthy of their skills. In reality, this meant millions in fees were no longer going to US lawyers.

 
5. Law firm profitability will be squeezed harder than ever before.  According to the 2012 Client Advisory from the Hildebrandt Institute and Citi Private Bank (p. 10):

   Many firms will need to work harder to maintain profitability at levels that meet the expectations of their partners.  Indeed, we expect that 2012 may prove to be even more challenging than 2009 in terms of profitability across the industry, not because revenues will be as depressed in 2009 but rather because of the combination of slow revenue growth and rising expenses.

 
6. Hourly billing and high partner profits will be questioned more and more in the future.  Clients generally do not live in an hourly billing world . They know their actual costs of doing business and plan to make a profit above those costs.  They have pricing risks and plans to manage those risks.  Clients often wonder why their law firms cannot do the same. Many corporate counsel started their careers as associates at large firms, and they know all too well how the profit model works for firms. Many are asking why partner compensation is so high. As Susan Hackett put it:

   …surveys—such as these from Corporate Counsel and Empsight—are coming out. They 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.

 
7. Competition on price and value will increase. The Hildebrandt/ CitiBank 2012 Client Advisory (page 5) also notes that “[There is] continuing client resistance to fee increases [and]… it is unlikely.. that the demand for legal services will grow robustly for the foreseeable future… The legal industry will be forced to live with uncertainty for some time to come…”.  With some law firms aggressively providing more value at lower prices, the competitive bar is going up. 

   Whatever else may prove to be true, it seems clear that cost will remain a major issue. As Mark Smith put it in a blog post entitled Excuse me, I think your pricing is broken: 

   The common refrain from private practice lawyers…is that in-house lawyers who talk about value based billing really just want to pay less, and are not really interested in concepts like sharing risk. Opening a dialogue about pricing is simply an exercise in getting the law firm to do the same work for less money...

   Of course they want to pay less!

   The fact that the firm hasn't developed a model that really meets their needs… does not turn this into the client's problem. It's the private practice lawyer's problem. It's the firm's problem. It's the profession's problem.

   The market has changed.

   Forever.

    

This post was written by Jim Hassett and Matt Hassett.

Legal pricing (Part 7 of 8): Summing up where firms are today

When law firms begin offering non-hourly alternative fee arrangements (AFAs), they must address two fundamental questions:

1) When bidding for new work, how do I set a price that is high enough to protect profits, but low enough to get the work?  

2) After winning the work, how do I manage the matter so that I make a profit (or at least break even) at that price?

To be honest, when we started writing this series a few months ago we thought that it would be limited to the first question: picking a price in the first place.  This requires external knowledge about your client and the marketplace, and internal knowledge about your own cost structure.

But the more we talked to people and reviewed the literature, the more obvious it became that the two questions are so wrapped up in each other that they are very hard to separate.  Add in the fact that most firms don’t even understand their own costs of doing business (see Part 2) and that price wars are forcing bids down for many practice areas (see Part 3), and you have the makings of a very confusing situation.  

Many lawyers would like to believe that if they could master the art of value pricing (Part 4 and Part 5), they could make more money than ever before.  Maybe some can.  But with competition constantly forcing prices lower, we have not seen much evidence for this yet.  Some believe that pricing will become more sensible when lawyers learn how to develop value metrics (Part 6), but we are not yet convinced.

As we described in our recent Bloomberg Law Reports article entitled “The Rise of the Pricing Director,” the two questions above are so difficult that firms like Baker & McKenzie, Fish & Richardson, Mayer Brown, Reed Smith, Vinson & Elkins, and Winston & Strawn are setting up committees and creating new positions for pricing directors.  Last week, Akin Gump joined that list when they hired Toby Brown as their new Director of Strategic Pricing and Analytics.

Responsibilities and methods varied for the people we interviewed, but none had independent decision-making power. Partners are ultimately responsible for pricing, so they must understand the principles before they will accept help from a pricing director or committee. Some firms are moving to develop policies which limit partners’ power to set prices, depending on their training and experience, but these policies are very much a work in progress.

No matter how a firm is organized, pricing analyses inevitably get pulled into the question of how to manage matters.  To set the right price, you must know what the work requires.  In the good old days when lawyers did not have to worry about how much things cost, that was relatively straightforward.  But now that so many clients are demanding efficiency, the work must be done differently.  That will inevitably change the cost of delivering a quality service, and ultimately its price.

Which takes the pricing discussion right back to a topic we have been talking about for years: legal project management (LPM) and process improvement. 

The best way to implement LPM varies from firm to firm, and even from one practice group to another within a firm, depending on its culture, clients, and goals.

In our experience, the approach that works best most often is to start with just-in-time training for a small group of influential partners who are open to change.  We introduce LPM basics very quickly and then get them to immediately apply key concepts to actual matters. The focus is on changing behavior to produce tangible results.  When these lawyers are successful, they can motivate other partners to embark on the same journey.  Case by case, lawyer by lawyer, the firm begins builds its experience in LPM and AFAs, and gradually changes the way it meets the needs of its clients.  For an example of how this worked in one firm, see our recent post entitled Legal project management in the real world: The case of Williams Mullen.  

One key to profitability is continuing business from a firm’s most important clients. For clients who demand AFAs, it helps to work in an atmosphere of mutual trust on a portfolio of matters. The firm may lose on some matters but with the right strategy and tools it can offset the losses with enough wins to profit overall.  For some real world examples of this, see Rachel Zahorsky’s recent ABA Journal article “Facing the Alternative: How Does a Flat Fee System Really Work?”  

If we needed to summarize where legal pricing stands today in a single phrase, it would be “in transition.”  Next week, in the final part of this series, our predictions for the future.

