124 posts categorized "Alternative Fee Arrangements"

December 13, 2017

Litigation AFAs (Part 1 of 3)

By Greg Lantier , Natalie Hanlon Leh, and Mindy Sooter, WilmerHale

Five Questions Every Lawyer Should Ask the Client Before Proposing an AFA

Note: Most of the AFA principles described here also apply to transactional AFAs, but the details and examples in this series focus on litigation.

An Alternative Fee Arrangement (AFA) is frequently required as part of a law firm’s response to a client’s request for proposals to handle new litigation matters. In-house attorneys routinely receive, review and compare such proposals, and nearly all law firms regularly submit them, but the parties often do not follow a disciplined approach in developing a realistic budget.

The risks to clients of retaining outside counsel subject to a poorly constructed AFA are very real, while outside counsel have their own set of considerations regarding whether to submit a proposal. To help ensure that the interests and goals of outside counsel and their clients are properly aligned throughout a litigation matter—and stay that way—it is crucial that AFA proposals be intentional in their construction.

In this series of articles, we provide guidance on this issue to be sure that responses are meaningful to both the client and outside counsel. We will identify questions that lawyers, clients, and law firms should ask each other and themselves prior to proposing an AFA.

 

1. Why Is an AFA Being Requested?

Clients who request an AFA have various reasons for doing so, and it is the outside counsel’s role to understand their intentions. The first step in assembling an intelligent response to a request for an AFA is for outside counsel to be certain they understand the primary reasons that the client is making the request.

Most often, predictability is the key driver for the client. But, is it predictability regarding overall fees for the matter? Monthly fees? And/or both fees and costs? To correctly structure an AFA proposal, outside counsel must know the client’s primary focus, so if the client hasn’t articulated her intentions, outside counsel should not hesitate to ask.

In some cases, the client may be requesting an AFA simply to find the lowest possible price, putting the quality of the legal services on a lower shelf. Comparing AFA bids (particularly if they are fixed fee proposals) makes it easy for the client to obtain the lowest price service. If the client is accepting competing bids, that is helpful for the bidding parties to know. This insight is necessary for outside counsel to determine whether making the proposal is in the best interest of the firm. If submitting is not the right choice, the firm’s internal resources are saved; if it is the right choice, this information allows the firm to price the matter as attractively as possible to be competitive—again, making the process more efficient for both sides.

Other circumstances also exist: the client may be requesting an AFA to better align the incentives of outside counsel with the client’s own interests; or an in-house attorney may be requesting a proposal because it is required as a matter of policy by her employer, and she may not have a good understanding of the reasons for the AFA request.

Of course, and as is often the case, the reasons for requesting an AFA can include a combination of several of the above interests as well as others. No matter the circumstances, it is critical that outside counsel understand those interests prior to assembling an AFA.

 

2. Is the Client Able to Share Information Regarding the Value of the Matter?

Intelligently constructing an AFA proposal requires outside counsel to make numerous assumptions concerning what steps will be taken in litigating the case. Those assumptions should be based, in part, on the expected value of the case. If a case is expected to settle for a relatively modest sum, for example, the proposal likely does not need to assume that there will be significant motions practice during expert discovery. Further, the number of hours budgeted for written discovery should vary greatly depending on the stakes in the case.

Outside counsel should ask their in-house counterpart for preliminary information about the exposed revenues and/or whether (if the client is a defendant) plaintiff has already made a settlement demand.

 

3. What Outcomes Would the Client Consider a ‘Win’?

Learning what the client would consider a “win” is paramount in building an effective AFA proposal. Here’s why:

  • Articulating what would be a “win” will calibrate inside and outside counsel’s goals. Starting off on the same page is important for efficiency’s sake and satisfaction with results—from both client and outside counsel perspectives.
  • If the only outcome that will please the client is a favorable, dispositive decision on the merits, then the proposal should reflect that, potentially by building in success bonuses or other financial incentives for outside counsel to devote the resources necessary to achieve that result.
  • If the client would consider a settlement within a certain range a “win,” then the matter strategy—and, accordingly, the AFA proposal—ought to be constructed to maximize the likelihood of achieving a win while moderating the legal fees and costs expended to do so. It may be appropriate, for example, for outside counsel to discount the fees that would be expected were the case tried because outside counsel expects that the case will be resolved short of a trial.
  • If a “win” cannot be defined, the client and outside counsel should carefully consider whether to request/submit an AFA. It is possible, if not likely, that opting out of the proposal process in this situation is better than moving ahead with an AFA proposal that assumes the case must be litigated through a trial and that budgets accordingly. If the goals cannot be articulated, then it is less likely that either party will be satisfied with any outcome that is achieved.
  • It is helpful to both in-house and outside counsel to express the goal for the matter up front, because if that goal changes over the course of the litigation, it may be necessary to also adjust the fee arrangement.

 

4. What Level of Involvement Does the Client Expect to Have?

A client’s level of involvement impacts not only the results of many litigation matters, but it also can impact the costs.

