194 posts categorized "Legal Project Management"

May 27, 2015

How to change law firm culture (Part 1 of 5)

By Jim Hassett and Tom Clay

Recently, Altman Weil was consulting with the senior management of a mid-sized law firm about its strategic plan and got into a discussion of the importance of measuring profitability by practice group, client, and matter. The CFO dismissed the idea; they had already tried that, he said, but it simply didn’t work.

A few years earlier, the firm had spent several hundred thousand dollars on software to measure profitability. Mathematically, the software was indeed a good way to calculate profitability by matter or by client. But when management tried to roll out the new system, there was an enormous amount of negative pushback from partners. The software was too complicated, partners said, and the assumptions too controversial.

More importantly, almost every lawyer who was told that a matter was unprofitable said there must be some mistake and questioned the way profitability was calculated. After months of acrimony and debate, the firm decided to simply stop using the software and put it on the shelf as a costly experiment that had failed. They wrote off all the time that had gone into choosing the software, installing it, and training lawyers to use it. Not to mention the initial investment of several hundred thousand dollars.

Mind you, management still felt that measuring profitability was an important and valuable strategy. Presumably, it just couldn’t be made to work in that firm’s culture. In any other business, the CEO might have required that the software be used whether people liked it or not. But many law firms are fragile partnerships where firm leadership simply does not have the power to enforce change.

In several decades of working with hundreds of law firms, we have seen many such examples where well-designed strategies have failed because partners refuse to embrace them.

Customer relationship management (CRM) software is another great example. Many firms have recognized the value of tracking client relationships more closely and invested six figures or more in technology to do that. But based on our unscientific count, CRM systems have failed at the vast majority of the law firms that have installed them, due to lawyers’ resistance to sharing information about their clients and their unwillingness to put in the hard work of tracking details in the system. Enormous effort was put into the initial stages of selecting software and implementing it, lawyers pushed back, and in the end management gave up and the money was thrown out the window.

The problem of failure to execute is not limited to software. “Key client programs” to improve service to top clients sound like a great strategy when they are committed to paper, but, when the time comes to act, many lawyers just keep doing what they’ve always done. Practice group planning is another problem area. When 81 managing partners responded to the Altman Weil Practice Group Performance Survey a few years ago, we concluded that “Law firm practice group performance… is mediocre at best across a series of measures.” For example:

Sixty-three percent of law firms say they have a formal Practice Group planning process, but planning quality is inconsistent and many firms fall short on plan execution. On average, on a scale of 0 to 10, firms rate the effectiveness of Practice Group planning at 6.0 and the effectiveness of plan implementation at a meager 5.6.

For every firm that has successfully implemented a strategic plan, several others have failed to execute.

We could go on, but there is really no need. You could probably add several recent examples from your own firm. As management consultants often say:  “Culture eats strategy for lunch.”  (The original quote has often been attributed to Peter Drucker, and a few years ago Curt Coffman wrote a book with that title.) 

Several decades of consistent financial success have led many law firms to develop cultures that are frustratingly resistant to change. As Richard Susskind noted in his widely quoted book, The End of Lawyers?, “It is not easy to convince a group of millionaires... that their business model is wrong.”

In a series of web articles entitled “Leadership and Culture,” Sean Culey noted that:

Every organization has its own unique culture, defined as the set of deeply embedded, self-reinforcing behaviors, beliefs, and mindset that determine “the way we do things around here…” It controls the way their people act and behave, how they talk and inter-relate, how long it takes to make decisions, how trusting they are and, most importantly, how effective they are at delivering results… Studies have shown again and again that there may be no more critical source of business success or failure than a company’s culture – it trumps strategy and leadership every time.

For example, consider the attitude toward perfectionism at many law firms.  As consultant Ron Friedmann wrote in his blog several years ago:

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, to guide in the right direction but with some imprecision.

When lawyers were getting paid by the hour and most clients didn’t seem to care how many hours it took to reach perfection, the mindset was reinforced by the compensation systems that are still found at most law firms: the more hours you bill, the more you are paid.

But clients are increasingly questioning hourly bills and/or asking for fixed fee alternatives. When realization goes down far enough, firms will gradually be forced to change compensation, as Jackson Lewis did when it announced that associates will no longer be compensated for billing more hours.  Instead, they will be rewarded based on factors tied to results such as efficiency and client service.

A slightly edited version of this series was originally published in the April 2015 issue of Of Counsel: The Legal and Management Report by Aspen publishers.  A pdf of that complete article “Strategies to Successfully Change Law Firm Culture: The Example of Legal Project Management” can be downloaded from our web page. 

 

May 20, 2015

New national survey links legal project management to financial benefits

Altman Weil has done it again.  Every spring they publish the most important survey of the year, and the 2015 Law Firms in Transition Survey they released last week is more thought provoking than ever.  (Full disclosure:  LegalBizDev is a strategic partner of Altman Weil, but I’d write this blog post even if we weren’t.)

Their 124 page report can be downloaded for free and summarizes the opinions of 320 managing partners and chairs on topics ranging from leadership to market forces.  I turned right to the section entitled “Efficiency of legal service delivery” and found data unlike anything I’d seen before.

For the last seven years, Altman Weil has found that the vast majority of law firm leaders say that there has been a permanent change in the legal profession increasing the focus on practice efficiency (this year 93%).  On the other hand, their surveys have consistently found that only a minority of firms are doing anything about it (37% of firms said that they had “significantly changed their strategic approach to the efficiency of legal service delivery”). 

What’s new this year is data correlating this strategic change to financial results to suggest that firms benefit financially by becoming more efficient. This can best be seen in profits per equity partner (up for 76% of firms that changed their approach to efficiency vs 61% of those that didn’t) and revenue per lawyer (up for 76% of firms that changed vs 62% of firms that didn’t).

