Make More Rain : productivity, alternative billing

Business Management Strategies Migrate to BigLaw

MichelleStPierre — Wed, 16 Sep 2009 15:50:00 GMT

A couple of items jumped out at me from my Google Reader yesterday that on the surface don't seem to have much in common but can help to pave the way to law firm success in using alternative pricing, like fixed fees and perhaps even value pricing...(read more)

Georgia Proposes Flat Rates For Representing Indigents In Capital Cases

Admin — Fri, 22 Feb 2008 08:00:25 GMT

Legislation has been introduced in Georgia to provide more cost accountability to state-funded defense of capital cases. What has caused the uproar?

In March of 2005, Brian Nichols was awaiting trial for rape in Fulton County, Ga. While changing clothes to prepare for his court appearance, Nichols overpowered a deputy, walked into Judge Rowland Barne's courtroom through the judge's chambers and shot both Judge Barnes and a court reporter. During his escape, he injured several and killed two others. The manhunt that ensured culminated in an unlikely ending: Nichols in the apartment of a drug user who was soul-searching and through an 11 hour conversation softened Nichols enough to let her leave. She called 911 and Nichols eventually surrendered without further violence.

Since then, Georgia has seen one of the longest murder trials in state history take place. Since Nichols qualifies as an indigent under Georgia law, the taxpayers are footing the bill for his defense. The Atlanta Journal Constitution reported that the cost of the trial has exceeded $2 million in defense costs alone. That has outraged the Georgia Legislature enough to change the law regarding representation of indigents in capital cases. According to the AJC:

The bill . . . could reduce the financial burden on the Georgia Public Defender Standards Council, which oversees the statewide indigent defense system. Under the bill, the council would pay for the first $150,000 paid to private lawyers defending an indigent capital case and 75 percent of the next $100,000, with the county paying the other 25 percent. Beyond $250,000, the state and the county would split defense costs.

Here's the kicker: The measure recommends that the council set contracts with flat rates for attorneys' fees and expenses in death cases. Sound like a good idea?

Perhaps if defending capital cases were akin to filing Chapter 7 Bankruptcy. However, for private sector attorneys who represent indigents in capital cases, does it remove the incentive to take on these difficult matters? Would a criminal defense attorney zealously defend a suspect for a flat rate for both fees and expenses when you have Judges saying things such as"[e]veryone in the world knows he did it" (as the New York Times reported Judge Fuller said before having to recuse himself from the case)?

Is Georgia trying to limit the representation of indigents in capital cases? Or are they only limiting the financial incentive to defend them? If it is the latter, then ostensibly an attorney may lose the zeal to defend a client once the money runs out - unless they believe that the defendant is innocent. And that might be the point of the legislation. [poll=8]

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Lawyer Professionalism Tied To Value Billing?

Admin — Tue, 19 Feb 2008 08:00:01 GMT

It's not that I am against value billing. I am just against the proposition that the hourly billing model is an inherent source of evil. When reading Ed Poll's post on Professionalism versus Competence, a sentence caught my eye that appears to be another slam against the billable hour.

The post is about a recent USA Today poll asking whether co-worker's rude or unprofessional behavior should be tolerated if they otherwise do a good job. Thankfully the answer was overwhelmingly no. No one wants to work with rude people.

Poll notes the new firm Patrick Lamb co-founded this year that focuses on value billing. There is much positive press when law firms move to this model so the marketing upside is a good thing. But then came this:

As more lawyers succeed in this business model, perhaps others will follow. Then, perhaps, will civility in the profession be achieved.

Am I to conclude that without this business model (value billing), civility can't be achieved in the legal profession? First, I don't want to mistake Poll's point: that providing value to clients and a team mentality within the firm adds civility to the profession. Agreed. However, how is this at odds with hourly billing? Is it because some (and unfortunately many) are sloppy in their billing process? Or worse, unfairly padding their hours?

Assuming this is a widespread problem, does value billing fix it? Maybe, but not by its presence alone. If you sell services at a fixed fee, you had better know the price of your services or you won't be in business long. Tom Kane explains in a recent post the importance of tracking time even if you bill at a fixed fee.

Understanding that in all but a few routine transactions there are variations in the time it takes to provide a service depending on the variables surrounding the case, you will need to account for differences in the price of particular tasks. So while on the surface everyone may be paying the same for a service, some will be paying more for a task while others pay less. It depends on how difficult the task is and how efficient the attorney.

In fact, if anything, value billing helps budgeting for lawyers since you can set goals on how many tasks you sell clients. Crafty firms can then weed out the difficult cases through case assessment to maximize profit. Finally, marketing efforts can sway those who would buy into the "value" concept unaware of the higher price they are paying for a simple legal task.