Sometimes clients can help to decrease the time that outside counsel must devote to a matter by undertaking certain responsibilities, thereby decreasing the budget used to calculate an AFA. For example, in-house counsel can add significant value, and decrease fees, by taking responsibility for developing the facts in a portion of the matter. Under such an arrangement, in-house counsel functions in part as another member of outside-counsel’s litigation team—and one who does not need to be budgeted for in an AFA. Similarly, some clients have robust internal procedures for collecting and conducting first-level document review or preparing first drafts of responses to written discovery requests. These capabilities should be accounted for when preparing an AFA.

On the other hand, while it clearly improves the team’s work product, frequent consultation with the client can also be expensive. Discovery correspondence with opposing counsel, for example, can take twice as long if every email is sent first to the client, revised based on client feedback, recirculated for approval, and then sent to opposing counsel. The drafting of motions and other papers likewise can take significantly more time when a client regularly suggests substantial revisions to drafts and/or there are multiple revisions prior to filing most documents. Finally, the time required for multiple calls with a client each week can quickly add up.

Whether a client’s desired level of participation in the litigation increases or decreases costs, it is important for both the client and outside counsel to understand the impact this has on an AFA.

 

5. Who Else is the Client Asking for a Proposal?

A last question that outside counsel frequently do not ask, but should, is what other firms are submitting proposals. There are key reasons for asking the question.

Asking who else is submitting a proposal may prompt the client to comment on her decision-making process for selecting firms as candidates for the matter. This can provide valuable insight into what the client’s goals are and how the client is viewing the matter at the outset.

In addition, knowing what other firms will be bidding can inform both the structure of the AFA that outside counsel submits and its packaging. If, for example, the other firms all have lower hourly billing rates than outside counsel, it may make sense to submit an AFA that proposes making a larger initial investment to obtain an earlier result, followed by a negotiated resolution, rather than an AFA that assumes the matter will be litigated through expert discovery.

There are, of course, many additional questions inside and outside counsel should address before accepting/submitting an AFA proposal for a litigation matter. Even with respect to the five questions above, there is significant complexity in translating the information received from the prospective client into a well-planned AFA proposal. We will touch on some of these additional considerations in the remaining articles in this series.

 

The authors are partners in WilmerHale’s Litigation/Controversy Department and IP Litigation Practice. This is Part 1 in a series of three related articles that have been adapted from Law 360 for the fifth edition of the Legal Project Management Quick Reference Guide. The Guide also includes three additional articles on this topic by the same authors.

January 25, 2017

Engagement letters and statements of work

At the beginning of a new matter, lawyers often specify its scope and fees in an engagement letter. The engagement letter is designed to clarify exactly what work and services are included, and excluded, from a particular matter.

Some states have specific requirements for what must be included in an engagement letter, and many firms have their own requirements as well. For example, in New York State, Part 1215 of the Joint Rules of the Appellate Division requires a letter of engagement in most matters, except for certain exceptions listed in the rule (i.e., an engagement letter is not required if the fee is expected to be $3,000 or less).

From a project management point of view, there is considerable room for improvement in many engagement letters. Consider, for example, this language from the sample letter of engagement published by New York State:

Scope of representation

A claim, dispute or dealings with relating to ______________.

All of our services in this matter will end, unless otherwise agreed upon in a writing signed by us, when there is a final agreement, settlement, decision or judgment by the court. Not included within the scope of our representation are appeals from any judgments or orders of the court. Appeals are subject to separate discussion and negotiation between our firm and you. Also not included in the scope of this agreement are services you may request of us in connection with any other matter, action, or proceeding.

The rest of New York’s two-page sample focuses on fees and client rights. Fee options for the sample include a flat fee, a contingency, or hourly rates.

If a law firm copied the New York State sample exactly and negotiated a fixed fee, they might end up being very sorry when the matter spiraled out of control. They would be better protected if the engagement letter specified timelines and deliverables, such as the maximum number of interviews, pleadings, interrogatories, opinions, and reports, the anticipated scope of travel and research, the use of outside consultants, and so on.

Could a lawyer possibly know in advance how many depositions would be required to settle or plead a particular case? Of course not. But he or she could specify the maximum number of depositions they expected and exactly what would be included within the fixed price.

This failure to provide sufficient detail is quite common. As the executive director of one AmLaw firm recently put it, “The scope of work often contained in our engagement letters is generally no more than one or two lines. Lawyers are missing an opportunity to clearly specify the scope of what is included in each matter and what is not.”

From the client perspective, better specifying the work up front could lead to more predictable costs and a more sophisticated understanding of what they are paying for. From the law firm’s point of view, it could reduce fee disputes, write-downs, and write-offs.

Entire textbooks have been written on how to develop what project managers call a statement of work (SOW), which specifies what a particular project includes and excludes. Lawyers may wish to adapt some of these ideas and write an SOW which could either be included in the engagement letter or be a separate document, depending on the nature of the matter, the lawyer-client relationship, and joint expectations.

 

This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.

January 11, 2017

Case Study: LPM Certification at Davis Wright Tremaine

By Jim Hassett and Jonathan Groner

Since our Certified Legal Project Manager® program began in 2010, we have written several case studies describing participant results, most recently a few months ago.

This post summarizes the long-term experience of Judith Droz Keyes, a partner at Davis Wright Tremaine in San Francisco who completed the program in 2014. Judith specializes in labor and employment law. Her practice includes extensive counseling as well as experience in the courtroom and before mediators.