While there is a great deal of anecdotal evidence that legal project management (LPM) improves financial results, this is the first national survey data verifying the link.

Similar results were found in this year’s data on AFAs.  Altman Weil reported that 68% of the firms that used non-hourly billing described it as “primarily reactive (in response to client requests),” while only 32% said it was “primarily proactive (arising from your belief in the competitive advantage of alternative fees).”  Interestingly, when the profitability of AFAs was compared to hourly work, the proactive firms were far more likely to say they were more profitable (29% vs 10%) and less likely to say they were less profitable (12% vs 41%).  Proactive firms have also been getting better at it.  When this question was first asked in 2010 only 17% of proactive firms said AFAs were more profitable than hourly work, compared to 29% this year.

While the survey did not directly ask why profitability was improving, there are only two possible answers:  either matters are being priced better at the outset, or the work is being performed more efficiently within budget.  We have no doubt that both are true for proactive firms.  And given the intense competition that is often driving prices below desired levels, our guess is that LPM was the more important of the two.  

As a reformed academic, I feel it is necessary to add two caveats to our claims about LPM and profitability.  The first is that there is still some controversy about exactly how to define LPM, and our statements above apply to the broad definition we use, as described in my book LPM, Pricing, and AFAs.  When Altman Weil asked firms how they were increasing efficiency, seven of the eight factors they mentioned come up routinely in our LPM coaching:  technology, knowledge management, training, contract lawyers, paraprofessionals, using non-law firm vendors, and re-engineering work processes.  (The eighth efficiency factor is usually not involved in our coaching, but is extremely interesting:  an amazing 49% of firms now say that they are “rewarding efficiency and profitability in compensation decisions.”)

The second caveat could come from my brother the mathemetician, who likes to remind me that a correlation does not prove causality.  Of course, technically he’s right.  But if I were a managing partner in this highly competitive profession, I would not wait for a long term double blind experiment to prove that the link was cause and effect.  I would just start promoting greater efficiency through LPM, and see for myself if it seemed to improve my bottom line.

Another thing managing partners will want to do is to improve efforts to understand client needs.  I found it quite interesting that of the ten tactics to improve client understanding in this survey, post-matter reviews came in dead last at 24%.  In our LPM coaching, this is often one of the first things we recommend, since it is so revealing of how clients feel about your work, and can be as simple as asking “what did we do well” and “what could we do better.”  (For a review of more sophisticated techniques, see the third edition of my Legal Project Management Quick Reference Guide.)  But in this survey, post-matter reviews finished far behind other tactics that are extremely useful, but far more difficult and expensive to implement such as participating in client industry groups (75%) and formal client interview programs (49%).

I was also interested to note that 61% of firms said that overcapacity is diluting their profitability.  Equity partners in 47% of the firms, and non-equity partners in 41%, simply need more work.  That’s one of the most common reasons behind what Bruce MacEwen has described as “suicide pricing” in his book Growth is Dead:  “Bids from name-brand firms… that are so breathtakingly low one wonders how they could possibly make any money. The short answer is they can’t.”  As the chair of one AmLaw 200 firm put it in my book Client Value and Law Firm Profitability (p. 80) “Lawyers will look at a case and say ‘I know you don’t want to get 70% realization on a $200,000 matter. But 70% of $200,000 is a whole lot better than 100% of nothing.”

There’s a whole lot more to be learned from this survey beyond the core topics of this blog.  So if you have any interest in how the legal profession is changing, I would strongly recommend that you download your own copy today.

If you don’t find it useful I’ll send you double your money back.  Oh wait.  It’s free.

 

May 13, 2015

How to solve delegation problems

A guest post by Gary Richards

 

Talented lawyers are sometimes bypassed for future assignments because they slipped a little on work that was delegated to them in the past. Partners may sometimes solve the problem by deciding to not put them on future assignments rather than giving them corrective feedback from which they could benefit.

For example, consider the following scenario: You have a competent set of lawyers and paralegals working with you on an important matter. However, one of the more legally talented members of the team has recently been coming in late with assigned tasks, or has not done it exactly as assigned, or both.

He always seems to understand exactly what you want when he accepts the task. After handing off a task, you always seek confirmation that he understands by asking questions like, “Do you have any questions?” or “Do you understand exactly what I want and when?” He always assures you that he has “got it.” Yet there is a recent pattern of incompleteness and lateness you would like to avoid in the future.

You are reluctant to complain to him because you know that he is quite busy working on other matters for other partners. By and large, his work quality is good and clients like him. You also don’t want to seem dictatorial when you hand off work for fear of insulting him or demotivating him, because you could really use his help if only he were accurate and timely.

However, unless this situation improves, you are considering not assigning him to any future work that is deadline-sensitive or has nuanced issues requiring significant attention to detail. That way you would save time dealing with his performance problem and wouldn’t have to waste your time coaching him on how to improve. You believe that any intelligent and experienced matter team members should do what he says he will do, on time. After all, you don’t recall anyone ever having to pressure you to correct your lack of detail or timeliness.

This is a fairly common situation. Unfortunately, deciding to save time by not assigning him to future matters is also fairly common. But it is a costly and shortsighted solution to deprive the offending lawyer of needed coaching. Furthermore, taking that approach would mean failing your responsibility as a partner to provide professional development of those working on your team.

The tension in this situation stems from your natural preference to avoid conflict, compounded by not knowing how to ensure clarity at the moment of handoff.

A better solution is grounded in two simple concepts: tactfully require people to repeat your instructions, and schedule a mid-point review.

 

Tactfully require people to repeat your instructions

When you encounter a performance problem like the one above, the best first step is not to ask “What is wrong with him?” Instead, ask “What can I do differently?” The truth is that getting work done on time, as expected, is usually much more dependent on how the work is handed off and monitored than it is affected by a flaw in the recipient.