Am I saying this is how firms who "value bill" operate? No. Can they operate this way? Yes. Is that a better value to clients? No. And to answer the presumptive rebuttal, "with value-billing, if the client doesn't like the fee, we will adjust it for them" I would answer, "and how is this different from hourly billing?" I've yet to meet a lawyer that is unfamiliar with post-bill adjustments. Some attorneys have a chronic habit of reducing their fees prior to billing as well. The biggest attraction to the value billing model isn't the savings to clients (marketing notwithstanding), it's the potential for higher revenues for well-managed law firms who price margin into the fee. The value of value billing to the client is nothing more than trading actual cost for pre-performance cost certainty - that apparently can still be negotiated after the service is provided (at least when firms open the door for negotiating fees after performance).

Once again, it comes down to trust. If there is a trusted relationship between attorney and client, then attorneys shouldn't overbill their clients and clients shouldn't question attorneys' fees (after-the-fact) - regardless of the method. As Poll states in an earlier post, "there is a very small percentage of 'bad apples' in the legal profession." The devil isn't in the billable hour. It's in those bad apples.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Reward Attorneys for the Commoditization of Reproducible Work

Admin — Tue, 15 Jan 2008 08:04:35 GMT

A friend of mine practices in firm that specializes primarily in transactional work. Much of the work is billed flat fee but they still track their time so the firm can determine profitability. Recorded time is set against an attorney's budgeted hours for the year so that they are credited for their flat fee work. My friend lamented associates padding their worked hours for flat fee work so they make their budget numbers. In this case, padding hours doesn't affect clients since the fee is pre-set but it does affect reporting of profitability.

Aric Press, Editor-In-Chief of The American Lawyer, wrote in the December, 2007, In-House article that 2008 may well be the year when clients start to demand alternative fee arrangements:

One of the unintended consequences of electronic billing is that clients can now easily compute and compare the cost of tasks. Soon there may be other technological threats based on knowledge management that can convert once complex acts of lawyering into rather commoditized routines.

I have been pretty adamant in my defense of the billable hour. That doesn't mean that I am against alternative fee arrangements when the use of them will improve the efficiency of the firm and thus increase profits. Recording time, regardless of fee arrangement, is still a good idea. However, sometimes it just makes more sense to bill using fixed fees for certain tasks.

Why not take advantage of this and place an internal value on the task as well? You can do this by determining the time it takes to perform the task, then mark it up to the market price (perhaps based on the hourly rate times the time it should take to perform it). When a task is routine, standardization gives firms opportunities that can revolutionize a firm's business model. Not only will attorneys have a value based on their billable hour, but certain repetitive and reproducible tasks can be valued as well. Your firm will diversify its product offerings to clients, giving them more options for services and giving you more options to strengthen the client relationship. You could ostensibly set a price list for legal products - in effect competing with the emerging online forms market.

In the example of my friend's firm, creating a standard task that is reproducible and given a proper value reduces the inaccuracies in reporting due to "padding time" by associates trying to make their numbers. In the example of the firm whose client has already placed billing guidelines on a firm, this has the equal benefit of both providing cost certainty to the client and saving the attorney from repetitive time entry.

There is also the benefit to the general practice firm. The firm can market package transaction services at a set rate, and tack on billable hours beyond the scope of the repetitive (and priced) task. Sound a bit like value-billing?

How would this work? For transactional work, it would be as simple as setting a value upon a routine task, such as creating a will. For a simple will, attorneys will determine what the variables are, determine what it has cost in the past, agree upon an acceptable price based on market acceptance and variables, then price it.

In a litigation matter, it is no different. Many firms are already required to provide budgets based on tasks for the benefit of client cost allocation. Each task that the firm performs can be priced. Litigators can anticipate the course of the suit and determine a cost for the entire matter. There should be a value placed upon every legal task, whether it be writing a status letter, reviewing a file, etc. The price can take into consideration variance in time it takes for different attorneys to perform the task. That is up to the firm to decide.

By standardizing the value of certain tasks, it also opens another opportunity for building firm expertise: giving royalties to attorneys who create reproducible work product. Firms spend years building up forms. Forms are rarely created again - they are typically modified. Yet no one gets credit for creating the forms.

By giving an attorney a royalty for a form, you encourage expertise to be passed on to the rest of the firm. You can position attorneys who have a talent for researching and integrating current law into forms as work product creators and attorneys who are better at managing relationships and matters representing clients. Both have value. Both can be compensated based on the work they perform. Form writers would receive a percentage of the cost of the task as a royalty for a certain time period whenever their form is used. Just as you should place a time limit on origination credit, you should only provide royalties on forms for a certain time.

