Make More Rain : disaster recovery, leverage

Leverage and the transactional practice

Admin — Fri, 29 Apr 2005 18:03:17 GMT

As the maturing practice area crests its life cycle and begins the long journey on the back side of the bell-shaped curve, it also begins its conversion to a transaction style service, becoming so routine that an increasing portion of the work becomes clerical in nature. More and more work moves to paralegals and clerical staff supervised by associates under the direction of a partner. Now highly competitive, the value of the work in the eyes of the customer client is constantly declining, putting downward pressure on fees. Successful transactional practices will be the low cost producers. They will have applied maximum technology and work flow management. They will have converted the service to a well-defined process. In short, like most successful businesses, they will have learned how to do one thing well and selling that product or service over and over again. Leverage is at its highest level. Per partner income is high in the best run and managed practices and too low for business continuity in the poorly run firms.

If the firm continues to pursue the practice too long, intellectual assets erode to the point that there is no way back. The practice will no longer have the intellectual capacity to take on either groundbreaking matters or matters of substance requiring demonstrated experience. The market place is not attracted to this practice for work other than the specialty area to which it has evolved. On the recruiting side, the firm attracts only those associates passed over by the competition. Candidates see little opportunity for challenging work or to gain experience that will increase their value. They see little opportunity for advancement given the small number of partners related to those who will be vying for any opening. Turnover begins to settle into a normal business pattern versus that of a professional organization. Over time, the transactional practices become more like a business and less like a law practice. And, with that evolution, management's role changes.

When a business moves into the commodity zone, which is where the transactional practice is headed, management has three options. Become the low cost provider, change the nature of what they are selling, or get out of that business and into another. Those same options are open to the practice area.

The most creative move is to change the nature of what you are selling. How can you do that? By creative thinking. With a commodity, aspects surrounding the service may become more important to the buyer than the commodity itself. A commodity is widely available but accessibility, fast turn-around or delivery, guarantees, risk assumption, and services, such as taking over part of the buyer's normal management role, become factors that make one supplier and their service or product more valuable.

In business, a common strategy is to turn an overripe mature service into a product and, vice versa, turn a commodity level product into a service. Tax services have been transformed into "do it yourself" tax preparation software. And tax preparation software has been turned into services that will review, submit and provide representation if subsequently required. The transactional practice can use similar approaches.

As a practice area moves downward in its life cycle, aspects of the services can become more valuable than the service itself and the firm that capitalizes on the aspects important to the buyer or client can sometimes revitalize the practice¾reinventing it and even move it to a new life cycle.

Leverage and the mature practice

Admin — Thu, 28 Apr 2005 17:50:47 GMT

As a practice area matures, firms (and competitive firms) gain experience. They develop work product and increase their ability to use less experienced staff for an increasing portion of the work. Clients seek out these firms because of their prior experience handling similar cases. But now other firms also have successful experiences. So there is competition for services. The trailblazer professionals have moved on to other practice areas or left the firm. They are no longer challenged once the trail has been established. The value of the services provided by the firm has declined due to competition and because the value of their work, while based on the firm’s experience and track record, nevertheless relates to increasing routine issues. Recruiting and retention has changed. Rather than hiring laterally, most of the additions to professional staff come from recruiting new associates. The firm is attractive to the recruit because the practice has an established history of advancement within the firm. The practice can sell the candidate on the opportunity to become a partner. Those that don’t reach partner within an expected period of time will leave the firm voluntarily or by being counseled out. The firm must now anticipate its needs and recruit and hire accordingly. The importance of leverage now makes it one of the most important areas for the firm to manage.

Partner income has become more related to leverage than fees. Partners have to handle multiple cases or matters at a time. The more effective the partners are at using associates and paralegals to do the work, the higher the firm’s per partner income will be. Firms that are less efficient at using associates and paralegals will have a lower partner Income. Thus, inefficient acquisition and or use of leverage in a mature practice area threaten the very continuity of the firm. Leverage is now a key factor determining success or failure of the practice.

Leverage and the trailblazer practice

Admin — Wed, 27 Apr 2005 18:46:37 GMT

In a prior article, I noted that there are two certainties, “change is constant and we are always judged by others”. It follows that any practice area changes its character over time and, as it does, so does the value (how we are judged) of those services. Graphically, the life cycle is similar to a bell-shaped curve.

As a practice area emerges, there are no precedents, no forms, no prior experience, and no accumulated work product. Solutions in this emerging area have to break new ground. This groundbreaking area requires the brightest and most creative minds. It commands the highest fees and clients seek out the law firm because of its reputation for creativity and for having a smart professional team. This professional work is performed with very little or no leverage. Effective use of leverage requires prior experience in order for the supervising professional to efficiently instruct, train and mentor the less experienced assigned professional staff. Thus, the trailblazer firm will hire laterally rather than recruit new associates.

As the practice area matures, firms (and competitive firms) gain experience. They develop work product and increase their ability to use less experienced staff for an increasing portion of the work. Clients seek out these firms because of their successful prior experience handling similar cases. By then, other firms also have successful experiences under their belt. Competition drives prices down. As the practice continues to mature, it will evolve into its transactional phase where the work becomes routine and leverage reaches its highest level.