The usual solution to this situation is to do a better job finding out exactly what he actually understands to be required and by when, no matter how well you think you have presented it. Simply asking a question like these will not uncover true understanding:

  • “Do you have any questions?”(Not really.)
  • “Is it clear what I need?”(I think so.)
  • “Do you understand exactly what I want and when?”(Sure, I’ll get right on it.)

Even if they are less than certain of the details, most people are not comfortable admitting that they are unclear or confused, especially if you outrank them. So those kinds of questions usually do not learn what it is they actually understand.

He may even demonstrate rapt listening and industrious note taking as you describe what you want, all creating the illusion of clear understanding even though some details may be missed. It is likely that the listener believes that he does understand it, because he is clear on what he thinks that he heard.

There is only one way to know for sure what he understand: Have him immediately repeat his understanding of your instructions so that you can compare what he says to your intended instructions. Such a request to repeat instructions received is rarely made because it could be taken as an insult to his ability or a veiled accusation of inattention. But there is a skillful way to request that instructions be repeated without being insulting or accusatory: Format the question as an “I” message, not as a “you” message.

Faulty way to request feedback of instructions (insulting and accusatory “you” message):

­Please repeat what I said so I can tell whether you got it all correctly.”

Effective way to request feedback of instructions (non-insulting and non-accusatory “I”):

“That was a lot of detail, Bob, and I described what I need pretty quickly. Would you mind repeating for me your understanding of those instructions and timing so that I can see if I said it clearly?”

As you listen to his repetition of your instructions, you can compare it with what you intended. In effect, this way you are comparing what is in his brain to what is in your brain. If you hear an omission or misunderstanding, you can immediately say, “What I meant to say was…” and provide the correction, possibly rephrasing it more clearly or in a different way to highlight its importance. It doesn't matter whether you did say it correctly the first time or not. What does matter instead is to correct the misunderstanding immediately, not to assign blame for the misunderstanding by saying something like, “No, you have it wrong.”

 

Schedule a mid-point review

Once it is established that the instructions are understood, the next thing to help ensure performance is to schedule a follow-up midway through the duration of the task. You have a right, even an obligation, to follow up to ensure that the work is on schedule, especially if there have been past problems with timely performance. Get agreement at the time of hand-off as to when you will follow up midway, and why. Unscheduled follow-ups like, “How are you doing on….” will appear that you don’t trust him. Also, he may have work appropriately scheduled on the task at a time closer to the deadline than when your surprise follow-up occurs, causing your question to be an unfair irritation that results in no information.

Instead, it is much better at the time the task is handed off to schedule a time-certain mid-point follow up. For example, if you hand-off a task on Wednesday and the deadline for completion is the following Tuesday by noon, say something like this: “How about I touch base around 10:30 A.M. Friday to be sure that you have everything you need and see if there are any questions?”

When a mid-point follow-up time like that is agreed upon, several things are put into play:

  • It becomes more likely that the doer will be further along in their work on the task by the follow-up time of Friday at 10:30 than if no follow-up had been scheduled
  • With that stated reason for the follow-up, the doer understands that it is to be a helpful event, not a sign of mistrust
  • You avoid having to interrupt the doer with “How are you coming?” whenever your anxiety compels you. Instead, you can relax until Friday at 10:30, knowing that you have plenty of time afterward to get things back on track if needed.

These two simple tactics can solve delegation problems, save you time by avoiding performance problems, and fulfill your obligation to constructively develop the skills of those working on your teams.

May 06, 2015

Tip of the month: Improve the way you manage your team

To provide clients with the value they are demanding, you may need to devote more time to actively managing the members of your team.  Start with these questions:

  • Who will have primary responsibility for completing each task on time, within budget?
  • Do they agree with your estimated schedule and budget for the task?  If not, discuss any differences of opinion before they begin the work.
  • Will they need any special help or support to successfully complete their assignment?
  • Should the team set up a regular schedule of very short meetings to assess progress and overcome any obstacles?

 

The first Wednesday of every month is devoted to a short and simple tip to help lawyers increase efficiency, provide greater value to their clients and/or develop new business. More information about this tip appears in the third edition of my Legal Project Management Quick Reference Guide.

April 29, 2015

Six challenges in defining law firm profitability (Part 4 of 4)

Law firms’ problems measuring profitability cannot be attributed to lack of trying. 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 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 starts.

At the 2014 LMA P3 conference, Jeff Suhr, vice president of products at Data Fusion, noted that his company had 91 clients actively using their tools, including 10 of the top 35 AmLaw firms (Jeff Suhr, “Best Practices in Leveraging Profitability Analysis to Better Price, Staff and Manage New Engagements,” presentation at the LMA P3 conference, Chicago, May 13, 2014).  Exactly how did these 91 clients calculate profitability? Ninety-one different ways. The fundamentals are the same, but there are 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.

For starters, you would think it would be easy to measure the revenue associated with a matter, but it’s not. John Iezzi’s Results-Oriented Financial Management: A Step-by-Step Guide to Law Firm Profitability (p. 132) noted that:

There are three different revenue numbers you can use. One is the accrual basis revenue number, which is hours worked multiplied by hourly rate. The second is the bills rendered number. And third is the cash receipts number.

The first two numbers reflect theoretical revenue. After client write-offs and write-downs, a significant amount of this may never be received. So a profitability system based on either accrual or bills rendered rewards lawyers for putting in more hours even if they produce no revenue. This is particularly troublesome with fixed fees and other AFAs, where lawyers with too little to do may pile on the hours “since it costs nothing and could help the client relationship.” Not to mention that in many firms attorneys get paid more if they bill more hours, whether the client ever writes a check for the hours or not.