How can this be advantageous to the firm? Several ways:

It encourages information sharing within the firm.
It compensates those who provide value to others in the firm.
It can further a strategy of increasing leverage by giving credit to partners while reducing their billable hours.
It transfers the wealth of knowledge gained at the firm's expense back to the firm.
It can aid the strategy of succession planning by providing a route to semi-retirement while ensuring that the firm maintain its areas of specialization.
It allows partners to spend more time on what they excel in most: rainmakers focused on marketing efforts and strategic planning and grinders developing work product.
It gives firms an opportunity to give associates responsibilities that will benefit the firm as well as the associate.

Of course, with any change in policy, there are uncertainties that have to be addressed. For example, what if another attorney within the firm finds a problematic provision in the form and proposes to change a few clauses? What if the attorney proposes an entirely new form? Although in theory it would be a good thing to have several different forms from which to choose, logistically it may make more sense for your firm to settle on a preferred form from which attorneys may receive a royalty. That along with determination of the royalty percentage is sure to provide lively discussion in the partner meeting.

Whatever direction your firm goes when applying new policies, it should conform with a universal requirement of periodic measurement and adjustment.

Cotterman: In Defense of "Lockstep" Compensation System

Admin — Mon, 14 Jan 2008 08:00:18 GMT

Many, including myself, have for several reasons (in my case, personal experience), railed against lockstep compensation as a debilitating agent to per partner income and the ability to keep top attorneys. I have seen the internal griping, the uncomfortable situations, and the inevitable loss of talent because of the appearance of unfair distribution of compensation based on a lockstep system.

James Cotterman, however, in an January 3rd post, argues "[t]he success or failure of any compensation system is not simply inherent within the structure of the program." He defends the lockstep compensation system - with a caveat:

[A] pure lock-step program largely requires the firm to assess a senior associate’s ability to progress as a partner over the remainder of his/her career. Essentially you are making some thirty or more years of future compensation decisions at one time. Such an assessment requires much more careful attention to the qualities of being a partner. And such attention is rare.

Among the benefits of lockstep compensation plans:

1. It supports a single firm philosophy.
2. There is little internal competition.
3. Leadership has more time to lead without the annual compensation ritual.
4. Non-traditional roles and new postings are more easily undertaken.

1. It supports a single firm philosophy.
I agree and disagree. It should support the single firm philosophy in that it treats all partners more or less the same. However, I don't assume a single-firm philosophy requires socialistic tendencies. In fact, such tendencies in a market system don't work well and can lead to a split up of the single firm. Also, the system in many ways requires trust within the firm that everyone will do their part. As David Maister has aptly noted, attorneys aren't big on trusting each other. In declaring that law firms are unmanageable professional entities, Maister wrote:

Recently, I was advising a firm on its compensation system. They didn’t like my recommendations. Finally, one of the partners said, “David, all your recommendations are based on the assumption that we trust each other and trust our executive or compensation committees. We don’t. Give us a system that doesn’t require us to trust each other!”

2. There is little internal competition.
Little internal competition should help foster trust and teamwork. Experience tells me that little internal competition fosters laziness. Distrust is a problem but competition is not. Measurement improves performance. However, if you don't care that you are being measured, then you won't excel. Incentives to reach goals fosters competition and that isn't a bad thing. If you incent properly (ie factor "firm citizenship" into your compensation system), teamwork will be rewarded.

3. Leadership has more time to lead without the annual compensation ritual.
There is no question that compensation discussions are a large source of discontent and delay in implementing strategic plans. If all partners agree to a compensation plan that is not going to change, that would be a great thing. Do I believe that is possible? Perhaps, if, as Cotterman notes, firms give more attention to the qualities of being a partner - ie, they are consensus-builders in the Henry Clay mold and can make "some thirty or more years of future compensation decisions at one time".

4. Non-traditional roles and new postings are more easily undertaken.
If compensation isn't affected, attorneys should be more willing to take on roles that otherwise would affect their ability to maintain their income.

Cotterman discusses two main arguments against lockstep compensation:

1. There is no accountability.
2. Stars are not specifically recognized monetarily (at least not instantly).

I made both of those arguments above in disagreeing in part to the arguments for lockstep compensation. Without measurement, there is no accountability. Without accountability, internal strife erupts and your star attorneys walk. So I don't disagree a bit to either argument.

Cotterman notes that some of the most prestigious and profitable firms in New York and the UK use lockstep compensation. This is proof enough that the system can work. However, I would argue (as he does) that a commitment to the mangement of the firm and a single-firm philosophy is critical to it success. The challenge for small and mid-size law firms is to create an environment that fosters teamwork and manageability. For the lockstep compensation to work, firms need their own Henry Clay who can effectively communicate the philosophy that supports the system and the consensus-building qualities to bring others to agreement.