This post was written by Jim Hassett and Matt Hassett.

Legal pricing (Part 6 of 8): Using metrics to define value

In the legal profession, everybody’s talking about value, but nobody seems to know how to measure it.

In September 2009, the Association of Corporate Counsel announced the creation of the ACC Value Index , a “client satisfaction measurement tool that helps ACC members to share meaningful information about the law firms they engage.”  Clients were asked to rate law firms on a 1 to 5 scale on six key factors

• Understands objectives/expectations
• Efficiency/process management
• Predictable cost/budgeting skills
• Legal expertise
• Responsiveness/communication
• Results delivered/execution

Then they answered a single summary question:  “Would you use this firm again?”

The idea of Zagat-type ratings of law firms was controversial from the start.  Six months ago, ACC announced that the Value Index had been closed because “ACC members voted ‘with their feet’ by continuing to use the eGroups for law firm referrals, instead of the Value Index.”

While the idea of a Zagats of law firms has disappeared for now, the six key factors in its rating system remain a great starting point for defining value.  The key phrase in that sentence is “starting point.”

In a panel discussion at a March 2011 Georgetown Law School Symposium entitled “Value: How do we define it? How do we measure it?”, Susan Hackett, then head of the ACC Value Challenge, noted that “Value is hard to define… The ACC Value Index offered an early set of categories of common interest to examine but it needs to move to the next level of assessment.  The future of value assessment will be data-driven.”

Thought leaders are beginning to discuss exactly what value metrics should look like, and how they should be related to prices.  A few months ago, Paul Lippe listed several value metrics that might be used to evaluate sales contracts:

• “How quickly did the contract get done?
• How favorable are the terms to the company (opportunity gained and risk avoided)?
• How easy are the terms for other parts of the company (finance, manufacturing, sales, etc.) to understand and perform?
• How satisfied were the true business clients?
• How satisfied was the counterparty?
• How much did the contract cost?
• Did the contracting process improve?”

If you want to explore just how complicated this type of measurement can get in the real world, see the series entitled “A Value-based Client-firm Relationship” on the ACC’s web page.  It includes 16 posts in which a client – Ken Grady, General Counsel and Secretary at Wolverine World Wide – and his law firm – Seyfarth Shaw, represented by Lisa Damon – talk through the details of how they defined value metrics and determined cost for work on a trademark portfolio.

Here is one list of possible value metrics from the law firm side early in their negotiation:

• ‘Success’ rate, measured by things like first action allowance, watch hit outcome
• Overall satisfaction
• Timeliness of communication
• Effectiveness of ‘lessons learned’ sessions
• Strategic participation/understanding of Wolverine business
• Proactive issue identification
• Budget variance
• Cost management effectiveness”

Here are a few of the value metrics that the client proposed:

• “Trademark Risk Rate (total dollars spent defending trademarks, divided by total number of trademarks defended)
• Counterfeit Recovery Rate (total dollars spent on anti-counterfeiting actions, divided by total number of units seized)
• Specimen Response Productivity (days from first request for specimen to receipt of acceptable specimen, divided by number of trademarks for which specimens requested).”

On the positive side, if you read all 16 posts about the details of this relationship, it is clear that the two sides developed a very trusting relationship, and that Seyfarth went the extra mile to be a proactive strategic partner that puts its money where its mouth is.  On the negative side, this is uncharted territory, and it took months of discussion to come up with metrics that enabled both sides to stay in control of the process and measure how it was going.

When the time came to tie the metrics to a portfolio price for the year, Grady proposed: 

"One way to set the new fee relationship for year one of the relationship would be to:

Adjust the baseline based on what we know about the business (that is, increase, decrease or the same amount of portfolio activity)

Adjust that amount to account for improvements in the processes to handle the portfolio using lean activities we will undertake with Seyfarth

Adjust that amount to build in whatever cost-sharing is appropriate for Seyfarth to get up-to-speed on our business as reflected in the portfolio

We then could agree on a base price to handle the portfolio work. We can gainshare on additional improvements – we get part of the benefit (lower costs) and Seyfarth gets part of the benefit (we don’t get 100% of the lower costs). We could add a topper fee:  depending on performance against certain other metrics (e.g., increase in average mark value using the equation I showed in the last post), Seyfarth gets an additional payment for helping to drive the increased average mark value.”

Here is one small part of how the payment system actually worked:

To measure Seyfarth’s systemic improvements, we will use two metrics: time to process an application, and time to receive a useable specimen (we have to file specimens in certain countries to show we are still using the mark). We need one score across both metrics to determine Seyfarth’s bonus, so we will combine the results on the two metrics by weighting them 80% on trademark applications and 20% of specimen gathering. We calculate the trademark application improvement metric, multiply it by .8, calculate the process improvement on specimens metric, multiply it by .2, and add the results. For every X% of weighted process improvement, Seyfarth will earn $.75.

This example is much more sophisticated, complicated and demanding than the simple value pricing examples we quoted in Part 4 of this series in which a client simply paid a hefty premium because he felt that he had received value in excess of hourly rates.

There can be little doubt that in the current environment, some clients will continue to look for metrics that allow them to precisely define value and tie it to payment.  But we predict that many lawyers will see the example above as excessively complicated, with a whole lot of arithmetic and price uncertainty.   So it is far less certain how many clients and law firms will ultimately develop and use metrics like this.

This post was written by Jim Hassett and Matt Hassett.

 

Bloomberg Law Reports on Pricing Directors (Part 2 of 2)

This post concludes the Bloomberg Law Reports article I wrote with Jonathan Groner on “The Rise of the Pricing Director.”  Part 1 can be found here.  To download a pdf of the complete article, click here.