In my LegalBizDev Survey of Alternative Fees (p. 118), one AmLaw 100 decision maker told us that:

It often happens that alternative fee matters, particularly large ones, end up being a dumping ground for individuals who may not be fully employed because you are reportable to the client for the result, not the cost. When lawyers work unnecessarily on a project your profitability looks bad, so in order to really determine the profitability, we need to deal with that issue.

As one chair in this research put it:

What you’re trying to do internally is change the mindset of the attorney who is used to billing hours. In the past, if you billed 2,000 hours, you were better than somebody who billed 1,200 hours. But with an AFA, you have to be more efficient and more concerned with delivering the value to the client in a way that makes this a productive relationship.

That’s why the best measures of profitability must ultimately be tied to cash received. But there’s no way of knowing that figure until a matter is completed and the bills are paid. In a large firm with tens of thousands of simultaneous matters, each on their own schedule, comparisons between matters must be based on a long list of assumptions about what will happen in the future, or postponed until the end of a case, which could take years to resolve. And this can lead to arguments and gamesmanship.

One senior executive at a firm that bases compensation partly on accrual-based profitability highlighted one such problem:

We use dashboard tools including Redwood Analytics and Intellistat to track key metrics and responsibilities for each attorney as a working, billing, and originating attorney. This information is directly used in each person’s annual review and compensation setting, along with qualitative and subjective elements. They have visibility to this key information every day, and it begets a whole different sense of responsibility and accountability.

Determining cost is even harder. In order to truly determine the cost of delivering services for a particular matter, one must answer two basic questions: what was the cost of the direct labor of performing the work, and what overhead indirect costs (such as rent, clerical staff, etc.) should be allocated to that particular matter?

The problems start with how to estimate the cost of each hour of a partner’s time. If a rainmaker partner was paid $1 million last year, how much of that was her direct cost for working on legal matters vs. origination fees, payment for time spent on management, profit distribution, and other factors? A number of different systems of “notional compensation” are used to split compensation between the amount allocated to billable activity and the amount allocated to everything else. The details of how to do this could easily go on for many pages, but in this context the most important fact is that every single system includes arguable assumptions. And if there is one thing that lawyers do well, it is argue, especially if a calculation affects the way their financial results are perceived. And if matter profitability is tied to compensation and perhaps even to job stability, the debates on how to calculate these figures will rapidly get louder and more passionate.

If you think that since associates are on salary, it would be easier to calculate their direct costs, you’d be right. But even there, important decisions must be made. For example, suppose two mid-level associates earn the same $300,000 salary, but Associate A billed 2,000 hours last year and Associate B billed 1,500 hours. To keep this example relatively simple, we will ignore the cost of their health insurance and other benefits and focus strictly on salary. Some firms say that the direct cost of Associate A is $150 per hour ($300,000 divided by the 2,000 hours she billed) while Associate B is more expensive at $200 per hour ($300,000 divided by her 1,500 billable hours).

Now suppose that relationship partners are rewarded for managing matters more profitably. Of course they will try to assign more work to the busy $150 per hour associate than to the $200 per hour associate who has more time available. In this case, the attempt to measure profitability to develop a more efficient system rewards behavior that is actually likely to reduce efficiency by overworking the busiest associates.

Discussions of other aspects of overhead can also get into heated debates about such details as:

  • If one practice group heavily uses the services of the marketing department and another doesn’t, should the first group pay more marketing expenses through higher overhead?
  • If one lawyer has office space in a high-cost city like New York, and another has an office in a lower-cost city like Cincinnati, do they have different overhead rates?
  • If one lawyer in New York has a 600-square-foot office and another has a 300-square-foot office, should that be reflected in different overhead rates?
  • If one lawyer’s assistant makes more than another’s, should that be reflected in their personal overhead?

The questions go on and on, and they raise the kind of awkward issues that sow resentments and dissension. As one partner interviewed for Michael Roster’s article noted:

Many of us have long believed that the non-attorney costs of the various practice groups are wildly different. At most firms, no one wants to hear that, probably because it might open Pandora’s Box.

Some experts believe that this box should be opened, and when it is it will reveal that different practice groups can afford to charge different rates. One expert we consulted, who preferred to remain anonymous, put it this way:

Cost accounting should be kept very simple lest the lawyers argue about it forever more. That said, it should not be the same for the higher cost of production groups that need a lot of work rooms, support services, etc. (such as litigation) versus the very low cost of production groups that can work in a cubicle and only occasionally might need a conference room (such as trusts and estates). GM charges a lot less for a Chevrolet than for a Cadillac, and yet the overall Chevrolet division may be far more profitable that the overall Cadillac division.

Others disagree and feel that analyses that compare relative costs will become divisive by focusing lawyers on their short-term individual interests rather than the long-term benefits of working together. The labor and employment group may come to question the wisdom of belonging to the same firm as the M&A group that needs more expensive space. Lawyers from the Cincinnati office may begin to ask whether it is really worth having a New York office with much higher overhead.

To explore the real-world solutions that law firms are using most often, Jonathan Groner  contributed to my research by interviewing two of the leading consultants in the field: Russ Haskin, director of consulting services at Aderant Redwood Analytics and Jeff Suhr, vice president of products at Data Fusion Technologies/Intellistat.

According to Haskin:

If a firm has hired a pricing director but does not look carefully at profitability in a sophisticated way, it is doomed to fail.

Haskin said that very few large firms do more than pay lip service to the concept of profit margin—and those that do are far ahead of the game. Among other things, they are ready to respond to AFA proposals in a way that will be profitable for them. A firm that looks at profitability in the “old” way by examining gross revenue rather than profit margin as seen at the client or engagement level is simply not equipped to respond intelligently to an AFA request.