That said, even Clay couldn't ultimately prevent the Civil War. I'm still against lockstep compensation. However, for those who want a guide on how to make it work (as it certainly can work, I am just not a proponent of it), read his article here.

Remove Consumption Barriers for Increased Law Firm Revenue

Admin — Thu, 26 Jul 2007 18:47:00 GMT

There are three key strategies for increasing revenue from existing clients:

Make it easier and simpler for people to get what they need
Provide good enough solutions to those with low-end requirements and risk
Remove barriers to consumption

Talk to a small business owner or mid-level executives in larger businesses and you find out that they avoid calling their attorney. Why? Because they know that the clock is always running and can easily escalate into a significant unplanned expense out of proportion to the client’s sense of need or risk.

On a recent trip to southeast France, I went to their version of a grocery store. The Intermarche’ is the French equivalent of Kroger, Publix, Albertsons or Wegmans. There is one big difference. U.S. stores encourage consumption by making the experience convenient for shoppers. The Intermarche’ reflects a French culture that discourages consumption.

Upon entering the store, the only available equipment for gathering my purchases were small plastic hand baskets about the size of those you see mounted on the handle bars of a bicycle. That was hardly what I needed to stock the rented villa for our group of eight. As it turned out, traditional wheeled shopping carts were located in the parking area. However, you had to deposit one Euro coin into a locking device to release the chain securing the cart. Of course, I didn’t have a Euro coin, so I returned to the store for change. The next surprise occurred when checking out. There were no bags, no boxes, and no sackers. You are expected to bring your own bag and sack your own groceries. Of course, I was the only person in the checkout lane with a week’s supply of merchandise. French shoppers limited their purchases. Each had their own shopping bag or individually decorated basket that they reused for shopping purposes.

Like the Intermarche’, law firms have erected barriers to consumption and can increase fee revenue and partner income by tearing down those barriers. Firms need to proactively propose a pricing arrangement that encourages their small business clients and mid-range corporate executives to call. In developing a pricing structure, put yourself in the shoes of your client. Predictability is often more important than actual cost. Department heads, division heads and other corporate executives are held accountable for their financial targets. Proactively offer a retainer arrangement that covers consultation on issues related to the normal operation of the business. The arrangement can provide that law firm services related to any particular matter that (in the judgment of the law firm) appear to require significant individual work shall be undertaken by the law firm only under a separate engagement agreement. The retainer arrangement will eliminate surprises. The clock only starts running when the law firm notifies the client that additional work on a particular matter will be outside of the scope of the retainer arrangement.

The client will call more often. The law firm will cement its position as a trusted advisor. More calls increase the opportunity for the law firm to add value under its traditional billing methods. The client will be happier and the law firm will increase fee revenue and per partner income.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Corporate World Still Hesitant About Law Firm Billing Alternatives

Admin — Fri, 19 Jan 2007 19:35:08 GMT

The January California Lawyer (page 8) reports that lacking comfortable alternatives, lawyers and clients are staying hitched to the billable hour.

The article, Driven by the Clock, notes that C-level executives on the corporate side seem more reluctant than law firms to abandon the status quo—the traditional hourly bill. Offered an alternative arrangement, one corporate executive rejected it, explaining, “I need someone watching my back. I already have an investment banker whose only interest is this deal is collecting his commission.”

The client did not want legal advice biased toward a certain outcome. One of the complaints against the “billable hour” by the business world is the perceived conflict-of-interest that may result in the lawyer finding things to do just to increase the bill. The article illustrates that alternatives to the billable hour can interject their own versions of perceived and real conflicts-of-interest into the lawyer/client relationship.

As observed by Brad Brian, past chair of the ABA’s litigation section, “There is an interesting dance going on. A lot of clients want attorneys to think about billing alternatives, but they’re nervous about them too because there are risks on both sides.”

There is no single pricing solution that will make everyone happy all of the time. It follows that a law firm should not have a single pricing model. Where alternative pricing fits, alternative pricing is a road toward more partner income and happier clients.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Law Departments Move Alternative Pricing to Short List

Admin — Fri, 30 Jun 2006 16:55:15 GMT

Rees Morrison reported that the InsideCounsel/DataCert Annual Report of Corporate Law Departments listed the top steps taken to reduce corporate legal cost. The list was derived from a survey of 180 law departments.

The top five cost reduction steps included:

1. Bring work in-house
2. Use of interns, paralegals or temporary staff
3. Moving to alternative fee arrangements
4. Preferred provider programs to reduce the number of outside law firms
5. Cutting staff

I was surprised by the third item on the list. Close to one-third of the surveyed firms reported using alternative fee arrangements to lower cost. Of course, we don’t know how extensively each of those firms is using alternative pricing, but it is worth noting that it has moved up in the consciousness of the General Counsel.