Judith first signed up for the program when a number of clients asked her about LPM, especially in connection with RFPs. At the time, she frankly wasn’t sure exactly how LPM worked, so she asked her practice group leader whether it made sense for her to get certified. The program was approved and the firm paid for it.

This program is offered via distance learning, conducted by phone and email, and organized into two modules. In Module One, participants review over 300 pages of readings from 10 project management textbooks and answer 18 essay questions about how these concepts apply to their practice. One of Judith’s Module One answers was so interesting that we ended up including it in the recently published fourth edition of our Legal Project Management Quick Reference Guide. (See page 90 for the section entitled “Process improvement to improve associate and paralegal time entries.”)

In Module 2, participants apply the concepts in their practice. Judith developed an “Employment law task list for a pre-complaint demand” (which is also reproduced in the Legal Project Management Quick Reference Guide on page 63). Her short-term goal – to take a more systematic approach to a case she was working on – was met. Her long-term goal – to simplify these task codes and get them adopted firmwide to improve client satisfaction, budget predictions, and profitability – has proven to be more elusive than she originally hoped.

One of the challenges Judith faced in getting other lawyers to accept her approach was the elephant in the room for all attempts to increase efficiency: compensation. As long as lawyers are paid more for billing more hours, efficiency is a two-edged sword. While reducing hours is often essential to make work profitable for the firm, it is almost impossible to motivate lawyers to spend fewer hours if they will be paid less as a result.

A few years ago, Jackson Lewis made headlines by announcing that associate pay would be tied to measures of client satisfaction and efficiency rather than the number of hours billed. In our view, this is the wave of the future for successful firms. But until firms make this transition, some aspects of the quest for efficiency will face resistance.

Another barrier to widespread adoption is that many lawyers believe that they are already LPM experts. After all, they’ve been planning budgets, scheduling tasks, managing teams, and communicating with clients for their entire careers. While it is certainly true that they have been doing these things well enough to succeed in the past, it does not mean that the same techniques will lead to success in the future.

Almost everyone agrees that the legal profession is changing. Clients are becoming more demanding, and competitors are improving LPM to meet client needs. These days, to retain current clients and win new ones, law firms must apply a new and more systematic approach to LPM. Those who fail to do so will be left behind.

Judith says that in the two years since her program concluded, she has continued to apply many of the lessons she learned in both in her litigation and non-litigation matters. For example, she now develops comprehensive project plans in advance of starting work on any major matter. This change has helped increase client satisfaction and profitability, especially on her fixed fee matters. She’s also learned not to worry about all the possible ups and downs and the unexpected events that can happen during a matter, such as colleagues taking leave or new people joining the firm.

These days, Judith also devotes more energy to communication issues: “Who needs to communicate what to whom and when?” When something as drastic as a final deadline for a court filing changed in the past, there was not always consistent communication about that deadline and how to work toward it. One thing she has done as a result of her LPM training is to plan ahead more consistently regarding all deadlines, communicating very clearly about who is responsible for the completion of each task, whether it’s a partner, associate, paralegal, or in-house lawyer for the client.

Nobody ever said LPM would be easy, and it would be a gross exaggeration to say that certifying a single lawyer will ever change the culture of an entire firm. But it has made a significant difference in the way Judith and some of her colleagues practice law at Davis Wright Tremaine.

December 28, 2016

Pricing legal matters (Part 4 of 4)

In the fifth edition of The Strategy and Tactics of Pricing, one of the most widely respected texts in this field, Thomas Nagle, John Hogan, and Joseph Zale noted that:

In many business-to-business markets, where high-volume repeat purchasers negotiate their purchases, buyers are ahead of sellers in thinking strategically…. Buyers have goals and a long-term strategy for driving down acquisition costs, while suppliers rarely have comparable long-term strategies for raising or at least preserving margins (p. 98).

The problem of salespeople discounting too deeply in order to close deals is also common in other businesses:

Customer satisfaction can usually be bought by a combination of over-delivering on value and underpricing products… The purpose of strategic pricing is to price more profitably by capturing more value, not necessarily by making more sales (p. 4).

Nagle’s text goes on to describe five basic concepts that can be used in any profession, including the law, to improve the way prices are set:

1. Differentiate. You may have heard legal marketers use this word quite a bit, and it is just as important to pricing experts. The features of a law firm that add differentiating value must be communicated to the client. Are you different because your legal project management expertise makes you more efficient than others or because you communicate progress better? Let the client know.

2. Communicate value. According to Nagle:

In our research, we have found that business managers rated “communicating value and price” as the most important capability necessary to enable their pricing strategies (p. 72).

Nagle makes special note of the value of an endorsement from a client known to be discriminating. For example, in the health field, Kaiser Permanente has an excellent reputation for being an informed buyer. As a result, “When other hospitals and health maintenance organizations (HMOs) learn that Kaiser Permanente has adopted a more expensive product or service, they assume that its price premium is cost-justified” (p. 75).

3. Have a clear and consistent pricing policy. It is important to have a clear and consistent pricing policy and to avoid commonly granting price exceptions. Discounting to win business creates client expectations of future discounts. In setting up your policies it is important to keep in mind that people are more affected by perceived losses than perceived gains, and you should frame your pricing with this in mind. If the client is offered a service package, it is better to have a policy that allows a reduction in cost if a service is dropped (a perceived gain) than a policy that requires an extra fee to get that service (a perceived loss).