At Winston & Strawn, the pricing strategy role is shared by the co-leaders of the firm’s AFA initiative: Kathrine Cain, the manager of business intelligence, and Keri Gavin, the controller. Cain reports to the firm’s director of business development, and Gavin reports to the firm’s CFO, but they work closely together to analyze the information that the firm needs for competitive pricing.

 “The partners are encouraged to reach out to us for assistance with requests for alternative fee arrangements and budgets,” Cain says. “Some partners were already very good at defining budgets and pricing strategies, while some were new to the concepts. We coach them through the process of defining a budget and identifying pricing options that align with their client’s needs and expectations. In the two years since starting the formal initiative, we have made significant strides in providing the tools and techniques to support our lawyers and clients.”

Cain says she and Gavin always consider a wide range of options for AFA proposals, based on the client’s expectations and goals as well as the projected internal rate of return, the anticipated level of staffing for the matter, benchmarks based on previous matters, the firm’s history with that particular client, and other factors.

Fish & Richardson uses a somewhat different model. There, the AFA group is led by Kurt Glitzenstein, a firm partner and patent litigator. 

Glitzenstein says that since his firm specializes in intellectual property law, many of his firm’s cases fall into just a few categories, such as patent litigation, Fish & Richardson is able to ask the same questions in nearly every case and obtain useful answers that will help in its pricing.“We prefer to price on an AFA basis,” he says. “To do that, my staff goes through a case and interviews the lead attorney about the details. Is it a judge whom we know well? How many patents are under litigation? What is the technology? How complex is it? As a result of inquiries like this, we can put together a litigation budget and use it as a guide for pricing. By asking the right questions, we can predict which cases will be more challenging to handle.”

“We think that the fixed-fee arrangements that Fish & Richardson often proposes improve aspects of the lawyer-client relationship,” Glitzenstein says. “Fixed fees allow lawyers and clients to focus on the merits of the case so that they can reach the best result, without the same level of concern as in a traditional hourly fee arrangement that changes to the case strategy, or unexpected developments, will significantly increase the cost to the client.”

Of course, in every firm, ultimately the success or failure of this new pricing movement will depend on buy in from the partners.

Mayer Brown’s Byrd says that although it is not required that partners consult him when they need to respond to an RFP or develop an AFA proposal, it is highly recommended, and that his plate has been full. 

Matt Laws, head of the pricing program at Reed Smith, where just about 20 percent of the annual revenue comes from AFAs, says his role “has been very well received . . .. Partners do tend to call every time a potential engagement comes up,” Laws says.

Laws says Reed Smith does not have “any strict guidelines about what we can or cannot do to win a client’s business. Any proactive approach to meeting a client’s needs is likely to be approved.”

In fact, Laws says he sometimes finds himself and his team having direct contact with the clients’ financial officers during the bidding process―something that would have been unthinkable only a few years ago. “In the old relationship, partners would work with corporate general counsel. Now, we see finance people and CFOs from the client companies. The process of online bidding, which has become more and more common, reduces the importance of the historical relationship between the firm and the client.”

Another interesting trend in this area is a growing emphasis on project management. According to Baker & McKenzie’s Dodds: “Over the last 18 months, the biggest change in the legal pricing field is a greater emphasis on project management and how we deliver services. Law firm clients are now looking for demonstrable value and efficiency, and we should not shy away from this challenge” This should not be surprising, given that once a firm is committed to a fixed price or an hourly fee cap, the most important determinant of profitability is being able to meet the client’s needs within a predetermined budget.

That’s why efficiency is on everyone’s minds these days. In the Altman Weil survey quoted at the beginning of this article, managing partners reviewed 15 current trends, and gave their opinions about which were temporary and which were permanent. Price competition was number two on the list, with 90 percent saying it was permanent. The only trend rated higher was the related idea of improving practice efficiency. 94 percent saw that as a permanent change.

The trend of appointing specialized pricing officials and devoting more effort to analyzing pricing is expected to increase. The International Legal Technology Association (ILTA) recently formed a Financial Management Peer Group to support this movement.

“Pricing is both an art and a science,” says Vinson & Elkins’ Brown. “We need to focus on both if we are going to grow our business. There are a host of pricing strategies out there, and lawyers are now just touching the surface. This is a dynamic world and my job is changing on almost a daily basis. The heat is getting turned up on law firms, and the pace of change is accelerating.”

Bloomberg Law Reports on Pricing Directors (Part 1 of 2)

A few weeks ago, Bloomberg Law Reports published an article I wrote with Jonathan Groner entitled “The Rise of the Pricing Director.”  Part 1 of this article is reproduced below.  To download a pdf of the complete article, click here.  

In a survey published in the December issue of the American Lawyer, 81 percent of law firm leaders said that more clients are requesting discounts, and 55 percent said clients are requesting deeper discounts. In a separate survey conducted by Altman Weil, 90 percent of managing partners and chairs said that increasing price competition is not temporary, but rather a permanent change in the legal marketplace. 

The economic balance of power has shifted to clients. Just a few short years ago large law firms reigned supreme. Now it seems that almost all large corporations and their in-house counsel are asking for some sort of price break from their lawyers―even from firms they have used for decades. Many General Counsel are seeing their legal budgets reduced, and they are passing the pressure along to their outside law firms.

As a result, large firms see pricing analysis and policy as more important than ever, and some are creating new pricing director positions to help them succeed in an ever more challenging environment.

