Legal Business Finance

Pricing (Part 2 of 6): The cost-plus approach

jhassett@legalbizdev.com (Jim Hassett) — Wed, 30 Nov 2011 12:49:00 -0400

A few weeks ago, when I gave a speech at the retreat of a 1,000 lawyer firm, a senior partner asked: "In your experience, how do large firms determine costs?" I replied: "Mostly, they don't. Until recently, most firms were making so much money they didn't need to precisely calculate their costs."

Many lawyers seem to think of their standard hourly rates as being equal to the firm's costs. But traditionally, rates have actually been based on "cost plus a lot" and no one was quite sure which part was the cost and which part was the "plus a lot."

One underlying problem is that compensation of equity partners typically

Pricing (Part 1 of 6): What lawyers need to know and why

jhassett@legalbizdev.com (Jim Hassett) — Wed, 30 Nov 2011 12:40:00 -0400

Some law firms are going to large companies and offering to do all their legal work for one fixed price, but the firms don't know how it will work out in the long run. I suspect in some cases it will come out really ugly.

This prediction was made in 2009, by a senior partner from an AmLaw 100 firm who took part in our LegalBizDev Survey of Alternative Fees.

In the two years since, this prediction has become a reality, and many fixed price legal deals have indeed turned out badly. In the 3 geeks about value billing as this is definitely a topic that needs exploring further, not least because I'm astonished by the number of law firm partners who continually tell me that it's for clients to find a pricing model that works for the firm's services.

The common refrain from private practice lawyers (especially those who know how I feel about hourly

The nine most common types of alternative fees

jhassett@legalbizdev.com (Jim Hassett) — Wed, 28 Sep 2011 12:48:00 -0400

When I interviewed chairmen, senior partners, and C-level executives from AmLaw 100 firms (in the LegalBizDev Survey of Alternative Fees), nine types of AFAs were reported most frequently:

Fee caps: In a fee cap, hourly rates are charged up to an agreed maximum amount for a particular matter. Beyond that, if additional work is required to complete the matter, the law firm pays for it. Of course, this is really just hourly billing with a twist: a hard limit on the maximum. While this arrangement clearly benefits the client more than the law firm, some firms see it as an important way to get new work

Year-end countdown: accounts receivable

nkclark@walkerclark.com (Norman Clark) — Mon, 19 Sep 2011 15:16:00 -0400

As we approach the end of September, firms with fiscal years ending in December should already be taking the first steps in their year-end fee collection campaign.

Your firm's billing team will probably do most of the heavy work, but in well-managed law firms the billing partner for each file is the one who is responsible and accountable to his or her partners for collections. Firms with active partner involvement have a much collections record, measured in terms such as

lower accounts receivable at the end of the fiscal year

lower average age of accounts receivable

These translate into higher profit distributions to partners, more generous bonus to associates and staff, and more money for investment in marketing, productivity, and service delivery capabilities to prepare for the new year.

If your fiscal ends in December, here are some things that you should be doing now to improve

How to manage budget risks – The example of enforcing a non-compete

jhassett@legalbizdev.com (Jim Hassett) — Wed, 14 Sep 2011 10:00:00 -0400

This guest post was written by Richard Rosenblatt, a partner in Morgan Lewis's Labor and Employment Practice. It is an edited version of an essay he wrote as a participant in our Certified Legal Project Manager^TM program.

When we represent clients seeking to enforce non-competes, there are many risk factors that can affect the success and cost of the matter. I used the Project Risk Analysis Template (from the Paul Easton started the first blog in this area, his first substantive post was titled "Defining legal project management." It included an interesting discussion of how the term differs from case management and this definition: "the application of widely accepted project management standards, such as those promulgated by the Project Management

What Does “Cost” Mean?

steven.levy@lexician.com (Steven B. Levy) — Fri, 10 Jun 2011 16:11:00 -0400

The always interesting 3 Geeks blog had a post the other morning about the procurement function in legal in general and reverse auctions in particular.

The bigger question is this: Should clients buy legal services based on cost?¹

I don't want to argue the question itself here. (The whole industry is arguing it anyway.) But I do want to look at the meaning of a key term, "cost."

Cost is more than the money disbursed to pay the invoice. Organizations that lose sight of this fact often stumble severely, behavior I've seen too often in my years in management.

Legal project management: Fundamental shift or flavor of the month?

jhassett@legalbizdev.com (Jim Hassett) — Wed, 08 Jun 2011 10:32:00 -0400

Last month, the Canadian magazine Lexpert ran an article about legal project management that began by describing two partners at Stewart McKelvey who participated in our Certified Legal Project Manager^TM program.