Both consultants agreed that the key to success is to simplify assumptions, and one way to do that is to look at gross margin (revenue minus direct costs). Suhr argued that at the matter level, gross margin is a better measure than any that includes overhead because issues like office space can’t be controlled at the matter level.

Haskin suggested that to simplify the cost analysis, the firm should allocate a standard cost rate to each lawyer or group of lawyers, for all clients, like the senior partner we interviewed who said:

We have a model that takes into account cost not based upon actual draws or salary, but it takes into account junior associate, mid-level associate, senior associate, junior partner, partner, and senior partner typical costs.

At the end of the day, there is a reason why Data Fusion’s 91 clients use 91 somewhat different methods to measure profitability. Companies like Data Fusion and Aderant Redwood work with each client to come up with a consistent approach that has grass-roots support within each firm.

As John Iezzi summed it up in Results-Oriented Financial Management: A Step-by-Step Guide to Law Firm Profitability (p. 145):

The subject of profitability at [the matter] level is one that is very difficult to grasp for those not fully versed in cost-accounting concepts. Whatever methodology is used, it should be agreed to by a consensus of the partners so that the results are accepted once the methodology is applied.… Make certain that everyone buys into how the process is going to be done, and more importantly, why it is being done and what decisions will be made from the information once the analysis is completed.

Jeff Suhr made a similar point more succinctly:

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.

And as one managing partner in this study summed it up:

You can argue all day about what the right profitability metrics are or what you’d include. We argue about it a lot.

Many participants, like this senior executive, think that the cure is worse than the disease and that firms should stick to more traditional measures:

We’ve used realization as a surrogate for profitability to this point. True profitability has been reserved for senior management analysis. We haven’t wanted lawyers arguing about indirect allocations and whether they only use 10% of a legal administrative assistant’s time versus 33%.

The profession may never find the perfect solution that some lawyers seem to want.  But it is absolutely clear that firms which want to survive and prosper in the current environment must find an answer that fits their culture and allows them to clearly distinguish between the matters that make money and the matters that lose it. 

This series is an excerpt from my book Client Value and Law Firm Profitability.  An edited and abridged version of this series appeared in the March 2015 issue of MP magazineThe MP article can bedownloaded from our web page

 

April 22, 2015

Six challenges in defining law firm profitability (Part 3 of 4)

Challenge #5 The problem with leverage

As Toby Brown and Vincent Cordo explain in the book Law Firm Pricing: Strategies, Roles, and Responsibilities (p. 18):

[Leverage can be defined] as the percentage of partner time worked per matter or per client.… The basic economic concept of leverage is that the more [non-equity] workers work, the more owners (partners) benefit. Workers generate the profits that pay partners. Therefore, the more work is pushed down to them, the better leverage you have and the more profit is generated.

Software programs that are designed to help lawyers bid in a way that maximizes profitability often do so by encouraging partners to push more work down to associates.

This concept is tied to the “old normal” pyramid model of profit, in which it was assumed that clients would have all their work performed on an hourly basis and would generally pay all their bills. But the legal world has changed to a “new normal” in which these assumptions are often incorrect.

For example, in a fixed price environment, efficiency is king and leverage can lead to higher costs and more unbilled time. Suppose a $1,000-per-hour senior partner can solve a problem in one hour, but a $300-per-hour associate will require 10 hours to come to the same solution. If the firm is paid the same fixed fee regardless of who does the work, it is obvious that solving the problem at the unleveraged partner “cost” of $1,000 is more profitable than at the leveraged associate cost of $3,000. (Of course, billable rates are a very approximate indicator of cost, but they are used here to keep this example simple.) 

Some critics have long questioned the value of leverage. In 1993, Bartlit Beck was founded on a totally different model, as Fred Bartlit explained in a 2012 ABA Journal piece:

Experienced lawyers can clearly do a task more efficiently than untrained rookies. So, why not choose a model based on low turnover, where only a very few high potential lawyers were well trained and mentored in order to dramatically increase experience levels? Our philosophy has turned the typical law firm structure upside down. Most large firms have few true partners and a large number of inexperienced associates. A typical ratio is 3.5 associates to each partner. Our experience metric is dramatically different: instead of the usual 3.5 associates/partner, we have 3.5 partners for each associate. This reversal of the typical large firm partner/associate ratio gives us a major competitive advantage in experience.

The result has been an award winning and highly profitable organization that Bartlit describes in the same article as:

The only firm in the world that does billion dollar litigation for Fortune 100 firms and is never compensated based on the hours expended.

One member of our Research Advisory Board summed up this view:

Leverage is a goofy concept sold by management and consultants. Ultimately, except maybe for some of the elite New York firms, high leverage will fail. There’s a reason Bartlit Beck operates with 3.5 partners per associate and Munger Tolles operates with slightly more partners than associates. Leverage and turnover have always been a disaster, except for the “golden era” (1980 to 2005) when clients weren’t paying attention, and thus it looked like a great business model for law firms to be inefficient, with high leverage and high turnover.

At this moment in time, the role of leverage in profitability depends on the client and the fee arrangement. For clients on a fixed fee basis or for hourly clients who refuse to pay portions of their bills due to inefficiency, greater leverage may decrease profit. If you have hourly clients who don’t question their bills and pay in full, greater leverage will still produce more profit. But it seems reasonable to ask how long this will continue.

Challenge #6 Problems applying cost accounting

The obvious way out of all this confusion is to move toward the approach used in almost every other business: applying cost accounting to measure profit. The basic formula looks deceptively simple:

Profit = Revenue – Cost

Cost accounting establishes rules for defining both revenue and costs, but it’s not as simple as non-CPAs might think.

