Make More Rain : law firm bus model, pricing

More Thoughts on Reducing Headcount

MichelleStPierre — Fri, 10 Jul 2009 13:45:00 GMT

The post yesterday by my colleague Brian exposed some interesting ideas about maintaining profitability. Another one of my colleagues, Bo Yancey, previously published an article in the 2009 LexisNexis Business of Law Insight on a related topic, exploring various 2009 scenarios to "right size" firms in the face of reduced demand and downward pressure on pricing. Bo draws a similar conclusion to Brian's assertions - the four scenarios he addressed in the article show that firms cannot maintain profitability by just reducing associate headcount, and he encourages firms to explore structural leverage.

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RFPs: A Necessary Evil

Admin — Mon, 09 Mar 2009 21:58:00 GMT

As we’re all aware, in today’s economic climate there is a big focus on cost reduction. It’s no surprise, then, that RFP’s are being used with even greater frequency by purchasers of legal services. The concept is not new, but the extreme focus on price across a large percentage of those companies probably is. For law firms, this is not a happy consequence. Law firms incur significant expense by simply responding to RFP’s, with no guarantee of work at the end of the process. Of course, a primary reason for companies using RFP’s to begin with is to get the lowest price across all parties—which means that the “winner” of the RFP may not be getting profitable work. In an RFP process, it’s not a guarantee that the lowest price will get the business, but it’s nearly certain that “bidders” with pricing substantially above the lowest prices will be eliminated quickly from consideration.

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Alternatives to the Billable Hour

Admin — Tue, 18 Nov 2008 21:30:38 GMT

For years, there has been much talk, and decidedly less action, on “alternatives to the billable hour.” GC’s say they want this, and firms say they are willing to provide these options, but neither side tends to “walk the walk” in a way that matches up with their stated intentions. We think there are a couple of key reasons for this:

1. On the GC side, as much as companies are interested in reducing costs, there is little creativity or interest in crafting “win-win situations.” There is clarity in the billable hour, and with that model, less concern that firms will be leaving money on the table that ends up in law firms’ pockets.

2. On the law firm side, firms quite simply have trouble managing to a fixed price or blended rate. It takes people skilled at active management and estimation, which only comes with experience. Firms often always lose money the first few times they try these types of arrangements, making them “gun shy” about doing it again.

The result of the above two issues is that the billable hour continues to dominate, despite its’ being a disincentive to efficiency on the firm side, and an inexact way of predicting legal expenses for clients.

In these less-than-robust economic times, both sides should take a harder look at the pricing models that exist currently for legal services. The most obvious issue, implicit in both of the above-stated problems, is one of trust, which is borne out of relationships and experience. As we all know, trust is a key component in the long-term success of any client/law firm engagement, and especially on one using a pricing model other than the billable hour.

On the law firm side, the more firms can accurately understand the value to the client they are providing for various types of work, the better they can accurately assess the appropriate work effort and the price the company is willing to pay. Over time, the combination of these 2 things can be used to accurately price the work profitably, based on staffing needs and their associated cost.

On the client side, the client has to understand that the law firm is a business too, and requires a margin on its work for it to desire to continue the long-term relationship. The greater the clarity into what the client bottom line is--- whether total cost, expense predictability, outcome, or some combination—the better the firm can be at pricing the work in question.

There are many tools available to law firms (such as Redwood Analytics’ Matter Planning Tool) to help firms price out blended or hourly rates, with multiple scenarios and sensitivities. These are a key piece, from the firm side, of understanding how leverage and pricing affect profitability. However, it is the back-and-forth between the client and firm that ultimately has the biggest impact on alternative pricing arrangements. Firms must understand and respect clients’ priorities and their relative importance regarding legal services, and clients need visibility into firms’ bottom line as well. This give-and-take, and both sides’ commitment to long term success of the relationship, will be what make alternative arrangements succeed. Given rate pressures, clients’ general dissatisfaction with legal services, and a more challenging economic environment, firms would do well to begin to engage their clients in these conversations, if they haven’t already done so.

--Bo Yancey

Bo Yancey is Director of Professional Services for Redwood Analytics/Lexis Nexis.

Client Stages - A new way of looking at a client's life cycle

Admin — Tue, 11 Nov 2008 23:59:00 GMT

Inventory aging buckets are boring. Useful, yes, but still boring. Looking at how unbilled or uncollected hours have been spread over 30 day increments reminds me of learning to count by 2’s. There IS a business need for dissecting Inventory into manageable buckets, but that is for another post. Even before hours start to age, it is important to understand if we are growing the number of hours being worked. It’s simple. Look at this year, look at last year, do the math – better/worse. Right?

At a basic level, yes. However, what if you take the concept of creating Inventory buckets and apply it to the growth in production over time? You would either create another collection of buckets (5%, 10%, etc.) OR you would have an entirely new perspective on the development of your client base.