Stuart Dodds became Baker & McKenzie’s first Director of Global Pricing last July, after serving for three years as Global Head of Pricing at Linklaters. His job includes four main components: “We help set the price in a proposal, help get the price, help our fee earners manage the price through project management, and then review how effective the pricing approach taken has been on a long-term basis for both our client and our firm. We are building a whole infrastructure within the firm with pricing do’s and don’ts.” Much of Dodds’ time is focused initially on the firm’s larger clients, and one key goal is to help assure pricing consistency and rationality for a firm with 70 offices around the world and over 3,750 lawyers. 

The same month that Dodds began at Baker & McKenzie, Toby Brown was hired by Vinson & Elkins to serve as its first Pricing Director. The firm’s leaders have put out the word that whenever pricing is an issue with an important client, Toby should be consulted early and often. One of the most important aspects of his job is to “create a culture of having conversations about value. Lawyers are really good at talking to clients about legal issues,” says Brown. “Now, however, they need to add another dimension to the conversation to include value, pricing and efficiency. . . . Sometimes I think my job is almost 100 percent business development.” 

Others with related titles also emphasize how pricing is tied to client satisfaction and new business. Matt Laws, alternative fee arrangement senior manager and head of the pricing group at Reed Smith, says “I see myself as working for the firm and for the client at the same time. I try to find that middle ground, a mutually beneficial arrangement.”  

Similarly, Vinson & Elkins’ Brown says “I like to walk the client through a whole list of questions. Sometimes, they won’t immediately understand what their own price sensitivity is. My job is to get them thinking about what matters most to them. I can be seen as an internal consultant to the lawyers in the firm, and also to the clients.”

Although at this time only a small number of firms have a separate pricing director or department, many see it as the wave of the future. “I find it hard to see how major firms could not organize themselves this way,” says Michael Byrd, Assistant Director of Pricing Strategy and Analysis at Mayer Brown. “What we do fits somewhere in between finance and business development. It’s at the same time both numbers-driven and creative.”

Mayer Brown’s Byrd sees the main benefit of a proactive pricing strategy as “increased competitiveness to keep us in the forefront of the market.” Both Byrd, and the partners he works with, believe that in his 18 months at the firm, the new emphasis on pricing has helped increase responsiveness to client needs, increase client satisfaction, and add value.

One key factor that is driving the pricing movement is the new emphasis on alternative fee arrangements (AFAs), including fixed and contingent fees. According to Altman Weil’s 2011 Chief Legal Officer survey, AFAs now account for about 14 percent of all legal fee revenue. This figure is still small compared to the 86 percent that is hourly, but it is measured in the billions and all of the forces of change are headed toward more AFAs. As Joe Morford, managing partner of Tucker Ellis & West put it, “Once we started working for a client with AFAs, not a single one has ever wanted to go back to hourly.”

In the good old days of hourly arrangements with rates that went up every year, it did not require sophisticated financial analysis to send a bill that multiplied each lawyer’s hourly rate by the number of hours spent. But to make AFAs profitable, law firms now need to spend more time thinking about pricing. 

Next week’s post will include more examples from these firms and also from Fish & Richardson, Winston & Strawn, and Reed Smith.

Client/firm collaboration: The case of Squire Sanders

A few months ago, we announced  that Squire Sanders was the first firm to sign up for our new client/firm collaboration workshops in legal project management (LPM).

Today, the results are in: It was absolutely amazing.  

The program was designed to facilitate collaboration between large law firms and their most important clients, by addressing the most fundamental question in the ACC Value Challenge: “Working together, how do we improve the value of legal services?”  

The key event was a half-day workshop at the client’s office with seven active participants:  the client’s General Counsel and three of his key staff, and three leaders of the Squire Sanders client team that serves them, Dave Grauer, Keith Shumate and Heather Stutz.  (The program was designed for six people to maximize interaction.  But this client felt it was important to add a seventh active participant, and so that is what we did.)  In addition, three other lawyers sat in to observe the discussion.

To start the day, we offered a brief overview of the eight key issues described in our Legal Project Management Quick Reference Guide.  Then we began a structured brainstorming process to efficiently identify action items:  How could LPM principles quickly be applied to strengthen this particular relationship?  

The brainstorming produced a list of 19 action items.  The biggest category involved improved communication, including scheduling a “lessons learned” review session for one current matter, scheduling regular meetings for both the Squire Sanders team and for the in-house department, and scheduling a monthly call in which Squire Sanders briefed the client on legal trends in their industry, including ideas for enhancing revenue.

Other communication action items involved technology.  Some were very simple uses of existing systems, including setting up a new folder on the client’s network to simplify internal access to key documents.

A few involved new software solutions.  Squire Sanders has developed a custom-designed extranet database called MyMatter which provides easy access to such documents as case plans, court pleadings, witness lists, expert information, deposition summaries, engagement letters, budgets, invoices, and more. As a result of the workshop discussion, Squire Sanders has now begun implementing MyMatter for this in-house department, to provide them with immediate access to key documents in a single location.

Five of the 19 action items involved alternative fee arrangements (AFAs).  Both Squire Sanders and this client were interested in exploring non-hourly AFAs, and the brainstorming process identified several specific steps toward this goal, including making a list of new work where AFAs made sense to both sides.

Does that sound like marketing?  It should.  The client/firm collaboration workshop is designed to strengthen relationships and increase value.  Which is a pretty good definition of marketing.

During the workshop, specific individuals volunteered to be responsible for each of the 19 items.  Then, for the next 30 days, LegalBizDev principal Mike Egnatchik followed up with participants to provide advice on implementation, along with gentle reminders to assure that the action items were actually performed.  Oh, wait. In this case Mike actually followed up for 45 days instead of the 30 we had planned.  The original followup period started around Thanksgiving and the client wanted more time, so that is what we gave them.  