Before we started working with law firms, my company spent almost 20 years developing training programs for financial services clients and for government agencies. Many of the government contracts we worked under were “cost plus,” in which an hour of a person’s time must be billed at its “true cost,”—as defined by many pages of government accounting rules—plus a negotiated fixed fee. (Note:  In our experience, the negotiated fixed fee on government contracts was typically between three and five percent of cost, which seems laughable by the standards of many law firms.) So you’d think that if anyone could identify the true cost of labor, it would be a government contractor.

But we gradually learned that government contractors have a number of options for calculating both the direct cost of what a person is paid per hour and allocating the indirect costs of benefits, rent, general and administrative overhead, and so on, to different groups within the company. So there was no single number for the “true cost” of a particular hour of labor, despite all the rules and regulations. The answer depended on a number of assumptions and interpretations.

Many law firms see cost accounting as the Holy Grail, with potential benefits to both themselves and their clients. As ACC Value Co-Chair Michael Roster summed it up in an article entitled “Facing Up to the Challenge: Law Firm Metrics”:

Once a firm or practice group shifts to a true profitability set of measurements, the firm finally has incentives to:

  • Keep reducing its cost of production—meaning moving matters to those with appropriate expertise while lowering leverage and hourly rates, where hourly rates are now used to monitor the cost of production, not how to maximize what can be billed
  • Measure and deliver better outcomes and be rewarded for that
  • Learn how to fix the cost of any given type of work
  • Along the way, improve profitability

However, in the widely quoted text Results-Oriented Financial Management: A Step-by-Step Guide to Law Firm Profitability, CPA John Iezzi explained that in working with law firms, he learned that this is much, much harder than it sounds:

My first article [on law firm profitability was]… written in 1975… after I had recently left public accounting, convinced that one could apply the same cost-accounting techniques to the service profession as one did to any other industry. [However], this was not the case, as I later determined once I began attempting to apply various cost-accounting practices to the legal profession.

The result for many firms is that, as one managing partner in my research admitted:

We struggle with a standard profitability model, and we don’t really have one right now.

Another managing partner pointed out the underlying problem:

There’s really more art than science as to what you count as revenue, and similarly what the cost allocations are going to be. Lawyers will debate all day long about those things. So it’s important to have uniform or reasonably well-accepted best practices for profitability analysis. I don’t think our practice is there yet.

As far as we can tell, neither is anyone else. When I talked to several members of our Advisory Board about this, Don Ware, chair of Foley Hoag’s Intellectual Property Department, said:

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.

In the final part of this series, we will describe what firms doing to get closer to this goal.

This series is an excerpt from my book Client Value and Law Firm Profitability .  An edited and abridged version of this series appeared in the March 2015 issue of MP magazineThe MP article can be downloaded from our web page.

 

April 15, 2015

Six challenges in defining law firm profitability (Part 2 of 4)

Challenge #4 The varieties of realization

A better approach to profitability starts with realization, as typified by this chair we interviewed:

We have made a big point to our attorneys that the focus is not revenue, it is profitable revenue. We try to get to realization. We start with the standard rates on a person’s time, and then we can determine, when bills are rendered and receipts are achieved, what percentage of the standard value we collect. It could have been a discount at the beginning. It could have been a write-off along the way. It could have been a billing or payment adjustment, whatever. But we look at the relationship between the standard value and the collection. If you spend $3 million worth of time to produce $5 million worth of revenue, that’s a hell of a lot better than spending $4.5 million worth of time to collect $5 million.

But realization is a lot more complicated than most lawyers think, because it comes in many flavors and goes by many names, each with their own strengths and weaknesses. The best summary of the underlying issues appears in an article by Jim Cotterman of Altman Weil, one of the leading consultants in this area, which explains seven key components that underlie various definitions of realization:

  1. Timekeeper discounting at the timesheet
  2. Write-downs of unbilled time
  3. Client adjustments resulting in write-offs ofreceivables
  4. Pricing variance
  5. Efficiency variance
  6. Turnover of unbilled time
  7. Turnover of accounts receivable

One result of the complexity is the fact that a number of different realization rates could be used to summarize a single situation, as shown in the table below. 

 Five Different Realization Rates for a Single Situation

The facts: A lawyer has a standard billing rate of $500 per hour and bids on 2,000 hours of work at a discounted rate of $400 per hour. She works 2,000 hours but before the bill goes out, she writes off 100 hours of inefficient time, so she only bills for 1,900 hours at $400 per hour. The client refuses to pay for 100 hours of this, so the firm is ultimately paid for 1,800 hours at $400 per hour.

Version number

Revenue paid to the firm

Realization formula

Realization calculation

Realization rate

1

$720,000

Revenue bid/ Revenue at standard rates

$800,000 (2,000 hours at $400) / $1,000,000 (2,000 hours at $500)

80%

2

$720,000

Revenue billed/ Revenue at standard rates

$760,000 (1,900 hours at $400) / $1,000,000 (2,000 hours at $500)

76%

3

$720,000

Revenue paid/ Revenue at standard rates

$720,000 (1,800 hours at $400 / $1,000,000 (2,000 hours at $500)

72%

4

$720,000

Revenue billed/ Revenue at bid rates

$760,000 (1,900 hours at $400) / $800,000 (2,000 hours at $400)

95%

5

$720,000

Revenue paid/ Revenue at bid rates

$720,000 (1,800 hours at $400) / $800,000 (2,000 hours at $400)

90%

Note that in all five cases, the firm is putting in the same amount of work (2,000 hours by a single lawyer) and bringing in exactly the same amount of revenue ($720,000). But the realization rate could be as low as 72% or as high as 95%, depending on which realization formula is used. And there are many other ways that some firms define realization, so there are far more than five options.

