Legal Business Development

Business development tip of the month: Assess the importance of relationships vs. value

At one time, legal marketing was all about building relationships.  These days, there’s a lot more emphasis on “what have you done for me lately.”  A general counsel may still prefer to emphasize relationships and work with people she’s known and trusted since law school.  But she may not have that choice when management pressures her to obtain more value at a lower cost.  In today’s evolving legal marketplace, every rainmaker must pay more attention than ever to the differences between clients, understand exactly what each individual needs today, and make sure they get it.

The first Wednesday of every month is devoted to a very short and simple tip like this to help lawyers increase efficiency, provide greater value to their clients and/or develop new business. 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

   …surveys—such as these from Corporate Counsel and Empsight—are coming out. They usually confirm that the average in-house counsel who hires outside firms makes only slightly north of what a bonused first- or second-year associate in a big law firm makes. There are a few hundred large law department top leaders who haul in comparable returns for their work—usually through non-salary comp—but nowhere near the number or percentage of highly compensated partners that we find in the ranks at big firms where entire equity partnerships pull in hundreds of thousands or over $1 million a year in profit per partner.

   The average in-house lawyer is well aware that he shares with those high-profiting partners the same schooling, sophisticated law firm background, and top-flight experience on his resumé. He’s made his choice, but please remember that he will more likely identify with the "99 percent"–and not the partnership–when he’s assessing who’s getting coal this Christmas.

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

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

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

   Of course they want to pay less!

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

   The market has changed.

   Forever.

    

This post was written by Jim Hassett and Matt Hassett.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This post was written by Jim Hassett and Matt Hassett.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This post was written by Jim Hassett and Matt Hassett.

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Legal pricing (Part 5 of 8): Ron Baker’s eight steps of value pricing

In Part 4 of this series, we reviewed basic concepts of value pricing from Ron Baker’s influential book Implementing Value Pricing: A Radical Business Model for Professional Firms.

The first four sections of that book review a great deal of interesting theory and a number of arguments against hourly billing.  If you want to focus on the “how to,” you can jump directly to Part V, which describes Baker’s “Eight steps to implementing value pricing”: 

1)      Conversation. Talk to the client to determine her wants and needs. This requires genuine communication, so you must listen actively and comprehend what is on the client’s mind.

2)      Pricing the customer: Questions for the value council. Pricing is of such importance that Baker says each firm should have a value council which studies the results of the value conversation, and considers the best strategy for pricing each matter.

3)      Developing and pricing options. The analysis in steps 1 and 2 can lead to an internal discussion of several different options to offer a client, at different price levels.  According to Baker, this can help the client to think about what is really of value for him and help the firm close a deal.

4)      Presenting options to the customer. Then it is time to effectively present the options to the client, and address any objections.

5)      Customer selection codified into the fixed price agreement. Baker assumes this conversation will lead to a fixed price agreement, which must be written carefully to “memorialize the meeting of the minds between the firm and the customer.”  (p. 289) Chapter 32 includes a sample fixed price agreement.

6)      Proper project management. Once the agreement is signed, the firm must manage the matter to live within the agreed upon price. (If you are familiar with our Legal Project Management Quick Reference Guide and our nine project management training options, you may not be surprised to learn that we stress the importance of this step.)

7)      Scope creep and change orders. In today’s dynamic business environment, changes in requirements are almost inevitable.  The firm and the client must have plans in place to decide when changes in scope lead to a change in price, and to resolve any problems or disagreements.

8)      Pricing after action reviews. The US Army has a policy of after action reviews to evaluate missions after the fact and learn from what happened. This same type of retrospective review is helpful for setting future prices.

Each of these eight steps is described in depth in its own chapter.  For example, in the chapter on Step 1’s conversation, Baker talks about:

• Twenty-seven questions you could ask the client (page 241).
• How to start the conversation and effectively point it in the right direction.
• How to listen carefully and hear what the client wants without dominating the conversation.
• How the firm should deal with clients who try to conceal information about how much your services are valued or what other firms may charge.
• How should you discuss risk with the clients?

Whether you agree with Baker’s rejection of hourly billing or not, the information in this chapter can be very useful in finding the best price.  Similarly, Chapter 29 goes over the key elements of Step 2 –what to do when you get back to the office and work on your pricing strategy based on that conversation. Again there are long lists of useful tips:

• What constitutes a good price? On page 245 there is a list of sixteen items to consider –including “Not allowing your dumbest competitors to set your price” which is related to the issue of avoiding price wars, as discussed in Part 3 of this series.
• What questions should you ask yourself before setting the price? There is a list of thirty-five questions on page 247.
• Four types of buyers – price buyers, value buyers, convenience buyers and relationship buyers – and how to deal with each.
• What are the psychological factors that affect the price sensitivity of the client?