Mike is uniquely qualified to facilitate collaborative discussions like this because he has worked on both sides of the table: first as a practicing lawyer at Shearman & Sterling, and later as an Associate General Counsel at Xerox, where he was trained in problem-solving techniques and earned a Lean Six Sigma yellow belt.

After the followup was complete, we held a review telecon with the GC and the head of the Squire Sanders team.  Interestingly, the GC chose to attend that meeting in person at Squire Sanders’ office.  He was there to follow up on a variety of joint actions, including several that had grown out of the workshop.

Of course, clients and their law firms have always collaborated.  But this new workshop applies proprietary techniques to increase client satisfaction and collaboration efficiency and to take the relationship to a new level.  It helps law firms integrate services with their clients’ operations, and to deliver greater value to them.  Which is increasingly important in the new normal.  As Legal Onramp founder Paul Lippe noted in The Future of Legal Services (p. 30):

The practice of law has shifted from an individual effort to one emphasizing teamwork and collaboration…  When firms had a monopoly on expertise, delivery of service was a one-way street.  But now most work involves collaboration and coordination between firms and clients.

Were there any problems?  In my opinion, there was one big one:  The participants simply could not find enough time to reap all the benefits of LPM.  That challenge began the day the client agreed to the program and continued to the day it ended.  It took several months to find a date when these extremely busy lawyers could all meet in the same room for the workshop, and in the followup period deadlines sometimes had to be adjusted due to other more pressing matters.   

I was reminded of a series of posts that ran in the Association of Corporate Counsel blog about 18 months ago to “follow the promise and pitfalls of forming a new value-based client-firm relationship.”  In Part 16 of the series  Ken Grady, GC at Wolverine World Wide described the benefits of a program with Seyfarth, but then said:  

What did we not do well?  It took too long...  General counsel of small legal departments often… get pulled in a lot of directions with little real control over their schedule.

The fact that lawyers are busy is not exactly headline news.  But one of the strengths of the client/firm collaboration workshop is the fact that it recognizes this reality, and is designed to work around it.

Squire Sanders has already signed up to repeat this program with another client, and they are talking about adding more.

 

 

 

Legal project management in the real world: The case of Williams Mullen (Part 2 of 2)

Last week, we talked about how legal project management (LPM) has helped Williams Mullen litigators find new work, and perform it more efficiently. 

On the transactional side of the house, M&A Lawyer Steve Burke has also seen LPM marketing benefits, especially in relation to alternative fee arrangements (AFAs). 

Burke participated in Williams Mullen’s second just-in-time workshop in March 2011.  When I interviewed him eight months later, he mentioned that a client had recently called him with a question about possibly using an AFA.  “I was able to answer the question in 15 minutes,” Burke said.  “Before our LPM training, that would have taken me much longer.”

This is not to say that the workshop introduced Burke to LPM for the first time.  One of the reasons he had been selected to participate in the class was that he had a reputation as a highly organized proponent of careful matter management.  But before taking the class, Burke said, he always started project management later in the deal. Our just-in-time program enabled him to see that the sooner you start, the better off you are. Talking to the client more at the beginning and thinking clearly at the start about scope, fees, and expectations, and how things will play out, makes an enormous difference in the way a matter is handled instead of “hitting the ball back and forth like a tennis match.”

These skills are especially useful for fixed fee matters.  Does that mean that fixed fees are a way to higher profits?  Some legal experts certainly think so.  We wish they were right, but think that in today’s highly competitive legal marketplace at most firms a “win some, lose some” portfolio approach is more realistic.

As one AmLaw senior partner put it in the LegalBizDev Survey of Alternative Fees:

Some fixed fee matters will be profitable, some will be loss leaders.  In general for similar repetitive engagements, you win some and you lose some, in that sometimes the law firm covers its costs and gets a margin, and sometimes it does not.  To make this work as a business proposition, ultimately the law firm needs to have the profitable cases offset the losses and provide a margin.

That’s why some AFA leaders prefer to bid on portfolios of cases rather than single matters.  Writing in ACC’s blog, Nicole Nehema Auerbach of Valorem put it this way:

Pricing a portfolio of matters…is easier for us and better for the client because it allows us to spread the risk inherent with one case across more. This allows us to provide a lower overall fee since the risk of an outlier, a deviation from the norm, is diminished. It also allows us to customize the bonus on either a case-by-case basis or some achievement for the portfolio overall. For example, our bonus can be tied to the overall savings in litigation spend, or simply the amount of savings we achieved across the portfolio in connection with settlement or judgment payouts.

Or, as Williams Mullen’s Burke summed it up: “When you commit to billing on a fixed fee basis, you need to take the bad with the good and with a smile on your face.”

When I asked Camden Webb to predict the future, he said that the greatest challenge will be figuring out how closely they can they adhere to the eight issues in my LPM book when they are deep in the throes of a particular case. “It is a lot easier to define the initial scope than it is to stick to it. The discipline of project management is difficult, especially dealing with issues like, ‘Yes, I do have to track my time, and yes, I do need to know how much has been spent at key milestones.’”

According to litigator Billy Mauck of Williams Mullen, “We are starting to get better at project management, but we need to keep improving.”

Transactional attorney Allison Domson spoke for the entire profession when she said, “Legal project management is a new mentality.  It needs to be accepted, but it is going to take time.”

 

 

Legal project management in the real world: The case of Williams Mullen (Part 1 of 2)

These days, many firms are experimenting with legal project management (LPM) to deliver greater value to their clients, protect profits, and reduce risk.  Some are having more success than others. 