The important point is that trailblazer practices will not remain low-leverage, high-fee areas for all time. The life cycle for a practice area is bell shaped. The practice emerges then matures. It crests the bell-shaped curve and on the down side of the life cycle curve, it evolves in transactional business. Trailblazers have two alternate strategies that they can follow. The practice can either change its leverage ratio and management style so as to operate successfully throughout the life cycle or it can move from one life cycle to another. That later strategy says, “We are going to remain a low leverage firm of only the brightest and most creative people”. The firm will look for and move to new emerging issues and abandon old issue areas as they mature.

Today most firms are engaged in multiple practices areas. In many cases, the multiple practice areas resulted from hanging on to trailblazer areas as they matured, or mature areas that have evolved into transactional areas. It is important to point out that all three types can be highly successful, but only if the appropriate leverage and management is applied to each. You can’t blaze trails configured and managed as a mature or transactional practice and you can’t successfully compete in the mature areas with the high cost of a trailblazer practice.

Leverage, the basics

Admin — Tue, 26 Apr 2005 17:45:44 GMT

While at the ALA in San Francisco, I thumbed through some of the books for sale in the ALA book store on the exhibit floor for the annual ALA conference. It struck me that Maister in his book, Managing the Professional Service Firm, quickly moves to the issue of leverage. He does so for a good reason. No other single factor has as much influence on the personality of a law firm or the type of professional services in which it can profitable engage.

The definition of leverage is simple enough¾the ratio of non-equity fee earners to equity fee earner. Thus, a firm with a 3 to 1 leverage has three non-partner fee earners (associates and paralegals) for each partner. But understanding the whys and the implications on management is far more complex. The management implications of leverage is generally underestimated and frequently misunderstood.

Leverage in a law firm isn’t an independent variable. You don’t just wake up one morning and say, "I think we will have a 3 to 1 ratio". Leverage is influenced by the nature of the practice and influences the practices in which the law firm can profitable engage. Its role in the success or demise of a law firm is complex.

There are three basic types of practices with variations in between:

The trailblazing practice

The mature practice

The transactional practice

Actually they are different points on the same life cycle of a practice. By practice, I mean a style of cases or matters. Most law firms are engaged in multiple practices each at differ points on their life cycle.

The trail blazing practice requires the greatest creativity and brains. By its nature there is no, or little, accumulated experience. Without experience and accumulated knowledge, there is no road map to train and guide associates. This practice involves little or no leverage but also commands the highest fees from law firm clients.

The mature practice is one in which the firm and its competitors have had experience handling. Through that experience, the firm has accumulated reusable work product that can guide new projects and provide a starting point to be adapted to the particulars of new matters undertaken. The mature practice can take advantage of leverage. The more projects each partner oversees, the more per partner income is generated for the firm.

The transactional practice could also be called the over ripe mature practice. By now the mature practice has become so well defined that most of the work takes on a clerical character and leverage is at the highest level. Paralegals do much of the work under the supervision of associates who in turn report to a partner. Competition reduces prices to the lowest offered by the firm. The successful transactional practices are those that have converted their services to a well-defined and highly automated process. They are the low cost producers.

Each of the above practices can provide a handsome per partner income level if properly staffed and managed. Each requires different staffing and different management approaches. Staff incorrectly or manage inappropriately and the practice area is likely to fail.

In the coming days, we will examine each of these three practice types in greater detail with the objective of understanding the role and influence of leverage and other factors on per partner income and business continuity.

LEDES: Electronic Billing Standards

Admin — Mon, 25 Apr 2005 20:43:58 GMT

In March 2005, the International Legal Technology Association, ILTA, published a white paper on “Accounting in the Electronic Age”. In it, Jeff Hodge wrote, “LEDES (Legal Electronic Data Exchange Standard) has been the de facto format for moving legal invoices from law firms to corporations worldwide since its introduction in 1998. This ASCII-based file format has been embraced by law firm’s time and billing system vendors, corporate matter management vendors and e-billing and spend management vendors serving corporations, firms and others. Some estimates show that more than 90 percent of the legal invoices moving electronically today move in the original LEDES 98B ASCII version of the standard.” Jeff should know. He was one of the key Price Waterhouse figures who, along with legal software vendors, created the original standard. Today, Jeff’s leadership abilities are devoted to DataCert, Inc.

Jeff notes that LEDES is going through a makeover from ASCII to the more flexible XML format. As Jeff noted, it is just a “matter of time” before the XML standard replaces the LEDES 98B standard. The migration will be driven by the law firm’s corporate clients.

Why is this important? The firm needs the ability to meet the XML requirements when the firm’s corporate clients demand it. And, in fact, firms with the XML ability can use it as a competitive advantage if your firm can offer it before the competition.

If you don’t already have the LEDES XML feature in your business software, ask your business system, or time and billing vendor, about their plans for the LEDES XML standard.

It is only a matter of time!