2 posts categorized "Alternative Fee Arrangements"

December 18, 2019

Legal Project Management: The Year-In-Review (Part 1 of 2)

In 2019, three major papers were published summarizing data collected from over 500 law firms and 250 law departments: 

  1. Altman Weil’s Law Firms in Transition survey (“LFiT”)
  2. Altman Weil’s Chief Legal Officer survey (“CLO”)
  3. The CITI Client Advisory report (“CITI”)

Based upon these reports, and also upon the multiple webinars, interviews, and informal discussions that we held with LPM decision-makers in 2019, we believe that law firm leaders should concentrate on five key issues to improve profitability, as discussed below.  One of our major takeaways from 2019 is that, if a law firm aggressively seeks to implement an LPM program and works to change lawyer behavior, it can make great strides towards resolving the challenges described in this blog series.

(1) For non-hourly alternative fee arrangements (AFAs), increase efficiency to reduce costs

It’s difficult to obtain unanimous agreement on anything, particularly among law firm leaders.  But not a single leader predicted that there would be a decline in the use of AFAs in 2020 (p. 8, CITI).  A huge majority (87%) predicted that the use of AFAs will increase in 2020, while 13% said that the use of AFAs will remain about the same (p. 8, CITI). 

From the client perspective, CLOs consistently report that one of the best management techniques for improving outside counsel performance is to negotiate fixed, capped, or alternative fees.  Over 75% of CLOs say that the use of AFAs significantly improves outside counsel performance (p. 47, CLO).  This too suggests that the use of AFAs will increase in 2020.

But any firm that has ever offered a fixed fee knows how easy it is to lose money on them.  The key to maintaining financial performance is to increase efficiency, so that the work can be completed at or below what it would have cost at standard hourly rates.  And this in turn will require significant improvements in LPM at most firms.

(2) To reduce discounting, law firms must accelerate the use of LPM

We were floored when we read the statistics on the percentage of legal fees that are derived from discounted hourly rates.  “Nearly one in five law firms (18%) receive 50% or more of their legal fees from discounted hourly rates” (p. 27, LFiT) [emphasis added].

Altogether, just over 75% of law firms receive a substantial portion (11% or more) of their legal fees from discounted hourly rates.  A paltry 2% of firms receive the full amount that their lawyers charge.  Amazingly, 3% of law firms do not collect this data and have no idea what percentage of their legal fees are derived from discounted hourly rates (p. 27, LFiT). 

Large firms offer more discounting than smaller firms.  The median for firms with 250 lawyers or more is that 41% to 50% of legal fees are derived from discounted hourly rates, while the median for firms under 250 lawyers is 11% to 20% (p. 27, LFiT). 

These results are validated by CLOs.  The number one strategy for controlling law department costs (at 57%) is to receive reductions on hourly rates from outside counsel (p. 26, CLO).

If law firms want to reduce discounting, their lawyers must embrace LPM.  The more efficient a lawyer or legal team becomes, the more valuable their time becomes (when compared to lawyers at other firms), which reduces discounting.  Moreover, the LPM tactic of properly delegating work ensures that the right person is handling the work, which again establishes efficiency and reduces discounting.  And even when clients are simply unwilling to pay standard hourly rates, LPM allows firms to increase profitability by embracing fixed fee work and using LPM tactics to ensure that matters are managed profitably. 

(3) Use LPM to better utilize financial data and increase profitability

Survey results confirm that most law firms are investing time and money obtaining better financial data.  For example, 52% of law firms have invested money to develop data on the cost of services sold, though only about one-third of those firms report any clear corresponding improvement in performance (p. iv, LFiT).  The data shows that merely gathering data does not necessarily translate into improved performance.  Instead, as Altman Weil notes: “Real achievements can and must be made in using cost data and project management techniques to improve matter profitability.” (p. iv, LFiT) [emphasis added]. 