4. Know your market segments. Clients are not all the same; they fall into different market segments. The Strategy and Tactics of Pricing gives an example of a company selling a scientific device to be used in DNA analysis. The device is a great improvement over existing competitor products and the company estimated the differentiation value in order to set a price. However, the company sold to two different market segments—the industrial market and the academic/government market. The differentiation value was not the same in industry and universities, so the ultimate pricing strategy involved different pricing policies in the two segments. As long as this policy is clearly stated it does not violate consistency requirements. Airlines do this all the time when they distinguish between refundable fares for business travelers and nonrefundable fares for vacationers with flexible schedules.

5. Know your client types. Within a given market segment there may be different classes of clients, and knowing their classification may help you to deal more intelligently with each group. The Strategy and Tactics of Pricing divides clients into four categories:

a. Value-driven clients have sophisticated analysis strategies for studying value-added, and you will need to work to establish your value-added for them.

b. Brand buyers (also known as relationship buyers)—For this group, the cost of analyzing value-added is perceived as too high. This “buyer will buy a brand that is well-known for delivering a good product with good service without considering cheaper but riskier alternatives” (p. 105). This is an easier client to deal with so long as you do not disappoint them.

c. Price buyers are looking for a specified service at the lowest possible price. Here you will need to “strip out any and every cost that is not required to meet the minimum specification” (p. 107). It is also important to fence off this job so that more lucrative clients who receive a higher level of service understand that this lower-priced work is at a different level.

d. Convenience buyers “don’t compare prices; they just buy from the easiest source of supply” (p. 108). They know that they are paying a premium for immediate convenience and will not complain.

But whatever price strategy a law firm uses, the simple fact that they are paying more attention to this area will have positive effects. In their book, Law Firm Pricing: Strategies, Roles, and Responsibilities, Toby Brown and Vince Cordo give this example:

Lawyers live in a reputation world, and [financial] monitoring exposes that reputation to risk. Once lawyers realize that others in their firm can see their financial performance on matters, their behavior often changes. In one example, a lawyer was losing money on the first phase of a fixed fee arrangement. Once a monitoring program was put in place, performance on the second phase dramatically changed, leading to a reasonably profitable result (p. 39).

This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.

December 21, 2016

Pricing legal matters (Part 3 of 4)

If law firm management has trouble defining profitability, it can hardly be surprising that lawyers are confused by the concept. Several of the AmLaw 200 firm leaders I interviewed for my book, Client Value and Law Firm Profitability, expressed frustration with the implications, including these two:

Lawyers don’t understand what profitability means or how they can influence that number. So it’s a case of sometimes being focused on revenue, but not necessarily the right revenue, because they don’t understand the profit trade-off. They say they’ve got an account that’s giving two million dollars a year. Well that’s fine. But if you’re getting a three-percent profit margin, stay in bed.

We’re still struggling with trying to communicate to our billing attorneys that when you agree to a 10% discount or a 20% discount, you’ve probably given away 100% of your margin. They don’t get that. They say, “It’s only a 10% discount.”

In the interest of improving understanding, Stuart J T Dodds, the director of global pricing and legal project management at Baker & McKenzie, has proposed in his book, Smarter Pricing, Smarter Profit, that when lawyers price matters, they focus on his simple 1-3-4 Rule™:

For every one percent improvement in price, the potential increase to profitability is three percent. To get the same level of improvement in profitability without increasing price, you would need to work four percent more billable time (p. 36).

Dodds goes on to explain that these numbers are an approximation and that the precise relationship depends on the firm’s margin (p. 38). He even provides a table showing exactly how discounts from 1% to 20% reduce margin for firms whose margin before discount ranged from 20% to 50%.

But for the vast majority of lawyers, the 1-3-4 Rule™ will be enough and will be a great way to simplify a mathematically complex relationship.

Smarter Pricing, Smarter Profit goes step by step through everything lawyers need to know to survive and prosper in today’s rapidly changing marketplace. It is divided into four main sections: set the price, get the price, manage to the price, and review the price. So setting an initial price is just the start of the process. LPM is vital for actually living within that price and collecting profit. Dodds notes that:

When getting started on a project or matter, there are three important themes it is important to address at the outset… better communication, greater clarity, and easier review. These break down into 10 key steps for those responsible for leading a matter:

  1. Confirm what the client wants and expects
  2. Group the work into the main areas
  3. Agree how to address changes of scope up front
  4. Develop and agree on the matter plan
  5. Agree on the fee and fee approach
  6. Agree on the engagement letter and share with the team
  7. Agree on the reporting format and schedule
  8. Establish your matter phases and tasks
  9. Approve new timekeepers
  10. Staff the core team and agree on client responsibilities (p. 222)

Taken together, all of the observations in this discussion of pricing could be interpreted as reflecting a glass half-empty (so much remains to be learned) or half-full (firms are moving quickly to focus more on the pricing function). It may make you feel better to know that the law is not the only profession that could greatly improve its pricing strategies.

This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.