If all these formulas and examples seem confusing to you, you are not alone. Indeed, the two major conclusions of this brief overview are:

  1. Firms’ different definitions of realization can lead to considerable confusion when people try to compare results across firms
  2. The definition that a particular firm chooses may affect lawyers’ behavior in unintentional and unproductive ways

When it comes to confusion, it is important to note that this can affect law firm leaders’ views of their own and other firms. We recently heard one story about two firms that were considering a merger, in part because one firm was impressed by the other firm’s 90-plus percent realization rate. But when they later looked deeper into the figures, they found that the realization rate would have been much lower if both firms used the same formula.

Cotterman’s article also included a number of examples of ways these differences have important business implications for firms as a whole:

We had a law firm client that was thrilled with their near perfect overall realization. Upon examination we discovered that their high realization was due to unbelievably low billing rates resulting in lost revenue overall. At the other end of the spectrum, large accounting firms have been known to have realization figures in the low 80%s due to routinely large discounts off high standard rates. These are two examples, one unintended and the other planned, where realization is affected by pricing decisions.

When Cotterman reviewed an earlier draft of this chapter, he noted that it “shows how easily one can become confused in the conversation and the need to examine realization on its individual components—that is where the real work is.”

Another reviewer offered this anonymous example of the problems one can get into when using realization as a measure of profitability:

I had one huge litigation where realization was not great, probably 80%. But all the associates worked long hours on the case, including nights and weekends. Effectively they were working overtime, at no additional cost to the firm. Also, the client had a policy that you could not bill for travel time, and there was a lot of it. I felt, in fairness, that they should record all their travel time and I would just write it off as billing lawyer. Other partners would have told them not to write it down at all, so their realization would have looked better, although profitability would have been exactly the same.

This confusion is one of the reasons firms are moving away from realization as the sole measure of profitability. As one chair said:

A lot of times, there is confusion that profit is just realization.

For an extreme example, consider an associate who earns $400,000 and bills 2,000 hours in a year. Now imagine that for competitive reasons that have nothing to do with the associate himself, the work was bid and paid at an average of $175 per hour. This does not cover the associate’s cost under any definition. Revenue of $350,000 (based on 2,000 hours times $175) does not cover a $400,000 salary plus benefits, no matter how you calculate cost. However, under definition 4 or 5 in the table above, that associate’s realization rate would be 100%.

When it comes to influencing behavior, the differences between definitions are not just mathematical subtleties that only a CPA would care about. You get what you pay for, and the realization approach a firm chooses can shape lawyers’ behavior, since firms often measure lawyers’ success and award their compensation based on realization. The lawyer in our table above could be rewarded for high realization if it was calculated at 95% (Version 4) or penalized if it was considered 72% (Version 3), despite the fact that both versions have exactly the same impact on the bottom line from a business point of view.

In today’s rapidly changing environment, the problems can be especially challenging for firms that use standard rates as the base for computing realization. In that case, to improve your realization all you need to do is lower your standard rate, as this senior partner implied:

When you look at those realization rates and you compare them to the actual profit margins based on standard hourly rates of the underlying timekeepers, it’s all over the board. There is no consistent profit margin in those rates anymore and hasn’t been for years, because nobody’s gone back and sunsetted them and started them all over again. So what’s happened over time is, as rates have been adjusted, some up, some down, you’ve lost that connectivity. So realization really is no longer an effective measure of profitability.

If partners are rewarded for realization rates based on what is billed rather than what is collected, it will drive them to put in more hours, even when that produces no revenue for the firm, as this senior executive noted:

For evaluating partners we’ve always looked at realization and realized rates, among other things. And some of our internal experts are concerned that those are the wrong numbers to be looking at because they can drive the wrong behavior, especially in an age where they allow people to price low and it doesn’t matter what we charge for it. They’re very concerned that if the project isn’t done on time and on budget, lawyers can be rewarded for putting in more hours, even though we don’t make any money.

Or, as a senior executive at a different firm put it:

I think we've been much too focused on realization and that partners have a skewed view of what’s really profitable. They assume low realization means not profitable and high realization means profitable, and we’re just starting to get them to come around to the idea that that’s not always the case. I think we can go a lot farther down the road of getting partners to understand the impact of leverage on profitability.

The next post in this series will discuss the concept of leverage.

This series is an excerpt from my book Client Value and Law Firm Profitability.  An edited and abridged version of this series appeared in the March 2015 issue of MP magazineThe MP article can be downloaded from our web page 

 

April 01, 2015

Tip of the month: Improve the way you plan activities at the start of every matter

Clients are demanding greater efficiency these days, and efficiency should start before each matter begins.  Instead of jumping right in, set aside a little time for planning and ask such questions as:

  • What deadlines will best align the client’s needs with the firm’s interests?
  • How can this large matter be divided into smaller sub-tasks which a single individual on your team could be responsible for?
  • Which tasks are on the critical path? That is, which tasks must be completed before others can start?

The first Wednesday of every month is devoted to a short and simple tip to help lawyers increase efficiency, provide greater value to their clients and/or develop new business. More information about this tip appears in the third edition of my Legal Project Management Quick Reference Guide.

 

March 25, 2015

An example of a simplified approach to process improvement: How to improve associate and paralegal time entries

Several years ago, I wrote in this blog about lawyers’ confusion about the differences between process improvement and legal project management (LPM).  To this day, we often hear from lawyers who think process improvement is the first or the only step in LPM.

In my book Legal Project Management, Pricing, and Alternative Fee Arrangements, I have argued that process improvement is just a small sub-area within LPM, and usually the worst place to start.

The confusion has arisen largely because Seyfarth Shaw has been so successful in publicizing its SeyfarthLean® process improvement programs.  What many lawyers don’t remember is that Seyfarth began working on these programs nearly a decade ago, and according to an April 2010 article in The American Lawyer, reported spending over $3 million in just its first few years working on these programs.