The good news is that if you do it right, legal project management produces measurable benefits and develops its own momentum.  The bad news is that change takes time, especially the kind of fundamental change that LPM ultimately involves. But the slow pace of the entire profession leads to more good news.  Last week, an LPM client we worked with over two years ago, who would prefer to remain nameless, emailed me about some recent success they’ve had and noted that: “If you move like a turtle but you're racing a bunch of snails, it all works out in the end.”

How do you do it right?  In the 26 years that we have been developing and delivering training programs for a variety of professions, we’ve found that the most important factors in success are selecting the right people and designing a program that measures progress toward their individual goals. 

When we begin working with a new LPM client, we often recommend starting just-in-time training with a small group of influential partners.  The ideal group will vary from firm to firm.  They could be people who are responsible for new alternative fee arrangements.  They could be relationship partners who are worried about protecting business with key clients who are seeking greater efficiency on hourly arrangements.  They could be practice group leaders who are designing new checklists, templates and processes to improve their competitive position.  But in every case, the best lawyers to start with will be 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.

“Doing it right” also means focusing on changing behavior to produce tangible results.  Last year, the Association of Corporate Counsel and the ABA conducted a meeting “at which leaders of corporate and law firm litigation departments rolled up their sleeves and tackled the complex issues surrounding present day concepts of value in litigation.”  In a May 2011 ACC Docket article summarizing that event, Susan Hackett and her co-authors emphasized that progress will not be based on improved understanding or increased knowledge.  Instead, “The challenge is change/behavior management.”  It’s not a question of knowing what to do; it’s a question of helping lawyers to do it. 

Williams Mullen, a 300-lawyer firm in North Carolina, Virginia, and Washington DC, provides a great case study of how this approach works.  We started working with them in October 2010, when we held a kickoff meeting for a just-in-time training workshop with three of their top litigators, and three of their top transactional lawyers.  In the workshop, each lawyer identified an LPM action item that could benefit their practice, and then LegalBizDev principal Mike Egnatchik followed up with them for 30 days to maximize results.

Williams Mullen was so pleased with the results that they decided to schedule another session “right away,” but it took some time to find a date that worked well for another six lawyers.  That second group achieved even more last March.  Then Williams Mullen got enthusiastic about rolling out a larger program.

Given law firm dynamics, programs like this inevitably take time to roll out.  At Williams Mullen, a few key partners kept pushing forward, led by John Paris, chair of the firm’s Innovation Committee.  On several occasions when committees met, next steps were debated, and dates slipped, John apologized to me for the delays.  My answer was always the same: “We should be thrilled with this rate of progress.  You should see how long other firms are taking.”

Next week, LegalBizDev principals Steve Barrett and Tom Kane will be offering our half-day “Introduction to Legal Project Management” workshop to about 25 lawyers in Williams Mullen’s Richmond, Virginia office.

When we began working on next week’s workshop, I had a rare opportunity to go back and interview people who had participated in our just-in-time training eight to twelve months before.  (We always try to collect followup information, but to be honest it’s difficult to get feedback once a program ends and busy lawyers are “on to the next thing.”)

Litigator Camden Webb stressed the marketing benefits of LPM.  “The environment is tough out there,” Webb said, “and it’s a lot harder to get cases than it used to be.  But the one thing that clients perk up about is when we describe a managed fee approach: ‘We’re going to predict what it will cost you before we start, and then keep you informed as things develop.’”

In litigation, LPM often requires a phased approach. “I can tell you what it will cost to respond to the specific complaint, and then we can scope out the rest…We can see what the next 30 days will look like and then go from there.”

Webb then cited several confidential examples of work Williams Mullen has gotten as a result of their emphasis on increased planning before cases begin, and aggressive management once they are underway.

He has also been developing standard tools and forms to “Take high-minded lawyer work and make it much more efficient.”  For example, research guides for particular types of cases can serve as training tools for associates and refreshers for partners. 

When we present our LPM workshop at Williams Mullen next week, the handouts will include a five-page sample from Webb’s toolkit (Checklist for Analyzing an Unfair and Deceptive Trade Practices Claim under N.C. Gen. Stat § 75-1.1, et seq).  The handouts will also include sample case plans that were developed from a checklist of questions to ask clients at the beginning of a case in order to define the scope and objectives and help determine what the most efficient team should look like.

Webb and his partners are creating a triage process for litigation.  Templates, standard operating procedures, and forms are helping to make routine, repeatable work more efficient, and free up time to work on novel high-end cases. 

A similar approach is being used by transactional attorneys at Williams Mullen, as we will describe next week in Part 2.

Legal pricing (Part 4 of 8): Value pricing basics

In the first post in this series, we noted that the two pricing strategies of greatest interest to law firms are cost-plus and value pricing.  Almost all law firms currently use variations on cost-plus pricing, as we described in Part 2 and Part 3 of this series.  But anyone who has ever heard of the ACC Value Challenge knows how important perceived value is to clients today.

If you have thought about applying value pricing with your clients, you have probably read about the work of Ron Baker.  His most recent book, Implementing Value Pricing: A Radical Business Model for Professional Firms, provides an excellent overview of the theory of value pricing, and how it applies to accountants, lawyers, and other professional services firms.

As Baker defines it (p. 233): 

The word value has a specific meaning in economics: ‘The maximum amount that a consumer would be willing to pay for an item.’  Therefore value pricing can be defined as the maximum amount a given customer is willing to pay for a particular service, before the work begins. This is not to suggest we can capture one hundred percent of maximum value, but rather that we have the potential to access some of it utilizing strategic pricing.

