233 posts categorized "Legal Business Trends"

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. 

 

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 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.

 

March 11, 2015

LPM at Stinson Leonard Street – A course on defining scope and much more (Part 3 of 3)

By Jim Hassett and Jonathan Groner

 

Given the success of the course “How to Define Legal Scope and Negotiate Changes,” described in Part 2 of this series, what comes next for LPM at Stinson Leonard Street?

It all comes back to providing clients with greater value, according to Jill Weber, the firm’s chief marketing and business development officer. The firm frequently conducts client satisfaction surveys, both in person and online, and has consistently found that when it comes to value, the definition varies from matter to matter and client to client. For value, “one size fits one,” Weber summed up, quoting an in-house lawyer who spoke at an ACC Value Challenge event a few years ago:

I see tremendous potential in LPM for improving the delivery of services, especially where we have multiple matters for a single client and there can be some consistency in how you plan matters and staffing. Mind you, that is not the only place for LPM, but it is the easiest place to become more efficient while still remaining effective and meeting and exceeding clients’ expectations.

Matt Wahlquist, the firm’s director of practice management, is continuing to integrate LPM efforts across every office, practice division, timekeeper, and administrative department.

A few months ago, Wahlquist hired Rodney Miller, a former practicing attorney, as an in-house LPM specialist. Miller joined the firm after the scope workshop and has worked extensively on follow-up activities related to the course.

There was always a good deal of interest in LPM at the firm, but now the lawyers are running toward it as a result of client demand. There is a synergy between client needs and attorney needs that puts LPM in the middle of it. I reach out to our lawyers to help them further their LPM goals. And I work with clients as well, when they want a change in scope in an alternative fee arrangement matter or a traditional hourly matter.

Wahlquist’s core team has now grown to include two legal project managers and three pricing professionals. The most recent hire, Bree Johnson, completed LegalBizDev’s Certified Legal Project Manager® program when she worked for another firm.

The team is already helping to improve performance on a variety of matters, including assisting in the development of a pilot test of a highly innovative new LPM-based process to design and implement a new pricing regimen with one of the firm’s largest clients.

According to Co-managing Partner Mark Hinderks:

Clients often fear alternative fee arrangements as “black boxes” with which they might be gouged, but we are working to combine project management principles with the advanced cost and pricing analytic capability we have been using for several years to create a new transparency in pricing. We believe this will prove very appealing, especially as an alternative to arbitrary discounting from rack rates that firms establish in different ways. It should provide assurance of savings to the client while also preserving a reasonable return to the law firm in a mutually sustainable relationship.

This is not an approach that a firm would want to use with just any client, but we expect it will be very helpful for large clients where there is a strong relationship built on mutual trust. Stay tuned as we pilot this.

Plans are also underway for individual coaching and other programs. Next June, Wahlquist will be reporting on the firm’s progress at the Ark Group’s Legal Project Management Showcase & Workshop on June 8 in Chicago.  When the firm holds its retreat in Phoenix next October, Jim Hassett will conduct a panel discussion of partners who are LPM leaders within the firm to internally publicize their progress and recommendations for next steps. Hassett will also give a keynote speech summarizing the firm’s efforts to date, how it compares to what other firms are doing, and his predictions for the future.

Co-managing Partner Lowell Stortz summed up the firm’s philosophy and plans like this:

We've picked lawyers who are willing to learn, with clients for whom we can have the most immediate impact. We’re building LPM a brick at a time, from the ground up, with those clients, and I think in a law firm environment that sells better than “preaching” and then hoping that it catches on.

Given the way legal practice is changing, we need to continue to improve. A year from now, we need to be further down the road than we are, and I am confident we will be there.

March 04, 2015

Tip of the month: Improve the questions you ask when you start an engagement

When I interviewed chairs and managing partners of AmLaw 200 firms for my book Client Value and Law Firm Profitability, they said that the single most important factor in LPM success was defining scope.  The simplest way to improve is by asking the right questions before an engagement begins, such as:

  • How do you define success or “a win”?
  • What business problem do you want to solve?
  • Are there strict budget limits?
  • What deadlines matter the most to you?

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.

February 25, 2015

LPM at Stinson Leonard Street – A course on defining scope and much more (Part 2 of 3)

By Jim Hassett and Jonathan Groner

After Matt Wahlquist, the director of practice management at Stinson Leonard Street,observed the course “How to Define Legal Scope and Negotiate Changes,” he noted that:

The course was extremely practical. We have had conceptual training before from other companies, but our lawyers are always looking for something they can use on a day-to-day basis, and that is exactly what this workshop provided. Some people put their lessons into practice that very day. After all, if we can decrease our write-offs as a result of improved upfront conversations on scope, those results flow through directly to the bottom line. A proactive five-minute conversation with a client can pay for itself very quickly from a return-on-investment perspective.

Co-managing Partner Lowell Stortz said that before the course was offered:

I was somewhat skeptical of the results, because we chose people for the workshop who already had some interest in and/or knack for scoping. It’s always easy to show progress when you start with someone who’s at zero; it’s much harder to show progress when you start with people who are already pretty good at something. At the suggestion of the course leader, three weeks after the course I sent an email to this group of accomplished, busy, successful lawyers and asked them to respond as to how they’d used it, if at all. Virtually all of them responded (and in a law firm environment that alone is amazing) with good insights.