The article went on to discuss other project management initiatives at such firms as McCarthy Tetrault, Ogilvy Renault (now part of the Norton Rose Group) and Osler and said that legal project management has "the potential to cause a fundamental shift of the tectonic plates of the traditional law

Partners: Start Your (Marketing) Engines

tkane@KaneConsultingInc.com (Tom Kane) — Wed, 01 Jun 2011 11:53:00 -0400

According to the "Firms in Transition Survey 2011" reported on Law360 on Tuesday "unproductive and underproductive partners" (read non-rainmakers) will be cut by 20% of the law firm responding to the Altman Weil (no follow) survey this year. The good news is that the percentage is less than the 33% of firms that cut partners last year.

On a separate note, it is also surprising how many law firm respondents don't seem to get it. By that I mean:

95% said they plan to raise hourly rates in the coming year (this is after 66% reported they "increased gross revenue in 2010). What are they

Building consensus in compensation: the Addleshaws case study

nkclark@walkerclark.com (Norman Clark) — Wed, 25 May 2011 12:13:00 -0400

Another well-intentioned and innovative reform to a law firm's partner compensation system has been aborted.

The senior management team at one of the United Kingdom's better-managed law firms, Addleshaw Goddard, has been forced, by what appears to be unexpectedly strong opposition from some of their partners, not to go forward with a proposed transition from lockstep compensation to a scheme more strongly oriented toward partner performance. The story is summarized in an article today at The Lawyer website.

Bob Denney has an article on Attorney at Work that talks about what you should do to assure that you get the fee you deserve. He states that most "fee challenges occur with either fixed or hourly arrangements..." With either arrangement, there is less likely to be challenges, if the law firm approaches client engagements utilizing legal project management (LPM) techniques. What struck me about Denney's article was how closely his suggestions come to the principles that I and my colleagues over at LegalBizDev offer as part of LPM training. Accordingly, I have included LPM terms in brackets

Engagement letters vs. statements of work

jhassett@legalbizdev.com (Jim Hassett) — Wed, 04 May 2011 11:17:00 -0400

This post was written by LegalBizDev Principals Mike Egnatchik, Tom Kane, and Jim Hassett.

At the beginning of a new matter, lawyers often specify its scope and fees in an engagement letter. The engagement letter is designed to clarify exactly what is included, and excluded, from a particular matter.

Some states have specific requirements for what must be included in an engagement letter, and some firms have their own requirements as well. For example, in New York State, Part 1215 of the Joint Rules of the Appellate Division requires a letter of engagement in most matters, except for certain exceptions listed in the rule (i.e., an engagement letter is not required if the fee is expected to be $3,000 or

Alternate Fee Agreements Meet Process Improvement

jln@lawgravity.com (Jayne Navarre) — Tue, 15 Jun 2010 13:57:00 -0400

Following my post on Alternative Fee Agreements for law firms and their clients I had one of those days where I wished I had never heard of the phrase. I was sitting in the middle of a flat fee project. Had I priced by the billable hour, I would be rich and retired today. Instead, my hourly rate is clocking just above minimum wage and it's not finished yet. That's just how it goes sometimes, I guess.

Of course I was discouraged. Of course I started beating myself up for not having managed my time better. I kept thinking over and over wondering what went wrong and how could I have stopped the runaway train? There really was nothing unusual about the project, a pretty straightforward engagement that I've done successfully many times over, which is why I priced it the way I did. Still, things got out of hand

Is It “Alternative Fee Arrangements” or “Value-Based Billing?”

steven.levy@lexician.com (Steven B. Levy) — Tue, 27 Apr 2010 14:08:00 -0400

Yes.

There has been discussion over the past months as to whether the better term for non-hourly billing is "alternative fee arrangements" or "value-based billing." The answer is yes, and yes.

The first "yes" is an increasing number of firms and clients - not a majority, not a tidal wave, but an increasing number - saying "yes" to non-hourly billing. Even more are seriously exploring the idea, perhaps not ready to jump yet but trying to prepare in case it becomes necessary or prudent for to offer such billing.

It's not yet clear to me that there will be a sizeable shift to non-hourly billing in the next few years, but it is clear as someone schooled in business that conditions are ripe to support such a shift. I also believe, as a businessperson working with law practices on their quest for efficiency, that they can be profitable in such a world... but that some assumptions that are today taken for

LexisNexis Tips Series: Mastering the Basics of Alternative Fee Arrangements

norman.mullock@lexisnexis.com (Norman Mullock) — Wed, 31 Mar 2010 11:23:00 -0400

Rising client demand for alternative fee arrangements (AFAs) has forced an increasing number of law firms to move away from the hourly billing model. In many respects, firms are implementing AFAs in rather entrepreneurial fashion without benefit of proper planning and controls, says Norm Mullock of LexisNexis. Norm suggests more formalized initiatives with enhanced tools and processes borrowed from best practices in innovation. Law firms should consider the following tips when planning and implementing new client pricing models. These steps can be implemented sequentially or in parallel prior to engaging a new fee structure.