Every lawyer can find valuable ideas and tools in this book, whether you agree with Baker’s rejection of hourly billing or not.  However, you may question his optimism about what the market will bear for value pricing.  On p. 275 in the section on “Dipping your toe into the water” for fixed pricing, Baker suggests calculating your initial fixed price estimate with a budget based on what you think your normal billable hours would be and then adding a premium of 50% to 90%.  That would be great way for law firms to do it, if they could find clients who were willing to pay 50% to 90% premiums in the current marketplace.  A few firms may.  But from what we’ve seen, most clients are looking to cut costs, and the firms that win fixed price deals these days often get no premium at all.

While we are not aware of any AmLaw 100 firms that have gone so far as to appoint the Value Council mentioned in Step 2, we did write an article for Bloomberg Law Reports recently entitled “The Rise of the Pricing Director,” including interviews with senior lawyers and staff at Baker & McKenzie, Fish & Richardson, Mayer Brown, Vinson & Elkins, Reed Smith and Winston & Strawn which described what law firms are doing to address a number of the issues described in Baker’s book.  Our next two posts will reproduce that article, and then a few weeks later we will return to this series and a description of other approaches firms are taking to pricing. 

 

This post was written by Matt Hassett and Jim Hassett.

Law firm risk management: How project management can reduce the long-term cost of professional liability insurance

According to a recent post  on the Wall Street Journal online, the cost of legal insurance is going up.

Professional-liability insurance typically has been among the top operating costs for law firms, after compensation and real estate… [These days] law firms are loading up on insurance against expensive liability claims as they increasingly find themselves on the wrong end of lawsuits.

The piece went on to explain that “Insurers are telling us that not only is frequency up, but so is claim severity. It's just costing more to defend and litigate a claim.”  And when the costs paid out by insurers go up, premiums are sure to follow.

When underwriters set the rates for a particular firm, “there is no doubt that insurers are interested in how the firm manages risk,” according to Bob Feagin, former managing partner of Holland & Knight and now Special Counsel at Paragon Risk Management Services Ltd , a company that advises US and UK law firms on risk management, business practice management and loss prevention.  “Some insurers subsidize risk management programs designed to reduce losses from potential claims.”

That is where the link to new developments in legal project management (LPM) comes in.

A few weeks ago, we were contacted by Paragon’s Director Natasha Watson.  Squire Sanders, the law firm that offered the client/firm collaboration workshop we wrote about last week, is a Paragon client. When Squire Sanders purchased its professional liability insurance through Paragon and McGriff Seibels, a risk management budget was included as part of the policy.  The funding for our workshop came from that risk management budget.

LPM can reduce professional liability risk many ways, including helping lawyers to control quality, to meet critical deadlines, to avoid or quickly resolve fee disputes with clients, and to maintain active, open and timely communications with clients on all aspects of every engagement.

For example, a recent article in Risk Management magazine quoted StuartPattison, a vice president at CNA (one of the largest commercial insurers in the US), about the insurance implications of properly defining scope:  “A well-drafted engagement letter can spare future turmoil by spelling out the precise nature of professional services including the attorney handling the matter, specific duties that are not covered, a time-frame and a definition of who the firm will -and will not- be representing.”  The article went on to note that “professional liability insurers now consider a well established risk management program as a pre-requisite for insuring a legal practice.”

When Paragon Risk Management Services Ltd asked LegalBizDev to join their panel of Preferred Service Providers, of course we agreed. The panel includes consulting organizations specializing in such areas as professional responsibility and actuarial and loss prevention services. LegalBizDev is the only company on the list that offers training and support in legal project management.  

In the future, Paragon clients will have the ability to finance our programs by drawing on a predetermined risk management budget which Paragon negotiated with insurers on behalf of these clients.

Programs like this are likely to increase in the future.  As Holland & Knight’s Bob Feagin summed it up:

Project management is the key to improving client service, and client service is the key to managing risk.  When law firms succeed in managing risk and reducing losses, that has an undeniable impact on lower rates.

Our new relationship with Paragon is a win-win-win-win.  Law firms win by improving their risk profile, which should lead to a more favourable claims record and ultimately to lower premiums.  Law firm clients win by getting more value and better service through hands-on project management.  Paragon wins by strengthening relationships with its law firm clients and its insurers and by reducing the risk of future claims.  And LegalBizDev wins by having an opportunity to provide our services to law firms that will fund the program through budgets they have already dedicated to risk management.

We always knew LPM could help law firms reduce risk.  But to be honest, it is only recently that we have come to understand that LPM could also reduce the long-term cost of their liability insurance.

Jim Hassett wrote this post with Mike Egnatchik who is leading a new risk management initiative at LegalBizDev.

 

Client/firm collaboration: The case of Squire Sanders

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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