While the hourly bill is still king, we continue to encourage law firms to propose alternative arrangements wherever possible.

You want your alternative pricing approach to provide the firm with the opportunity to increase margins through efficiency while reducing the client’s cost and increasing their cost certainty. In my book, that means a fixed fee per transaction, project phase, or for a portfolio of business. In more common general business terms, it means packaging (defining scope) and adopting product-like pricing.

Clients want lower cost and certainty of cost, not just cheaper services. The law firm and the client can both win through increased law firm efficiency:

Better scheduling
Use of competent but lower-cost talent where appropriate
Improved reuse of knowledge
Better project management
Taking increased advantage of technology to automate processes
Equipping the client to carry part of the load

In most cases, law firms are viewed by the clients as too good, too expensive, and too complex. Alternative pricing is one way to shift law firm thinking toward “a solution that is good and simple enough for the situation at a reasonable price."

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

The Entrepreneurial Law Firm in Three Steps

Admin — Thu, 25 May 2006 17:52:44 GMT

The Entrepreneurial Law Firm in Three Steps

The entrepreneur’s sprit is a restless one. Here is a three-step classic road map that has been used by many entrepreneurs to transform a moderately successful service business into a significant financial success.

1. Figure out how to package the business’ services in order to market and price them like a product (the razor strategy)

2. Figure out how to add a service component to the packaged service product (the razor blade strategy)

3. Add amenities around the product and services to create a unique, high-value experience for the customer.

Can the tried and true three steps work for a law firm? There are entrepreneurial firms already doing it. Here is a hypothetical example just to illustrate the application of the three steps:

1. An estate practice bundles its services in several different packages, each targeted to different segments of the population—the up-and-coming professional, the young married couple, the mature high-net-worth couple. The packages are sold for a fixed price, and promotional materials use the same look and feel as the brochure for a car.

2. An estate practice adds an optional monthly fee to its service package. This razor blade service includes updating the documents for changes in law and keeping the client informed of any changes or expected changes in taxes, laws, court decisions, and regulations that might affect their estate or estate plan.

3. The estate practice adds an extension to its office along with upscale hospitality staff, all specifically designed to cater to higher-net-worth clients. Everything about their high-worth facility and services is designed to reinforce the special VIP status of the firm's high-net-worth clientele. The experience provided for the client benefit raises the firm to an entirely new level, attracting high-net-worth clients.

The key is to focus on opportunities and to think strategically.

What does the firm do best?
Who are the prospects for our service?
What distinguishes one type of prospect from the other?
What is unique about each type?
How can we build our services to appeal to some of the larger segments of the prospect population?
What is the value proposition that appeals to those groups?
How could we price this to be a success with the selected targets?
What opportunities are there to provide a related ongoing service associated with the initial package of services?
What experiences, amenities, etc. would appeal to our target groups, making our relationship more valuable for them?

Can you apply the three-step strategy to areas where your firm excels? Give it a shot. Maybe the light will come on, and your firm will start operating at a new, faster pace—entrepreneurial speed.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Client Checks Belong in the Law Firm Bank Account

Admin — Wed, 24 May 2006 17:08:00 GMT

I’m a bit surprised by the need to mention this, but checks need to be deposited every single day. Even better, use a lock box so that client payments go directly to the bank. If checks are mailed to the law firm, the person that restrictively endorses the checks and makes up the deposit should not have accounting responsibilities for the clients' accounts.

Juris Client Services team reports that they still run into situations where checks are accumulated and deposited only one or two times per week. We also run into situations of weak internal controls where the law firm's accounting person handles it all.

Cash is a wasting asset; it belongs in the bank. And cash (including checks) is a temptation that needs to be safeguarded through appropriate internal controls.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Billable Hour's Death has Been Greatly Exaggerated

Admin — Mon, 03 Apr 2006 17:42:51 GMT

Daniel Lee Jacobson, a practicing attorney and professor at Pacific West College of Law, writes a scholarly and surprisingly objective review of the history of the billable hour in April issue of the California Layer. He notes that the billable hour may yet prove to be a transitory convention but objectively reports that the available statistics suggest it is not likely to disappear soon.

Lawyers understand the income-limiting nature of the billable hour. They understand that removing this income-limiting governor on earnings capability means unlocking law firm revenues from the billable time of the owners and partners, either through contingency work, fixed fee agreements, or through the prevailing method of leverage off of others. So why is the billable hour so entrenched?

There are two important influences at work. First, law firms are doing pretty well as is. Yes, they have greater potential, but things may just be good enough the way they are. Why risk a good thing for something that might or might not produce a better result? Sometimes “good” is just good enough!