Does that sound like price gouging? It’s not. As Stanley Marcus (former president of Neiman Marcus), put it (p. 22):  “You’re really not in business to make a profit, but you’re in business to render a service that is so good people are willing to pay a profit in recognition of what you are doing for them.”  

In cost-plus pricing, cost is known before you set the price.  In value pricing, you start with the price the customer is willing to pay and control your costs to meet that price. 

Baker sums up the difference in these two diagrams:

Cost-Plus Pricing

            Services  » Cost »  Price » Value » Customers

Value Pricing

            Customers » Value » Price » Cost » Services

Baker feels strongly that value pricing should be embraced by lawyers, and that timesheets and hourly billing should be eliminated. 

His web page bio begins with the mission statement:  “To, once and for all, bury the billable hour and timesheet in the professions.” Chapter 17 of his book Implementing Value Pricing is titled “The Deleterious Effects of Hourly Billing” and describes numerous disadvantages including misalignment of interests, a focus on effort instead of results, hoarding of hours, leaving money on the table, and diminishing the quality of life.  Chapter 18 explains why timesheets should be eliminated.  Its title indicates the strength of Baker’s feelings on this issue:  “Why Carthage Must Be Destroyed”.

Baker (p. 160) also emphasizes that value pricing can sometimes produce far more revenue than the hourly approach.  He gives the example of an accounting firm that was engaged to develop an exit and management succession strategy which produced substantial tax savings. Initially the CPA billed at standard hourly rates, but at some point he said to the client “I don’t believe hourly rates [are]… appropriate [in this case]…  You tell me what all the value of this is to you… I know I will be happy with whatever you come up with.”  Ultimately he was extremely happy, because the total payment was “a little bit over $1 million.” 

By then, he had stopped tracking time on this engagement, so it is impossible to say exactly how much he would have gotten on an hourly basis.  However, he did say his prices had “skyrocketed” and reading between the lines our guess is that hourly rates would have totaled less than $100,000.

Any lawyer would love the concept of value pricing if it meant that she could get paid 10 times what she would earn for billing hours.  And many law firms see value pricing as a ray of hope in a troubled marketplace, an opportunity to increase profitability at a time when there are unrelenting competitive pressures to charge less.   

Baker notes that “These types of engagements are certainly not the rule in any firm, they are the exception.  Nonetheless, they do arise, and when they do it is critical to recognize the value you are creating and to utilize innovative pricing strategies to capture it.” 

Companies like Apple have become very profitable by creating consumer perceptions of value, and pricing products like the iPad and iPhone accordingly.  But there is only one Apple, and there are dozens of companies like Dell, HP, Samsung, Lenovo, and Asus who find themselves competing on price.

A small number of the most profitable law firms in the world have been using value pricing for years, just as Apple has.  But they are at the top of the profession and specialize in “bet the company” work.  If a client is defending a billion dollar law suit, or acquiring a powerful rival, or being accused of a white collar crime, she will care much less about the price than about the outcome.

When Jim Durham published The Essential Little Book of Great Lawyering, he estimated such “bet the company” matters at only about 5% of all legal work.  The rest he classified as important matters (65-70%) or commodity work (25-30%). In the six years since Durham published this book, all signs are that legal commodity work is growing, and “bet the company” and “important” work are shrinking.

In my new Legal Business Development Quick Reference Guide, I’ve written about the traditional marketing implications of these three different types of legal work, as summarized in this table:

Type of legal work	Value’s significance in marketing	Relationships’ significance in marketing
Bet the company	High	Low
Important	Medium	High
Commodity	Low	Low

But the world is changing, and when it comes to getting new business, the marketing significance of providing value is going up, and the importance of prior relationships is going down.

A few weeks from now, we will post Part 5 of this series, discussing the nuts and bolts of Ron Baker’s eight steps to implementing value pricing.  We will argue that the problem with value pricing is an expectations gap.  Law firms want to believe value pricing will lead to higher prices and profits.  Sometimes it can.  But in most cases these days, when legal clients say “value” what they mean is “I need to pay you less.” 

 

This post was written by Jim Hassett and Matt Hassett.

What Would Andy Rooney Say About Law Firm Finances?

By Steve Barrett, Principal, LegalBizDev


Several years ago, an AmLaw 100 COO told me that his kids' Boy Scout troop had a more sophisticated financial management than his firm.  I remembered that…

We all were saddened by the recent passing of CBS TV’s 60 Minutes curmudgeon Andy Rooney.  But his death leads one to question some basics in our professional lives, as Rooney often did.  With the serious challenges facing the legal industry since the 2008 downturn, the expressed need for far more predictability and transparency of costs by major law firm clients, and the dip in law firm revenues, staffing and profitability, some thoughts arise.

The other night I was re-reading the Hildebrandt Baker Robbins/Citi Private Bank 2011 Client Advisory, a report that I’ve found gets to the heart of what’s going on amongst major law firms.  Several numbers leapt off its pages:

1. From 2001-2007 “demand for legal services was growing at…4.5% or so per year and…(firms passed along) annual rate increases in the 6-8% range.” (p. 5)


2. Secondly, while the 2010 HBR/Citi report noted a softening in law firms’ 2009 realization rates, this latest report notes that (chart 9, p. 13) by the end of the 3rd quarter of 2010, they had softened even further – even after more than 18 months of law firm headcount reductions and cost containment.  Indeed, billing realization averaged 89% and collection realization 87%, among the respondents.

What conclusions can we draw from these numbers?  In the first case, when times were good law firms’ rates increased much faster than the rate of demand growth.  So while the pie was growing, law firms’ appetites grew even faster (or their financial management wasn’t so hot).  Wonder how table manners would respond to a shrinking pie?