One participant reported to Stortz that:

I have one client that I thought just wasn’t interested in LPM or scoping. But as a result of the workshop, I reached out to the client and engaged them in a conversation and it turned out that there really was a place for this. The training led me to give it a shot, not only from my side, but also inviting the client to think about it. This yielded some benefits right away.

Another participant, Scott Hecht, is an insurance litigation partner at the firm and head of the insurance department. He explained that at any given time he is responsible for managing dozens of matters pending for a particular client, although a group of other attorneys do the bulk of the work. He took the class because he wanted:

To enhance my ability to manage those matters, communicate effectively with the client, and maximize efficiencies in billing and other areas.

Each of these matters is a litigation matter or an administrative investigation. They are all somewhat similar in scope on the surface. The variation is based on the number and nature of opposing parties, counsel, witnesses, and documents in each case. What I took away from the scope course is the need to have a constant sense of the client’s expectations in each matter and the way in which external factors sometimes only known by our defense attorneys handling the matters can still substantially affect the scope of each matter. It’s a question of getting and keeping your ducks in a row for each of dozens of similar matters.

In this client organization, there are 30 or more people who are my points of contact; they all have different personalities, levels of experience, and expectations, and I need to be very responsive to all of them. I expect LPM techniques to translate to a better experience for my client contacts, which differentiates our law firm from others.

Course participant Paul Hoffmann, a bankruptcy partner, pointed out that the office of the U.S. Bankruptcy Trustee, which supervises bankruptcy matters nationwide, recently set forth a rule change that requires advance budgeting in all larger bankruptcy cases. Therefore, bankruptcy lawyers have a legal obligation in many of their cases to develop budgets in advance.

I took the course because I wanted to improve my ability to estimate fees and to draft engagement letters. This will help to reach agreement in advance with clients on nontraditional billing matters and also help clients draw up budgets on traditional hourly billing matters.

There are so many ways in which a lawsuit can change as it unfolds. There can be a change in parties, a change in issues, or there can be the need to document a settlement or an appeal.

The course did a very good job of telling us how to explain budgetary changes to clients so as to minimize any client concerns that might arise. And it also did a very good job of showing us how the billing attorney must meet with the entire team to discuss the budget and to discuss any budgetary changes that may arise as time goes on.

Tracey Donesky, still another course participant, represents employers in many types of matters, particularly both federal and state wage and hour suits under the Fair Labor Standards Act and other various employment discrimination claims brought under various state and federal employment laws. According to Donesky, the single most important fact about LPM is that:

Clients want LPM, so law firms will have to use it to increase client satisfaction and better manage their cases. LPM needs to be integrated into every aspect of every case. The course helped solidify in my mind the need for LPM from a client expectations standpoint.

Donesky has recently begun to use LPM techniques on a number of matters, including several for one firm client where she is lead counsel. She seeks to budget for each case 30 days in advance, working with partners, associates, paralegals, and other timekeepers on the file to identify what litigation activities are anticipated for the month ahead and then allocating estimated hours expected to complete such activities. This provides the clients who use LPM an estimated budget, which helps increase predictability and manage expectations in advance. While there is some level of trial and error to the process in these beginning stages, the hope is that over time and as similar cases begin to work through the LPM system and historical data is gathered, the budgeting and estimating process will become more predictable and precise. 

As Donesky summed up the experience to date, “The firm is only going to get better at this process as time goes on and more data is analyzed.” 

Part 3 of this series (coming March 11), will focus on additional efforts in the firm currently underway to improve LPM.

February 11, 2015

Business development best practices: Work with others

This is one of a series of occasional posts summarizing the most important best practices from my book the Legal Business Development Quick Reference Guide which is now also available in a Kindle edition.

Business development is difficult, and it helps to work with other people who provide support through the losses, and help you celebrate the wins. One way to do this is to form a business development group. It could be your entire practice group, a formal committee including people from your marketing department, or just two or three lawyers who meet for breakfast once a month.

Keep the agenda simple. At the first meeting, each person should commit to action items for the next meeting. Then at every subsequent meeting, go around the table and have each person report what they accomplished since the last meeting and what they have planned before the next one.

Working with a group provides social support, increases accountability, and leads to steady progress. No one wants to go to a meeting and report that they have failed to follow up on all their action items. The simple fact that you know you have a meeting coming up will help spur you to action.

The results can be summarized in a simple report after each meeting. The fact that a report is being circulated will create a friendly competition and increase compliance. Nobody wants to be the person who has all zeros in their business development report.

The most reliable systems often put a staff person in charge of collecting the data (say, every Monday by noon), and publishing the results every week at the same time (such as Mondays at 5). The report should never be delayed to wait for an individual’s results. This week’s missing data can be filled in next week. And the phrase “missing data” in the report will help to ensure that the information will be supplied, sooner or later. Ideally, the reports should start with a clean slate every few months. Without this fresh start, once people fall behind, they are likely to stay behind and just give up.

But whether you decide to have written reports or not, the biggest challenge here is to simply make sure you keep meeting. Life is sure to intrude with your meeting schedule, and it is easy for these meetings to fade away after a few misses. Therefore, it can be extremely useful to include a non-lawyer (e.g. your marketing person) who takes responsibility for reminding everyone of the next meeting, and do everything possible to maintain a quorum. In a nice way.

For many lawyers, an even better way to proceed is to work with a professional legal business development coach.

On the other hand, working alone may not be as good as working with a coach or a group, but it’s a whole lot better than doing nothing. If you are one of those rare individuals who will continue to follow-up through sheer self-discipline, go for it. The important thing is to find a system that works for you, and to sustain it over the long term.