Second, there is no significant counterinfluence from the legal consumer. The Law Office Management & Administration Report (LOMAR) for March noted that almost ninety percent of all fees are still based on hourly rates. Businesses have invested significantly in systems and procedures for tracking and managing the traditional hourly bill. The corporate world has too much invested sunk cost to move in a different direction at this time.

Not only are hourly rates still the prevailing norm, they are on the increase. An Am Law survey of managing partners found that firms have raised rates for 2006 by an average of six percent. According to LOMAR, midsized firms averaged a five percent increase nationally.

So while morepartnerincome.com is a proponent for taking advantage of every opportunity for fixed fee pricing at the matter and portfolio levels, you need not think you are out of synch if you depend on the billable hour in combination with leverage to drive the majority of your law firm revenues. The billable hour is well and quite healthy, thank you!

PS: Just because things are doing pretty well, doesn’t mean you shouldn’t kick them up another notch. A copy of the Law Firm Business Survey results for the business year of 2005 will give you benchmark information to compare to your own results. The comparison will indicate areas to change for “More Partner Income”. Participate in the survey today to receive your copy of survey results.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Protecting the Law Firm's Bottom Line

Admin — Fri, 16 Sep 2005 17:22:00 GMT

I just returned from TexLaw Management 2005 in Dallas where I hosted a discussion panel on the subject of Protecting the Bottom Line in a Complicated Marketplace. However, as I told the audience, an alternate title might be Can Both Law Firms and the Business Clients of Law Firms Get What They Want Out of Their Business Relationship?

The panel included yours truly as the moderator as well as:

Marc Capelluto, Microsoft LCA (Legal Dept.) Procurement Manager: Marc’s current focus includes “Microsoft’s Project 50” and redesign of Microsoft’s Preferred Provider Program. Project 50 is a program to drive $50,000,000 to the bottom line by cutting expenses.
David Hill Bradley, Partner with the prominent litigation firm Touchstone, Bernays, Johnston, Beall, Smith & Stollenwerck: As a legal service provider and partner, David is on the front line when it comes to this issue. His practice areas include transportation, business/commercial, premises, product liability and insurance.
William C. (Bill) Cobb, WCCI, Inc. (Cobb Consulting): Bill is one of this country’s experts when it comes to pricing strategies for legal services. He invented the "value curve" which has played an important role in understanding and guiding the pricing of legal services for over a decade.

The hype today is that alternative fee arrangements are rapidly displacing the billable hour. In addition, the news is full of stories about activities to control legal cost. Consider the following examples:

“It is only a matter of time before e-billing becomes the norm.” Corporate Legal Times, August 15, 2000
Eight Big Corporations Form Group to Get Better Rates From Law Firms. National Law Journal, August 15, 2005
GE just auctioned off purchase of legal services for seven practice areas to law firms who offered the "lowest rates." Corporate Legal Times, September issue
General Counsels agreed that a major part of the solution is “getting tough with outside counsel." Corporate Legal Times, September, 2005

Yet the reality appears quite different based on data from multiple surveys.

90%+ of corporate 1000 firms haven’t moved to e-billing
Law firms derived less than 10% of revenues from fixed fee arrangements

Among other related questions, the panel tried to answer the following:

What is going on and what is the driving force behind all of the activity?
What can law firms do to take advantage of existing conditions or at least protect their bottom line given the activity among corporate clients to control legal costs?

I believe the panel agreed with the following:

Legal Departments are under pressure from CEOs and CFOs who have to make the numbers.
General Counsels are struggling to achieve predictability, and that struggle manifests itself as an attack to reduce hours and rates.

One of the big questions of the day was the question “where are the alternative fee arrangements?" In spite of the hype, flat fee project arrangements and fixed fee portfolio services engagements are few and far between. I asked the panel, “Who is dragging their feet?” That is really an important question because only the flat fee and fee fixed arrangements address the underlying problem—the billable hour. On the law firm side, the billable hour method puts a lid on per-partner income and encourages inefficiency. On the corporate client side, the client has no idea what their cost will be. Flat and fixed fee arrangements would provide the solution:

Law firms would be able to profit from their own technology & efficiency.
Corporate clients would get want they want most—predictability.

Through give-and-take between the audience and the panelists, we may have arrived at an answer. We have a love/hate relationship with the billable hour. We may complain about it, but the truth is we have learned to live with it. Corporate clients are learning to manage it and that includes “preferred provider” programs to encourage or coerce law firms into doing right by it—“it” being the billable hour.

The fact is hourly billing is just an easy way to do business. We have gotten used to it. We know the dance steps:

You bill;
They adjust;
We both complain.