December 14, 2016

Pricing legal matters (Part 2 of 4)

There are many challenges in defining law firm profitability and then managing the firm to become more profitable. For my book, Client Value and Law Firm Profitability, I conducted in-depth interviews with managing partners and other leaders of 50 firms from the AmLaw 200. One question I asked was, “If you compare profitability for two lawyers in your firm, is there a software program or formula used to calculate profitability or is the comparison more intuitive?” (p. 52). Seventy-four percent said profitability in that case was defined by a program or formula, but 26% said it was more intuitive.

As one senior executive put it:

We don’t calculate profitability by formula. It’s really seat of the pants.

The managing partner at another firm put it this way:

Profitability is to some extent in the eye of the beholder. We’re still looking for good tools to evaluate what is profitable and what is not.

Other evidence suggests that even the firms that have formulas are measuring profitability in a variety of different ways. A growing number of software programs are available to handle the calculations. The two long-time leaders in the field—Intellistat Analytics from Data Fusion Technologies and Redwood Analytics from Aderant—have been providing sophisticated tools to quantify law firm profitability for several decades. But to use these tools one must make a series of assumptions, and that’s where the trouble lies.

At the LMA P3 conference a few years ago, Jeff Suhr, senior vice president of products at Data Fusion Technologies, noted that his company then had 91 clients actively using their tools, including 10 of the top 35 AmLaw firms. Exactly how did these 91 clients calculate profitability? Ninety-one different ways. The fundamentals were the same but there were important differences in the details, which can have significant implications for the way profitability is interpreted and used to motivate changes in behavior.

Suhr distinguished between the relatively straightforward science of calculating profitability and the art of determining the exact methods that best fit the needs of each firm. He also discussed the different challenges of “macro strategies” for analyzing profits for a firm, an office, or a practice group vs. “micro strategies” for analyzing a book of business or a particular matter. These sometimes require different assumptions and different approaches.

As Suhr summed it up:

The right way to measure profitability is one that is accepted in your firm. The art is to measure it in a way that keeps everybody happy.

In an email exchange, Donald Ware, chair of Foley Hoag’s Intellectual Property Department, summed up the state of the art more critically:

I’ve never heard of a law firm that has a good way to measure matter profitability. Many say they do, but when you push on the details it becomes clear that they really don’t.

This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.

November 30, 2016

Pricing legal matters (Part 1 of 4)

When it comes to offering fee estimates at the start of a matter, far too many lawyers still rely on ballpark estimates that they sometimes pull out of thin air. But even if you follow the “high detail” estimation techniques described in our Legal Project Management Quick Reference Guide (p. 152), the fact that you have a budget does not necessarily mean that you have a price which should be quoted to a client.

Wikipedia lists 25 different pricing strategies suppliers use in other businesses, ranging from loss leaders to premium pricing. The two that are used most often in law are cost-plus and value pricing.

Cost-plus pricing is similar to the traditional hourly billing approach and is exactly what it sounds like: a price is based on the cost of delivering a service plus a markup or profit margin. Normally the markup is already built into the hourly rate, so with this approach you could in fact quote your budget as the price.

Some of the most popular new alternatives for lawyers are built around the idea of value pricing, where the client’s perception of value is the most important factor. The best-known proponent of this approach is Ron Baker, author of several books on the topic. In practice, value pricing is much harder than it sounds. (For details, see chapters six and seven of my book, Legal Project Management, Pricing, and Alternative Fee Arrangements.)

In today’s highly competitive marketplace for legal services, where some firms seem downright desperate for new work, price competition is a giant wild card.

In his book Growth is Dead: Now What? legal consultant Bruce MacEwen has described:

“Suicide pricing” in response to RFPs. These are bids—from name-brand firms, mind you—that are so breathtakingly low one wonders how they could possibly make any money. The short answer is they can’t. These bids come in 5, 10, 20, 40% under what my clients think would be reasonable for the matter. But… firms in an industry with excess capacity face an almost irresistible compulsion to cut prices, even to unprofitable levels. The goal is simply to keep people busy, in service of keeping the firm alive and satisfying clients, and in the hope that once market conditions recover, everything can get back to normal.

The bad news for most law firms is that low prices are the new normal.

When Altman Weil’s Law Firms in Transition survey asked 356 managing partners and chairs of US law firms about current trends which represented a permanent change in the legal landscape, the top trend was “more price competition.” Ninety-five percent of respondents said this was a permanent change in the legal profession. (Interestingly, number two on their list was a “focus on improved practice efficiency” or LPM, which was rated as a permanent change by 93% of respondents.)

Another challenge is posed by the growing popularity of alternative fee arrangements. When the same survey asked, “Compared to projects billed at an hourly rate, are your firm’s non-hourly projects more profitable or less profitable?” 28% said non-hourly matters were less profitable. Of the remaining respondents, 18% said non-hourly arrangements were more profitable, 42% said they were about the same as hourly, and 13% were “not sure.”

Would you invest in a company that didn’t know which deals were profitable? Of course not. But if you are a partner in a US firm with 50 lawyers or more, there’s a 13% chance you already own one.

A few years ago, an AmLaw 100 firm that was just beginning to think seriously about pricing invited me to speak at a practice group leader meeting about pricing trends. When one participant asked what I thought was the most critical issue, I said it was determining the difference between low prices that are acceptable and prices that are simply too low to make business sense for that firm. “Where do you draw that line in the sand?” I asked. The chairman replied, “We don’t even know where the sand is.”