There is no question that process improvement can improve efficiency.  But there is a huge question about when or even if a particular firm should start down this path.

At LegalBizDev, we believe that few - if any - firms can justify the time and money required for even a “lean” approach to process improvement.  It simply takes too long and costs too much.  And even after you define a better process, many lawyers will resist following it. 

When I interviewed leaders of AmLaw 200 firms for my recent book Client Value and Law Firm Profitability, I asked about their most pressing concerns and “low hanging fruit.”  None mentioned process improvement.  Instead, they reported that the two most urgent areas for LPM improvement are defining scope and communicating better with clients. 

Fortunately, there are some highly simplified approaches to process improvement that don’t require spending millions of dollars, or even attending a half day workshop.  Several are described in the third edition of my Legal Project Management Quick Reference Guide (beginning on page 36), and applied in our coaching and other programs.  The short guest post below was written by one of our clients who used these very simple techniques.

 

A guest post by Judith Droz Keyes

Judith Droz Keyes completed our Certified Legal Project Manager Program® and is a labor and employment lawyer and partner at Davis Wright Tremaine.  Several months ago, we published her guest post on another topic based on her answers to essay questions from her certification. In the example in this post, she quickly applied simplified process improvement techniques to address a problem faced by many law firms:  Associate and paralegal timesheet entries are often written poorly, inconsistently, or not in accordance with firm standards, requirements or expectations.  This can result in time wasted to rewrite them and ultimately in time being written off.  Judith’s improved process is built around a few short steps:

 

  1. I could provide a written set of rules/standards to be followed in all matters on which I am working (e.g., capitalization, punctuation, avoidance of “email to J. Keyes” . . . .)
  2. As part of the project plan, the team and I could agree on phases and phrasing (e.g., complainant vs. claimant).
  3. Before I review a prebill, I could forward it to the associate on the matter, to review and improve it in accordance with the rules.
  4. Before I review a prebill, my secretary could review it for certain things, and she could forward it to the associate to review and improve.
  5. Regarding time:  At the outset of every assignment or task, I could have a clear understanding with associates and paralegals about the time to be spent and billed.
 

March 18, 2015

LPM workshop: Experts from five firms discuss how to change behavior

On June 8 in Chicago, five law firms that have made significant progress in LPM will frankly discuss what has worked and what hasn’t at the fifth session of one of the Ark Group’s most popular events : “Legal Project Management Showcase and Workshop: Changing Behavior within the Firm.”  I look forward to chairing this session and discussing the latest developments with:

Andréa Danziger, Director of Business Development and Practice Management, Loeb & Loeb

Stuart J T Dodds, Director of Global Pricing and Legal Project Management, Baker & McKenzie

Michael Nogroski, Director of Knowledge Management, Chapman and Cutler

Scott Wagner, Partner, Bilzin Sumberg

Matt Wahlquist, Director of Practice Management, Stinson Leonard Street

If you are planning to attend this year’s Legal Marketing Association’s P3 conference (the three Ps stand for Project Management, Pricing, and Process Improvement), you may notice that the  Ark conference is scheduled one day before P3, which is also in Chicago.  That was not an accident.  I hate to travel, and Ark was kind enough to agree to schedule this workshop the day before P3 to save me a trip.  I wouldn’t miss P3. 

Implementing LPM is more critical than ever.  In Altman Weil’s 2014 Chief Legal Officer Survey, the top three things that clients wanted were greater cost reduction (58%), more efficient legal project management (57%), and improved budget forecasting (56%).  Since LPM will help meet the first and last requests, you could say the top three things clients want are LPM, LPM, and more LPM.

From the law firm point of view, when I interviewed AmLaw 200 chairs, managing partners and senior partners and executives for my book, Client Value and Law Firm Profitability, LPM was identified as the single best way to provide greater client value while protecting profitability.  But many firms have learned the hard way that while it is easy to offer awareness training to lawyers focused on LPM theory (and put out a press release announcing all their lawyers have now been trained in LPM), it is very difficult to get them to change their behavior.  The managing partner of one AmLaw 200 firm that invested heavily in traditional training and was disappointed in the results put it this way: 

I think project management probably will have the longest-term positive impact [on value and profitability], but it’s been the biggest challenge, because it’s something that hasn’t been easily absorbed by a lot of the lawyers. When busy lawyers start scrambling around, the inefficiency creeps right up. At our firm, project management has not met expectations.

After previous sessions of this program, audience members said:

This workshop did an excellent job of offering practical suggestions for dealing with the issues law firms encounter when they implement legal project management. The frank discussions between partners and executives at firms that have successfully changed lawyers’ behavior would be helpful to anyone who is trying to get their arms around this challenging transition.

Delilah Flaum, Partner in Charge of Knowledge Management and Legal Project Management at Winston & Strawn LLP

 

This workshop is a great way for any law firm to jump-start an LPM initiative. Jim Hassett has the experience and credentials to be THE leader in this area. His approach is directly applicable to achieving greater efficiency, competitiveness, and client satisfaction and the workshop panelists described how they used LPM to increase revenues and repeat business. I was truly inspired and enabled by this program to achieve higher profitability for my firm.

Pete C. Elliott, Director of Legal Project Management, Benesch, Friedlander, Coplan & Aronoff LLP

For more details about what these five firms have done so far, and on the workshop, download the brochure, visit the Ark Group’s web page or contact Ark’s Peter Franken at pfranken@ark-group.com or (312) 212-1301. Readers of this blog qualify for a special 15% discount.  Simply write “LegalBizDev Discount” on your order form and subtract 15%, or ask for the discount when you register by phone.