I think Marc Capelluto from Microsoft said it best—“I don’t care what method you use to bill me, as long as what you bill is what we expected." In short, the message from the corporate world is "we have a budget and if you want to do business with us, both of us are going to live within that budget."

Corporate clients aren’t looking for the cheapest legal services. They want law firms to be more efficient. Off-the-street hourly rates are too high and can’t keep going up. Law firms can’t continue to improve their “productivity” just by increasing the hours worked on “my” business. The billable hour is fine, but it isn’t a license to increase law firm profits at the corporate client’s expense. Law firms are going to have to become more efficient. As we neared the end of the session, the message took a surprising turn. It came down to the following:

Law firms do not invest in adequate management talent. As the discussion ended, Marc, talking about law firm operations, asked me "where is scheduling software, where are budgets, where is voice-over IP, where is online conferencing and collaboration, etc? Why aren’t law firms implementing at least the basics when it comes to operational efficiency?"

We know the metrics that drive law firm profitability. To succeed, law firms have to manage leverage, utilization, effective rate, realization, etc.—but not at the expense of one particular case, matter or book of business.

Companies like Juris, Inc. offer powerful tools to track Key Performance Indicators and manage law firm talent. Juris, Inc.’s application, MyJuris®, provides managing and supervising attorneys with situational awareness that should allow them to make sure that their talent is fully utilized, but also that they are not over-lawyering individual matters or books of business. There are extraordinary tools available to law firms—but they are useless without sufficient dedicated management attention within the law firm. Twenty-five percent of a managing partner’s time just will not get the job done!

The billable hour isn’t going away. Even though alternate fee arrangements are good for both parties, with few exceptions, neither law firms nor corporate clients are pushing flat or fixed fee arrangements. The panel and audience appeared to agree that the billable hour will continue as the preferred billing method. But, corporate clients are going to push down both the number of hours they accept and the prices law firms can charge. Law firms are going to have to become more efficient to protect per-partner income. By doing so, they will provide the corporate client with a smaller target. Doing so will require more dedicated management at the law firm level.

Law Firm Pricing Model to Win Business

Admin — Thu, 15 Sep 2005 18:25:51 GMT

I just finished reading the September issue of the Metropolitan Corporate Counsel and its special section on technology and legal research. The interview approach taken by the publication is a great source of “best practices."You need to read what your corporate customers are reading. You need to know what they consider to be their priorities. You need to know what they are looking for in a relationship with a law firm. You need to know their concept of service quality. Knowing your customers gives you a competitive edge.

I was particularly interested in the publication’s interview with Robert D. Rowe, chief operating officer of NEXTRA Litigation Solutions, http://www.nextralit.com. NEXTRA is in the business of reviewing documents in litigation cases. It is their pricing model that interested me most. I was also impressed at their technology and attention to process detail where seconds per page add up to hundreds of thousands of dollars in review cost. The interview is on page 29 and is worth your time.

The reality is that in spite of the “hype in the press and consulting world," use of alternative (fixed fee) pricing has not materialized to a significant degree. Part of the reason is the corporate decision makers fear they will pay too much. GCs desperately want cost predictability, but accepting a fixed cost proposal exposes the corporate decision maker to the risk that those who judge them will criticize the deal.

NEXTRA’s pricing model appears to be designed to overcome that buyer resistance. Under the NEXTRA pricing model, the buyer pays the lowest of three values:

    1. A guaranteed capped amount;
    2. An agreed upon blended rate times actual hours;
    3. The amount of hours at the hourly rate of each timekeeper.

I’m not crazy about the model, but maybe it is a way to get the corporate buyer to drink from the water trough. Then, over time, the three value options can be replaced with a straight fixed fee arrangement that allows providers to benefit from their efficiency and technology. The pricing model does give NEXTRA a competitive edge. It does what a good salesperson does. They have taken the time to learn the buyer’s concern and then they have addressed it. In this case, NEXTRA has capitalized on the buyer’s need for a predictable cost by neutralizing the buyer’s concern about “overpaying."

The Missing Alternative Fee Arrangement for Law Firms

Admin — Wed, 14 Sep 2005 20:37:00 GMT

I have discussed both the flat project fee and the fixed fee for the continuing services method of billing. I just don’t have the patience to deal with each of the so-called other alternative billing methods. Aside from the contingency method, which we all understand, the rest are mere variations of the hourly billing method. Each is an attempt to soften one or more of the shortcomings of the billable hour. Each falls short of addressing the underlying issues behind the love-hate relationship we have with the hourly billing method. If you want a blow by blow list of alternatives, purchase the ABA’s publication Winning Alternatives to the Billable Hour.