But that was then. Now that same firm has a pricing director and a number of new pricing and management initiatives in place.

This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.

October 19, 2016

Four ways to simplify legal process improvement (Part 1 of 3)

By Jim Hassett and Tom Kane, LegalBizDev

Traditionally, lawyers have been trained to place enormous emphasis on avoiding risk, and little or no emphasis on increasing efficiency. As Ron Friedman put it:

Clients often want to know if there are any major risks: “Let me know if there are any boulders in this playing field.” Lawyers often hear that and think they need to find not just the boulders, but also the pebbles. The fear of being wrong—and of malpractice—runs deep. “Perfection thinking” makes it hard to approximate, to apply the 80-20 rule, [or] to guide in the right direction but with some imprecision.

But as in-house departments are increasingly pressured to control costs, they in turn are pressuring outside law firms to find ways to increase efficiency. Business process improvement is one path to the lower costs that many clients are demanding.

While there is widespread agreement that clients also want legal project management (LPM) and that it pays off for firms, the field is so new that experts still disagree about exactly what should be included and excluded from its definition. These arguments have slowed LPM’s progress.  For example, consider these remarks from one AmLaw 200 firm leader we interviewed for the book Client Value and Law Firm Profitability (p. 89):

We were just at a board meeting last week where we were talking about whether we should do formalized project management training. My answer to that is obviously yes, we absolutely should. But first we need to agree on what legal project management is.

We first became aware of the seriousness of this problem a few years ago when the director of professional development at an AmLaw 100 firm asked us to explain the differences between project management, process improvement, Six Sigma, and Lean. This was an extremely sophisticated client who had been researching this area for months, but she had heard so many different claims from competing consultants that she had trouble keeping them straight.

Process improvement, has gotten a lot of headlines in the legal world as a result of Seyfarth Shaw’s highly publicized success in using it to streamline work, along with Six Sigma and Lean. All three approaches originated in the world of manufacturing.

Six Sigma is built around techniques Motorola developed to eliminate the causes of manufacturing defects and errors. Lean was developed by Toyota to increase manufacturing efficiency by eliminating the “seven wastes” (excess inventory, excess processing, overproduction, transportation, motion, waiting, and defects).

Process improvement typically starts by defining the exact steps that are required to perform a legal process. This includes looking at every process from the client’s point of view, analyzing whether each step adds value for the client, and eliminating the steps that don’t.

Writing in Law Technology, Alan Cohen has noted that this traditional approach “can take weeks to create a map, but the result is a template that spells out the various phases of a matter—and an efficient way to do them.” If you consider the fact that Seyfarth has developed over 500 process maps, each of which took a team of lawyers and staff weeks to develop, you can see why Six Sigma for Dummies (p. 10) says the approach is “not for the faint of heart. It is intense and rigorous, and it entails a thorough inspection of the way everything is done.”

In my book, Legal Project Management, Pricing and Alternative Fee Arrangements, I described how Seyfarth has spent more than 10 years and millions of dollars refining its system. They have trademarked the term SeyfarthLean® and formed a separate company—SeyfarthLean® Consulting—as a wholly owned subsidiary which offers advice to law departments on how to work more efficiently.  However, the Seyfarth model has been so widely publicized that some law firms think that LPM equals process improvement.

We have frequently argued for a much broader definition of LPM, including any activity that increases client satisfaction and firm profitability by applying proven techniques to improve the management of legal matters. Thus, we see LPM as an umbrella term that embraces a very wide range of management techniques, including pricing, communication, process improvement, and much more.

Under this broad definition, process improvement, Six Sigma, and Lean are simply specialized approaches that fall under the more general umbrella term LPM. They are simply tools in the belt, to be used in some cases and ignored in others.

And when they are used, we recommend always looking for simpler and more efficient approaches, starting with the four approaches described in the next two parts of this series.

This post was adapted from the recently published fourth edition of the Legal Project Management Quick Reference Guide.

 

[1] http://www.prismlegal.com/wordpress/index.php?p=1026&c=1

[2] http://www.dailyreportonline.com/id=1202566995546/How-six-big-law-firms-get-serious-about-legal-project-management

[3] Link to the book on Amazon

May 11, 2016

Task codes and budgeting: What works and what doesn’t (Part 1 of 7)

By Jim Hassett, Jonathan Groner, and Steve Barrett

This is one of the longest series of posts in the eleven year history of this blog, because there is currently so much controversy about the best uses of task codes.  A much shorter summary of this research was published recently by the Bloomberg BNA Corporate Counsel Weekly and reprinted in the Bloomberg BNA Corporate Law & Accountability Report. 

In 2012, we published an article in Of Counsel entitled “Tracking Legal Costs with Task Codes: Different Firms Take Different Approaches.” Since then, the number of firms using task codes has grown dramatically and a consensus has started to emerge about what works best.