At Redwood Analytics, we call this Client Stages. These Stages allow us to analyze the client base in ways beyond a simple ranking of hours or growth rates. The basis for the Stages is the growth of the hours worked over the last 12 months (Rolling 12) compared to the 12 months prior (Prior Rolling 12). By using the last 24 months, independent of calendar years, we capture the growth from 2 full business cycles rather than a partial perspective such as year-to –date. Once the growths rates are calculated, the clients are categorized into the following lifecycle stages:

ACTIVE	Work within the last 12 months
New & Renewed	Work within the last 12 months, no work in previous 12 months
Thriving	100% growth in work vs. prior rolling 12 months
Growing	Between 20% and 100% growth in work over prior 12 months
Stable	Between -20% and 20% growth in work from prior 12 months
Declining	Between -50% and -20% growth
At Risk	More than 50% decline

INACTIVE	No work in the last 12 months
Dormant	No work in the last 12 months, but work in previous 12
Lost	No work in last 24 months

Having the client population dissected into these stages allows for much broader analytic review. Now rather than looking at the clients as a total pool, we can analyze them based on their lifecycle stage. Identifying clients who are declining or at risk of going dormant becomes easier and provides you with meaningful, decision-making information very quickly. If you are trying to determine where to spend client development dollars, focusing on strategic clients in some of the underperforming stages is a good place to start.

The more that you can look at your client base from different angles, the more that opportunities will reveal themselves to you. Client stages are just the beginning of a forward looking view at your firm’s health—which in large part is based on its clients. Take some time and consider the value that could be gained from examining clients based on how long they’ve been with the firm; their ranking based on the revenue potential they bring to the table; or perhaps a rating system based on key metrics like realization, production, and cash cycle. Inventory aging buckets are useful from a billing & collections standpoint, but don’t limit yourself to one perspective of your firm’s lifeblood.

--Jonathan Huyard

Jonathan Huyard is a senior consultant with Business of Law Services team for Redwood Analytics/LexisNexis.

RainToday Report: 76% of Law Firms Discount Fees

Admin — Fri, 06 Jun 2008 07:00:32 GMT

Pricing has been a frequent topic at More Partner Income. Some past topics include the science behind pricing, the ill effects of inflation on pricing, pricing management, and discounting.

RainToday has recently released the Fees & Pricing Benchmark Report: Law Firm & Legal Services Industry 2008. David Maister wrote a blog post on a similar report released by RainToday focused on the consulting industry on April 28th. There were some striking similarities between the two reports:

65% of consulting firms reported they discounted fees. 76% of law firms reported discounting fees;
Average discount of responding consulting firms was 11.7%. Average discount of responding law firms was 9.9%.

Of the two pre-bill adjustments (mark downs and discounts), discounting is the most difficult to change. Both show weakness in the firm, but discounting creates a feeling of entitlement from clients. How?

Marking down time tells your client one of several things (the below is not exhaustive):

I spent more time than I can reasonably charge you for the service provided: ie, I am not efficiently working the matter;
My associates spent more time that I can reasonably charge you for the service provided: ie, my firm has less competent attorneys working on your case or I have inefficient staff working on your case;
Even though I spent an adequate amount of time on this, it "seems" too high to me: ie, I am unclear on the value of my service.

All of the above are correctable. They are entry-specific adjustments that can be seen as temporary.

On the other hand, discounts are typically applied to the entire bill. This gives rise to expectations of entitilement. They can tell your clients one very negative thing: I am overcharging you up front and adjusting it on the back-end.

Just as discussed on this site in the post Discounting At Law Firms, the RainToday report suggests that there may be valid reasons to discount, but only when the discount is intentional, strategic, and, ultimately, mutually beneficial to you and your client.

Some reasons to discount given in the report include well-funded start-up clients (in expectation of long-term payoffs) and absorbing the cost of training new associates. It is also something to consider when trying to win RFPs, in exchange for quick payment of invoices or in return for a threshold amount of work that the client will provide to the firm.

The important part of discounting is that it is mutually beneficial to you and your client - there needs to be consideration for the discount. It needs to be binding so that if the client does not perform on their end, the discount doesn't get applied. If there isn't quid pro quo, you are giving a clear message to your client that you overcharge up front - and that your rates are open to negotiation.

Tax Reform Up For Grabs

Admin — Thu, 29 May 2008 07:00:45 GMT

With the tax cuts enabled during the Bush administration coming to an end soon, lobbyists and tax attorneys are lining up to offer their opinions on how the tax code should be reformed.

According to an article in the National Law Journal (Firms Gear Up For Critical Tax Polcy Changes), "[a]bout $4 trillion worth of tax revenue provisions are expiring, the most in the history of the U.S. tax system":

"The next president has some ticking time bombs to address," said Jim Miller, a tax attorney who last month moved to Winston & Strawn's Washington office from Hunton & Williams. "There's now the greatest potential for tax reform certainly since 1986".

How is this important to you? Consider this:

"Tax issues will be the key driver for political and economic activity for the next half-dozen years," Mike T. McNamara (a Sonnenschein Nath & Rosenthal partner) said. "All of our clients are trying to look at how tax policy will drive or hinder their business plans."

It isn't just your clients who need to watch the tax policy. Your firm needs to pay close attention to how tax policy is addressed so that you may draft your own business plan that take the new policies into consideration.

Alan J. Auerbach, Jason Furman, and William G. Gale wrote an essay on possible approaches to tax policy titled Facing the Music: The Fiscal Outlook at the End of the Bush Administration.

The tax foundation has a summary of each of the Presidential Candidates' tax plans that can be accessed by clicking here.

If you want to talk about "perfect storms", consider the effects on your business of expiring tax cuts and a struggling economy. How tax policy is approached in the coming year(s) will be telling on how well our economy rebounds from this (at least so far) minor contraction.