I started this series of postings by saying we would search for the missing Alternative Fee Arrangement -the one that faces the underlying cause behind our dissatisfaction with the hourly billing method:

The customer does not know in advance their cost;
Law firms do not benefit from efficiency and technology investments.

In spite of its shortcomings, hourly billing accounts for 90% of law firm fee revenue. As bad as hourly billing is, the alternatives are considered worse by most law firms and their customers. The hourly billing method makes doing business easy. Whereas, alternative fee arrangements (alternative billing) requires the parties to agree on scope and negotiate price. That takes effort. Neither law firm nor business clients have been willing to consistently invest that effort. They have become comfortable with hourly billing in spite of their misgivings about it.

Hourly billing will never disappear for the above reasons but AFA (Alternative Fee Arrangements) can benefit both law firm and client in ways that the hourly bill can never do. For that reason, I would suggest that firms should use it offensively when and wherever they can.

The protocol for the missing alternative consists of the following elements:

Advance payment;
Fixed amount to include reasonable fluctuations in scope;
Provision to quote and bill separately for material variations in scope that could not be reasonably anticipated or that were excluded in the initial scope definition.

Why advance payment? If we are going to propose an alternative to the hourly bill, we should also tackle another major problem with the current billing method. The typical law firm takes 78 days to bill for work already performed and then waits another 60 days to get paid. That is inconsistent with how the rest of the world does business. And I can tell you firsthand that the law firm’s business clients do not consider that delay meritorious. They consider it sloppy and unbusinesslike. There are reasonable variations to the "paid in advance" approach. You might bill in installments based on milestones, but those installments should be billed at the milestone arrival, not its passage. If you are providing bundled services for a month at a time or a quarter at a time, bill in advance for the month or quarter.

I have written enough about the flat fee or fixed fee arrangements. Which, in addition to contingency, are the only real alternatives to the hourly billing method. Let me just say again that for them to work, the law firm has to accept the risk of normal and customary fluctuations in scope. The only scope changes that should be outside of the services covered by the fixed fee should be material items that, because of their magnitude, were singled out from the beginning as something that would be priced separately or that the material changes could not be reasonably anticipated.

Wherever it is proposed, the AFA’s objective is never to lower the cost to the client—although it may, particularly in the long run. The AFA value proposition is certainty of cost. That is how it should be positioned by the law firm. It should provide the client with certainty and provide the law firm with the opportunity to benefit from internal efficiency.

The final question becomes, “How is the price determined?” Is the price determined based on the value to the client, competitive alternatives available to the client or by adding up the cost to the law firm and adding a profit component?

The answer, of course, is all of the above and none of the above. Law firms are subject to reasonableness constraints. But even without that imposed professional constraint, the long-term laws of economics prevent the unfettered use of customer value in setting price. Set price too high and your client will go elsewhere when they get the opportunity—and they will. But let’s be honest, most attorneys do not have just one hourly rate. High client value should call for use of your best people, after hours access, overtime work, etc., and all of those factors should go into your pricing¾the highest level of services should provide the highest level of profits. Low value work should use the lowest cost talent that can, under supervision, perform competently and should, wherever possible, eliminate intensive people handling through systems and technology.

Pricing is magic. You have to learn the art and apply it fairly in a way to maintain integrity. Pricing always is influenced by value, cost and competition.

Blended Rate as an Alternative Fee Arrangement for Law Firms

Admin — Tue, 13 Sep 2005 17:39:00 GMT

There is a song that includes the line, “Short People Got No Reason." I always remember those lines because I am slightly height challenged at 5’ 8”. I used to be taller but standing in booths at legal conferences robbed me of a good inch and a half. My driver’s license still reads 5’ 9½”. What has the above got to do with anything? As far as I am concerned, “Blended Rate Agreements Got No Reason!”

My research on Google™ did not disclose a single defense of the Blended Rate approach that made any sense for either the client or law firm. The only possible idea I can come up with is that the resulting rate saves the client from questioning why a partner was doing work that could have been performed by an associate or paralegal. I suppose on the other side that it means that the law firm could theoretically make more on the engagement by using less qualified people. If the client is smart, and most are, they start dictating who in the law firm is authorized to work on their matters. Thus, they push the talent level up and realization down.

Whatever the logic, it is bound to lead to a result that is neither in the interest of the client nor the law firm. If you can defend the Blended Rate Arrangement, please post your supporting comment.

The ABA’s publication, Winning Alternatives to the Billable Hour states that blended rate agreements have all the advantages and disadvantages of regular Billable Hour agreements. The publication includes the following conclusion regarding value:

“Generally [the Blended Rate Arrangement] is unrelated to value to the client, which may penalize either the lawyer or the client."

Amen—and may the Blended Rate Arrangement R.I.P.