This series of posts summarizes new conclusions and recommendations based on our experience working with lawyers in numerous firms, on published reports by a number of experts, and on interviews we recently conducted with 12 experts who have had significant experience using task codes to plan and track legal budgets:

Nicole Beck, Senior Client Value Pricing Lead, Reed Smith

Diane Bertrand, Partner, Fasken Martineau DuMoulin LLP

Toby Brown, Chief Practice Management Officer, Perkins Coie

David Cohen, Lawyer, Project Management, McCarthy Tétrault

Stephanie Flitcroft, Director of Pricing, Loeb & Loeb

Bill Garcia, Chief Practice Innovation Officer, Thompson Hine

Sam Goldblatt, Partner, Nixon Peabody

Jon Hulak, Director of Pricing and Client Service, Mintz Levin

Keith Maziarek, Head of Strategic Pricing, DLA Piper

Megan Panchella, Legal Project Manager, Reed Smith

Robert Parker, Practice Group/Client Matter Management Administrator, Quarles & Brady

Scott Wagner, Partner, Bilzin Sumberg

To maximize the frankness of participant responses, we promised that while their names would be listed in our research summary, no quote would be attributed to a particular person or firm. In addition, all of them reviewed a pre-publication version of this section of this summary and had an opportunity to remove or edit any of their quotes before publication.

The main reason that these and many other experts have increased efforts to implement task codes over the last few years is easy to understand: To remain competitive in an ever more challenging marketplace, firms are being forced to predict and control legal costs better than ever before.

Several of the people we interviewed reported that their use of task codes had already produced a payoff:

We have seen immediate benefits in tracking our alternative pricing arrangements and working to budget. The use of task codes takes the guesswork out of the budget.

Some partners have actually landed new work because the firm has a task code system in place. A number of potential clients won’t even deal with a law firm that doesn’t have such a system.

Task codes have been useful in helping track matters against budget, so they are already paying dividends.

We use task codes to price better, to help attorneys manage better, to determine what our profitability drivers are, and to make the business case for alternative staffing models.

Task codes make it easy to have a conversation with the client who wants to know where things stand in terms of the matter and its budget. For us, task codes have also been an integral part of the AFA process. We can offer a flat fee for, say, a motion to dismiss because we can see how much a motion to dismiss has cost us historically. Also, task codes help attorneys see the budget vs. actual reports for any matter and see what, if anything, has changed from the original budget. Was there a change in scope?

Even at firms where there has been resistance to using task codes, the lawyers that have used them have reported benefits:

In my personal practice, the use of phase codes has been very helpful in improving estimating and budgeting.

One expert we talked to has developed about 10 different templates so far for various transactions:

If an attorney is starting one of those types, he or she just goes to the template and builds a budget. These templates can compare actual versus budgeted time on any phase of the matter. You simply look at a picture of what the transaction will probably be in advance and compare it to what actually happens. In addition, there is another advantage: You never forget anything. The template prompts you to remember each needed step, and each task within the step, so you budget better as a result.

Originally we included a brief history of the most widely used system – UTBMS, the Uniform Task-Based Management System – starting from the fact that the system was designed in the 1990s primarily by clients who wanted to standardize e-billing and understand and control costs rather than by law firms who wanted to predict costs.

Many clients, especially in insurance defense, require law firms to use task codes in e-billing as a condition to getting paid.

Unfortunately, what started out as an effort to create a universal language for analyzing legal work later evolved into a system in which many clients tweaked the system to fit their unique demands. For example, in 2007 the UTBMS Insurance Update Initiative issued a slightly revised set of codes to better meet the needs of insurance companies.

As one expert put it:

Sometimes it seems every client wants to use a different set of task codes. For example, one Fortune 50 firm doesn’t use L-codes [for litigation], it uses what they call K-codes. If the clients think the codes don’t tell them what they want to know, they just make up some new codes.

Another summed up the situation like this:

The problem with standards is that so many people have different ones.

In some cases, a single lawyer may have to use two different codes for exactly the same type of work performed on the same day for two different clients. If one wanted to maximize human error, it would be hard to come up with a better system.

This problem is so common that some legal financial software vendors have added automatic translation features so that all the lawyers in a firm can use one standard codeset and have it automatically translated into different codes for different clients. However, these algorithms require painstaking mapping and assume that there is a one-to-one correspondence. If a code in one system overlaps with two or more codes in another system, no algorithm in the world can do an automatic translation.

Despite these barriers, in the last few years many law firms have invested significant effort in using task codes to better track time and cost and ultimately to respond to client demands for more predictable costs. The remainder of this series will explain six key lessons they have learned to date:

  • Use standard UTBMS codes whenever possible
  • Avoid excessive detail; focus on phases not tasks
  • Train lawyers and staff to use the codes
  • Use task codes selectively rather than on every matter
  • Limit retrospective analysis of past matters
  • Create an internal code for work that is out of scope

This series was adapted from the Fourth Edition of the Legal Project Management Quick Reference Guide which will be published this fall.

February 24, 2016

The evolving role of directors of legal project management (Part 3 of 3)

By Jim Hassett and Jonathan Groner

In addition to pricing, several of those interviewed stressed process improvement, as in these examples:

I spend most of my time working with practice group leaders and individual partners to identify problems and opportunities for increased efficiency for the firm.

My major goal is to educate the lawyers on process improvement solutions, to make their jobs easier.

My chief goal is to help attorneys constantly plan their matters well and to think of new ways to do the firm’s work. This is particularly useful in IP, because patent and trademark prosecutions often involve the same steps repeated in the same way, so careful attention to each step can save time and effort.