One project management technique that could improve matter profitability is to use collected profitability data in conjunction with the firm’s LPM efforts.  For example, only 55% of law firms that collect profitability data currently use that data to manage their practice groups (p. v, LFiT).  If profitability data is readily available, the natural next step is to use that data to actively manage practice groups in conjunction with LPM efforts.    

(4) To increase new business, law firms must differentiate themselves

Anyone with a marketing background can attest to the importance of differentiation in the marketplace when selling goods and services.  Differentiation is what allows one law firm to stand out from another. But nearly half of law firm leaders cannot point to a single compelling differentiator that significantly elevates their firm above others (p. iii, LFiT).  

Using the old standby “our lawyers are better than theirs” doesn’t cut it anymore.  True differentiation allows one law firm to contrast its services with competing services and emphasize the unique aspects that make its services superior. As Altman Weil writes: “Establishing a credible means of differentiation should be a key area of attention for all firms and each group within a firm” (p. iii, LFiT).  Using the LPM tactic of client communication (e.g., conducting “lessons learned” reviews with clients) may be a good place to start if a law firm wants to identify the ways in which it separates itself from other firms.

(5) Be realistic about how clients perceive the quality of your firm’s services

When it comes to the delivery of client service, perception often does not match reality.  Firms tend to overestimate the quality of their services.

53% of law firm leaders say that their firms are significantly ahead of the competition in terms of delivering client service (p. iii, LFiT).  In summarizing this data, Altman Weil notes: “It is mathematically impossible and logically inconsistent for most firms to lead the pack on these or any other factors.  If everyone’s ahead, there’s no pack to lead” (p. iii, LFiT).

Of course, overestimating the quality of client service likely means that many firms do not take appropriate action to improve the delivery of client service when, in fact, they should.  The tendency for law firm leaders to inaccurately assess client service is highly significant because unsatisfactory client service has consistently been one of the top reasons that clients shift a large portfolio of work ($50,000 or more) from one law firm to another (p. 50, CLO).

*****

In Part 2, we will examine the tactics that law firms use to become more efficient and why the LPM change process has been so slow at some firms.

May 18, 2011

Announcing the first Certified Legal Project Managers™

Last December, we announced that Squire Sanders, Stewart McKelvey, and Harris Cost Lawyers were the first three firms to sign up for our new Certified Legal Project ManagerTM program.  

Lawyers from all three firms have now completed their final case studies and been awarded certification.  We have also begun certifying additional lawyers in the United States, Canada, Brazil, China, and Germany.  The smallest firm to sign up has eight lawyers, the largest has over 3,000. 

The first certification group has provided an important proof of concept that busy senior partners can indeed complete this program within a few months, build a solid foundation of project management knowledge, and apply this knowledge to develop and implement new procedures that improve client service and increase profitability.

Over the course of the program, each participant studied over 300 pages of assigned readings from six textbooks and answered 17 essay questions about how the concepts applied to their practice.  Then, in three phone conversations and numerous emails, we discussed their “low hanging fruit”: which of the concepts could be most efficiently applied to achieve immediate and practical results?

The first to finish was Fraser MacFadyen, a partner at Stewart McKelvey, a 220-lawyer firm in Atlantic Canada.  Fraser decided to focus on improving practice-wide procedures for handling certain types of secured financings, starting with representing borrowers on a loan secured by real property and related personal property. 

For his final project, Fraser developed several templates to increase efficiency:

  • Standardized spreadsheets for estimating the cost of easy, moderate, and difficult transactions
  • A standardized cost estimate letter to clients that explains what is included in the price and what is not
  • A working agenda summarizing key tasks, who is responsible for each, and deadlines
  • A closing agenda and checklist

We also discussed sustainable tactics to use these templates to maximize benefits to clients, and then to implement them throughout the firm.  We agreed on minimum success criteria for the next 90 days, including using the forms in at least two of Fraser’s matters, getting in-depth feedback from at least two partners on how to improve the forms for their practices, and holding at least one client meeting to discuss how to work together to increase efficiency.  Again, these are the minimum goals.  We both hope he can achieve much more in 90 days, including having other partners actually use the templates. 