In the second case, combining the two realization rates, we see that law firms didn’t bill some 11% of their incurred hours (the 89%), and then also didn’t collect 13% of what they billed (the 87%).  Taken together, these two figures yield a combined realization rate of approximately 77% (0.89 X 0.87=0.7743).  Thus, in a rough sense, everyone’s been giving away an unintended 23% discount.

If major clients walked into a firm and demanded a 23% off-the-top, first dollar discount, brows would furrow.  But what if ALL clients demanded that discount?  Likewise, if a sophisticated Fortune 500 company’s management saw a recurrent 23% hit to their gross margins, whether from inventory shrinkage, loss, or inefficiency how long would it take for them to find the source and correct it?

In the past there's been little serious cost accounting – of the sort most big product-driven enterprises do – in the legal business, and there’s been little pressure for granular examination of cost structures.  Just add everything up at the end of the year, subtract expenses, set associate and staff bonuses, divvy up the remainder and give it to partners.  (A decade or so ago, I read that when the three major accounting software vendors - Aderant, Elite and Juris - were polled, they reported that only a tiny percentage of their law firm customers had either installed or used cost accounting software modules.)   

Almost all law firms practice cash accounting, and most of their indirect costs of servicing clients (copying, telephone calls, travel, lodging, etc.) have traditionally been reimbursed by clients, lessening the need for comprehensive cost accounting.  There are many firms who still mark up reimbursements (e.g. charge $2 per page for faxes when they cost pennies, 15 cents per page of copying, when Kinko's or Staples can do it for much less, add handling charges to telephone costs, etc.).  So there’s been little pressure to seriously examine costs of service.

Hourly rates have often been set based on the “rule of three”:  multiply salary by three so that 1/3 covers salary, 1/3 overhead (direct + indirect) and 1/3 partner profit distributions.  About the most significant adjustment made for cost variability is to set attorney hourly rates for expensive markets (e.g. New York, Los Angeles, DC, San Francisco) well higher than less expensive markets (like Atlanta, Denver, Omaha, Seattle and countless smaller markets).  This is because their payroll and occupancy costs are so much higher.  And each year rates were re-set like clockwork after budgeting time, by incrementing them upwards to cover next year’s projected costs.

BUT…law firms do spend a maniacal amount of time tracking and measuring HOURS.  Hours are – after all – not only the firms’ products, but also their inventory and Work-in-Process (WIP).  They’re the key component of most firms’ associate and partner compensation.  What gets measured, gets managed, right?  As Paul Lippe recently pointed out in a piece titled “Managing What You Measure” on LegalOnRamp: wrong!  He correctly says that what SHOULD get measured is “Value.”  But it’s stunning that perhaps the most-measured “value” in law firms is time.  Partners are compensated through Byzantine hours-based formulae, associates are bonused and advanced based on hours, firm performance is reported in units of time (“3rd quarter hours are up/down”).  In tenths of hours, no less!

But we’re losing 23% of the revenue from all this time by not billing it, or not collecting that which has been billed.  (This ignores hours worked but never recorded, but that’s another post.) 

Let’s have a closer look: 

Traditionally, most firms have struggled to police their WIP, since they haven’t been able – despite all sorts of initiatives – to get timekeepers to post their time promptly.  Remember, time equals overhead, inventory AND product.  An hour worked on the first day of this month often won’t appear on a pre-bill until after the end of month, get billed in mid-next-month, and collected 45-60 or 90 days later.  So WIP/inventory typically goes unpaid for from three to five months.  But the “suppliers” (timekeepers), landlords, equipment lessors, Lexis and WestLaw are all paid in “real time.”  So law firms start out well behind on the cash flow curve.

And who hasn’t heard the story of the associate given a task that should take five hours and he does it in 65?  Or the partner who submits $5,000-$10,000 in time from last March spent on a deal (and file) that closed before Labor Day?  So…when it comes time to up the efficiency of law firms, using Legal Project Management (LPM) and process improvement, one of the key constituents on the path to making gains stubbornly resists management.  Even in law firms where filing, document management and library systems have been bar-coded for years.

LPM encourages more-frequent matter status updates. If we cannot get all the costs entered at least every week, how are we ever going to get our arms around this problem?  Efficiency gains are becoming mandatory, and clients expect them.  Project management can substantially reduce that 23% going out the window.  It minimizes surprises.  It mandates time allotments for tasks assigned to others. It demands real-time querying of case status.  It prefers daily time entry, but could settle for weekly.  In any event, it cannot tolerate March time appearing in late August…or hours filed in the wastebasket.

One positive thing about many alternative fee arrangements is that they provide a real opportunity to improve cash flow.  Some are based on an annual or monthly retainer, paid in installments.  Some propose a stated number that can be pre-billed, then adjusted after the matter’s conclusion.  Where pre-agreed figures are settled on, it becomes simple to seek half down, half on conclusion, or a third, third and third…just like an orthodontist or your kitchen remodeler.  AFAs can also greatly reduce the staff needed for processing all those hourly invoices, reimbursements, etc.

Of course, today’s competitive environment is changing everything.  Firms are improving their financial systems, their internal procedures, their matter management, progress tracking and billing processes.  The ones that move quickest are most likely to thrive in this “new normal.”


Before Steve Barrett became a principal at LegalBizDev, he spent nearly two decades heading marketing at four AmLaw 200 firms and consulting to many more.  After reviewing drafts of the pricing series that started recently in this blog, he sent a long e-mail ruminating on his personal views of law firm finances.  That e-mail evolved into this week’s guest post by Steve.