Our major achievement has been to teach lawyers how to deliver legal work in the most efficient way through process maps which show the most efficient paths to achieve a variety of legal goals. For clients, the results are reduced costs, greater predictability and transparency, more efficiency, better use of technology, and better legal and business outcomes.

Several people we interviewed also mentioned their role in helping lawyers to think more clearly about profitability:

My group has helped introduce the concept of profitability of a particular engagement into the law firm’s thinking. Profitability is not the amount that is billed; it is, broadly speaking, what remains after paying associates and everyone else who is involved in the matter.

A few mentioned improving communication. One said that:

The major advantage of LPM is to improve communications between the firm and its clients so that the client can understand what is going on at all times. We also use end-of-case reviews to evaluate what we did right in a case and what could be improved.…Through the appropriate use of LPM, I believe our firm can improve its realization by two percent annually on a consistent basis.

Several talked about working directly with clients, as in these examples:

My work is heavily client-driven, since the firm’s clients are much farther along in their understanding of value and efficiency than some of the partners are. My role is to be a liaison between the firm’s clients and its partners…. The firm’s partners let me work directly with clients and understand what makes them tick. My job is to work with each client and to find out exactly what they’re looking for from us. Do we want to partner with our clients to utilize new technology and to take advantage of innovation? Do we want to propose arrangements based on reduced rates and still remain profitable?

For the next year, my priority is to increase my visibility in client meetings—attending them more often and serving as more of a support system for the partners.

Whether it’s the result of differences in firm culture or in the way that LPM director roles have been defined by management, there are differences in the degree of lawyer acceptance. On the positive side, one respondent reported:

While there are pockets of resistance, they are not vocal or persuasive.

More commonly, there was greater resistance to LPM:

In my director role, I need to have a thick skin vis-à-vis the attorneys. You are talking about people who have worked the same way for years. You can’t force people to change.

My most important challenge is building relationships with the partners and developing their trust.

The biggest barrier to success is the need to instill a sense of urgency among the attorneys. 

My major obstacle, in addition to technology, is dealing with a subset of partners who want to do things the way they have always done them.

I have a real question whether most lawyers have the resiliency to make changes in the way they practice law.

Another common theme was that the resources available for LPM are too limited. Indeed several directors described lack of time as their single biggest problem:

The biggest obstacle to achieving my objectives is the number of hours in a day.

Everyone is too busy. I just wish I had more time to show everyone the framework that’s in place. 

We know that our clients all over the world are interested in budgeting. We need to have the resources available in our department to answer all these client questions. 

The question is, how do we staff everything when we have so few people to achieve all our goals?

This high demand is a good thing in that it proves that LPM directors are making progress in showing attorneys the benefit of LPM. But it also implies that going forward the biggest questions for firm management will be how much to invest in LPM and which activities produce cost-effective changes most quickly.

Our 15 interviews revealed 15 approaches to these tactics, some of the differences subtle and others quite significant.

To those views we would add a 16th opinion about what works best, based on our experience working with a number of firms. Our general approach is summarized in our article “LPM: An evolving process” in the February issue of Managing Partner magazine. As we wrote there:

Too many firms act as if hiring an LPM director and/or a pricing director will solve all their problems. This is clearly part of the solution for many firms, but it only works if partners are committed to changing their approach.

LPM and pricing directors are hungry for information about what works and what doesn’t.  A number of thought leaders have banded together to form the True Value Partnering Institute , described on its web page as “an invitation-only virtual Think Tank… [which organizes] Cohorts which meet several times via one-hour conference calls and can also participate in specialty topic Sub-Groups to collectively explore topics of interest.”  For example, their “Legal Project Management Leaders” Cohort has a sub-group devoted to “Defining the Role and Measuring the Value of a Legal Project Management Director.”

As a result of our interviews, we recently expanded our LPM Acceleration Program to include a wider variety of services to support in-house LPM directors, as well as access to the proprietary scripts and guidelines we have developed over the last several years.

Whether a firm accepts our recommendations or those of others, the most important conclusion from this research is that firm management must play an active role in defining the best way to implement LPM. Fundamental questions regarding the firm’s business approach to profitability and client satisfaction are simply too important to be delegated.

As we reviewed all of our findings, the good news was that these 15 firms and many others are devoting significant resources to meeting client demands for greater efficiency, and that all of them are making progress.

But there is still a great deal of work to be done and LPM directors currently disagree about the best approach to using limited resources. The challenge is to find the tactics that will produce the greatest benefits for each firm, in the most cost effective way possible.

All this at a time when the pace of change needs to increase. In our survey of Client Value and Law Firm Profitability, when we asked AmLaw 200 leaders, “Will firms have a competitive advantage if they change more quickly?” 85% said yes, they would.

At the end of the day, the burden is on the partners who own each firm and on the firm’s management committee to review all the conflicting opinions about LPM tactics and make the best decisions they can in an uncertain environment.

The stakes are high. As one senior executive in our AmLaw 200 survey (p. 11) put it:

I think the market’s going to shake itself out. [And] I think [firms] that can’t do this will fail.

 

A white paper which summarizes this entire series, and describes our LPM Acceleration Program can be downloaded from our web page.