Bloomberg BNA: Can in-house counsel help law firms become more efficient?
Jim Hassett: Absolutely. Many law departments need to become more efficient themselves if they expect their firms to deliver better service. A few years ago, an AmLaw 100 Chairman I interviewed for an earlier research report (The LegalBizDev Survey of Alternative Fees) noted that “It is very difficult for a law firm to tell a client that a matter is not going well because of what is going on in the legal department. I think we’ve all had experiences over the years with in-house counsel who are not good managers… [This] can increase cost and reduce the quality of outcomes.” Another participant echoed this theme when he described some problems he was having with a very large client but noted, “I am reluctant to tell [the GC] that his own people cause a fair amount of inefficiency, because he’s not going to want to hear it.”
My new book lists the top three things clients should do to increase value:
- Define objectives and scope at the beginning of each matter
- Increase transparency about client needs
- Improve in-house project management
As one chair summed it up, “Clients have to jointly work with us to figure out what it is they want us to do less of in order to meet their expense goals. You can’t do scorched-earth approaches to matters at reduced fees.”
Bloomberg BNA: How are new staff roles contributing to profitability?
Jim Hassett: In 2012, Jonathan Groner and I wrote an article for Bloomberg Law Reports entitled “The Rise of the Pricing Director.” At that time, despite extensive networking, we were able to find only a handful of people who held the title of pricing director in a law firm or performed that function. Law firms generally move a little slower than glaciers, but the growth in pricing directors in the two years since has been meteoric. According to a 2014 survey by ALM Legal Intelligence, “Seventy-six percent of big firms now employ some sort of pricing officer. And these positions are in the midst of a remarkable growth spurt.”
With 20/20 hindsight, it is easy to see the reason for the rapid growth of the pricing director title and function. The well-documented changes in the legal profession over the last few years have placed intense pressure on profits. It is therefore not surprising that a new host of high-level executives has emerged to help law firms set their prices in a way that will help them to maintain profitability.
Many firms agreed on the value of hiring people with business backgrounds and empowering them to use their skills to help lawyers make crucial decisions on pricing and efficiency. As one managing partner put it: “I think what’s had the greatest positive effect is our business managers. They can much more impartially sit down and analyze profitability. They build up a database of what it costs us to do things, and they’re just invaluable. They work with enough lawyers that they’re able to focus on the numbers and their minds work differently… These non-lawyers are focusing on the business side of the equation and what it costs to do things, pushing back and helping lawyers have a little bit of backbone. They can now show them a model and say, ‘No, that’s too low, you’re going to lose your shirt.’”
Bloomberg BNA: Is profits-per-partner a good metric to measure a law firm’s influence?
Jim Hassett: In my opinion, it is definitely over-emphasized. Unfortunately, when lawyers talk about profit, many think first and foremost about profits per equity partner, the figure publicized in the American Lawyer annual rankings of the top 200 firms. This is widely perceived as a sign of financial health and sometimes used to recruit laterals to higher profit firms. It is also misleading.
In any other business, profits are defined as the revenue that is left over after all expenses have been paid. In the law, partner salaries come out of the “partner profits” pool. In a law firm, if there were no partner profits, partners would be paid nothing for their work. This leads to considerable confusion. For example, one managing partner in our study said: “As a partnership, everything we make above our cost is profit. I once had a lawyer who stood up and said, ‘How did we lose money this month?’ I said, ‘We didn’t lose money, we just didn’t make as much money as we would have liked.’ It’s very hard for a law firm to lose money, that is, be in a situation where you’re not paying your partners anything.”
In other businesses, companies analyze which product lines and groups are most profitable, and they act on that information by fixing or discontinuing unprofitable products or people. In law firms, the focus on total profits per partner distracts people from one of the most critical questions in today’s competitive legal marketplace: which matters, practices, partners, and offices make money and which don’t?
If that’s not bad enough, there are a number of other problems with these figures, starting with the fact that they are not audited. An August 22, 2011, ABA Journal article by Debra Cassens Weiss reported that “More than half of the nation’s top 50 law firms could be overstating profits per partner to the American Lawyer magazine… An analysis by Citi Private Bank Law Firm Group reportedly found that 22 percent of the top 50 firms overstated profits per partner by more than 20 percent in 2010. Another 16 percent inflated partner profits by 10 to 20 percent, and 15 percent boosted partner profits by 5 percent to 10 percent.”
Bloomberg BNA: Will the legal market ever “bounce back” from the recession, or do law firm partners now need to learn how to excel in a totally different environment?
Jim Hassett: Most of the people we interviewed believe that the world has permanently changed, like the managing partner who said: “The way law firms deliver legal services to clients is undergoing a huge revolution. It’s going to change before our eyes in the course of a very short period of time. And it’s all being driven by clients who want to get value for their money.”
As the chair of another firm summed it up: “I believe that we’re still in the beginning of the process. There are a number of famous economists who have talked about disruptive technologies and disruptive business processes. I think there’s a lot of evidence out there that this profession is being subjected to those pressures. Five years from now, if I turn out to be wrong, that will be great. But if I’m right, then I have to believe that those firms that adapt more quickly will have a competitive advantage, because the firms that don’t adapt quickly enough will be out of business.”
Adapted with permission from Corporate Counsel Weekly Newsletter Vol. 29, No.48, December 10, 22014. Copyright 2014, The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com.