Although the program has technically ended, I will be calling Fraser after 30 days and after 90 days to check on his progress.  I want to know what works and what doesn’t.

The second to complete the program was Liz Harris, the founder of Harris Cost Lawyers, an eight-lawyer firm in Melbourne, Australia.  Timing is everything in life, and Liz read about our program on the internet at exactly the right moment.  She had just completed the first module in a program to become certified through the Project Management Institute (PMI) and concluded that while “the PMI program was extremely interesting, much of the content was not relevant to my practice.” So when she saw an announcement that explained how our certification program was specifically designed for lawyers, she signed up right away. 

For Liz’s final project, she created over 25 pages of checklists and templates to enable her firm to better define scope for four types of fixed price matters, and to complete them within budget.  For example, one of Liz’s templates will help her firm to complete particular stages of litigation under Australian law.  One of her checklists lists 12 issues to take into account when estimating the extent of work a matter will require, built around practical details and hard-won wisdom, including “Who is instructing us…a client with little litigation experience will need a more detailed explanation of concepts like instructions for experience offers of compromise" and, “Which court are we in – federal court objections need to be much more detailed and reference case law.” 

Harris Cost Lawyers has been using the templates for the last month, and has already started seeing results.  The templates have “resulted in a clear change in focus on the part of the lawyers in planning matters upfront.”  The firm is planning to increase its percentage of fixed price work, measure the results, and continue to improve their processes.  According to Liz, “the materials developed in this program give us a clear competitive advantage.”

The third to finish was Stacy Ballin, a partner at Squire Sanders, which has over 1,200 lawyers.  Stacy is co-chair of Squire Sanders’ Project Management Committee, so she came to the program with a very strong interest and background in this area.  She is also one of the people who convinced me to start the program, along with her partners Mitch Thompson and Howard Nicols.  We met last fall after I gave a speech at the Squire Sanders Partners meeting, and we talked about the lack of standards in this rapidly growing field.  After they convinced me that the profession needed to establish standards as quickly as possible, I went back to the office and started designing our Certified Legal Project ManagerTM program.

Stacy’s final project is likely to produce immediate results that go straight to the bottom line.  As the Litigation Group Business Partner, she is responsible for approving discretionary write-downs, where a relationship partner decides not to bill a client for some of the time charged to a case and writes down a portion of the bill before it is sent to the client.  According to data reported in the 2011 Hildebrandt Client Advisory, the average large law firm write-down rate – also called billing realization - has been increasing for the last few years, and currently exceeds 11% (p. 13).  (Firms also write off an additional 13% of the bills they send as uncollectible, but that is another story.)

Squire Sanders has not revealed its billing realization rate, but with annual revenues over $500 million, a reduction of 1% would mean an immediate increase in profits of $5 million.

When Stacy reviewed all 2010 litigation write-downs over $10K as part of this program, she saw that a few young partners had unusually high write-down rates, which they explained as simply costs beyond budget or caused by a pattern of inefficiency.  Inefficiency reduces the value clients receive and discretionary write-downs have an immediate negative impact on the bottom line.   So Stacy decided to interview six of these young partners and explore with them how the firm could help them reduce inefficiency and write-downs in the future. 

For her certification case study, Stacy developed a phone interview survey questionnaire based in part on the 17 questions she answered in the first part of our certification program.  In the next few weeks she will conduct these interviews and “develop a plan as to how to use the results to reduce write-downs in the future, and to measure the financial impact of my recommendations.”  Depending on what Stacy finds, her initiative may include future project management training to help key partners manage their teams more efficiently.

All three of these lawyers have been awarded certification and their programs are now officially over.  However, I have planned additional follow-up with all three over the next few months.  I want to hear exactly what happens next.  And when I do, I will let you know.