Set up a team with financial and project management expertise. Comb the firm and bring together a "hot team," a diverse, strategic decision-oriented team with financial, legal, and project management background.

Get baseline knowledge. Arm the team from finance and project management with information as

The Future Value of Today’s Inventory

Derek.Schutz@placeholder.com (Derek Schutz) — Tue, 23 Mar 2010 21:26:00 -0400

Most law firm managers understand intuitively that the value of inventory (both WIP and A/R) degrades over time, but by how much and how quickly? The ability to understand and answer these two questions is the first step in preparing a realistic, forward-looking valuation model - one that can identify opportunities and drive action.

To begin to assess the future value of current inventory, it is important to recognize that there are two different forces diminishing a firm's return on work performed, and both have the same basis: time. In essence the old adage "time is money" is true; as time passes, a firm's inventory becomes less valuable.

Read the full

Gaining Confidence in Alternative Billing

Kris.Satkunas@placeholder.com (Kris Satkunas) — Tue, 23 Mar 2010 09:29:00 -0400

The tide appears to have turned in favor of alternative billing solutions. Amid the continued economic tumult, firms are responding as never before to client demands for more creative pricing. As these arrangements play out, however, some firms are likely to find the deals they've struck are less profitable than anticipated. Inevitably, such unwelcome results will stem from the fact that in pricing such matters, firms have failed to account for key variables.

The problem lies with the reflexive approach to matter pricing that still prevails at many firms, where partners often use a back-of-the-envelope method to structure an offer to a potential client.

There is a better way. Firms that model matter planning scenarios provide their partners and business development staff with the crucial ability to gauge up front how different approaches to pricing and staffing will affect profitability. Modeling allows firms to make adjustments before making their bid - and therefore

Gaining Firm Acceptance of a Profitability Model

Kris.Satkunas@placeholder.com (Kris Satkunas) — Mon, 22 Mar 2010 09:25:00 -0400

As law firms grow in size, and expand geographically and across practice areas, the use of firm-wide profitability tools has become a business necessity. But understanding the urgency to adopt or update a profitability model doesn't guarantee its successful implementation.

The road to success begins with the ability to anticipate the pitfalls that may impede the process. In addition, firm managers should consider what they're seeking to learn from profitability analysis. The model they select should meet these goals and provide the data needed to move the firm's business strategy forward.

In helping deploy more than 75 profitability models over the past five-plus years, Redwood has learned that certain key components will determine how effective a model becomes in enabling a firm to improve its performance.

Does Bringing this Suit Make Sense?

bensenmyers@gmail.com (Rebecca Kelder Myers and Eric E. Bensen) — Wed, 03 Mar 2010 17:04:00 -0400

The second in a series of articles about how to reduce litigation costs while getting better results. The following is adapted from Chapter I.C of Bensen & Myers on Litigation Management.

Once the pertinent facts and applicable law are analyzed and a detailed budget prepared, virtually all of the pieces of information needed to decide whether to bring suit are available except one: the outcome. There is typically no shortage of predictions about the outcome, of course, but those who favor going forward with the suit usually have rosier predictions than those who do not and vice versa. Notably, moreover, those favoring suit are not necessarily the people responsible for the litigation budget.

Many subjective considerations may come into play

What Good is a Litigation Budget?

bensenmyers@gmail.com (Rebecca Kelder Myers and Eric E. Bensen) — Wed, 24 Feb 2010 09:40:00 -0400

The first in a series of articles about how to reduce litigation costs while getting better results. The following is adapted from Chapter I.B of Bensen & Myers on Litigation Management.

There is probably no other part of the litigation process where the cold hard reality of hindsight has less in common with the lofty expectations of planning than the much demanded, but universally dreaded litigation budget. Budgeting is a foundational brick in virtually every sound business process. While it always poses its difficulties - too low for the department head, too high for executives- and usually imperfectly matches expectations, it serves a legitimate purpose and, with some planning, can usually serve that purpose well.

In litigation, that all goes by the

Milking a Cash Cow

Edward.Wesemann@placeholder.com (H. Edward Wesemann) — Wed, 27 Jan 2010 11:34:00 -0400

With all of the reporting capabilities of sophisticated time and billing systems, it is easy to lose sight of the most basic rule of law firm economics: Cash in must exceed cash out. To that end, one of the most valuable assets any business can have is a cash cow. Yet, many law firms never benefit from practices that could be cash cows because they just don't seem to understand the concept. It sounds pretty simple -bleed as much revenue as you can out of practice areas in which your firm has a dominant position. But, somehow, they keep screwing it up.

Read the full article.