Six steps to better budgets (Part 2 of 2)

Step 4: Look for ways to lower costs

In the current competitive environment, if your budget perfectly reflects past history, it may not be low enough to win the work.  For many years, there was little pressure on lawyers to lower costs or to work more efficiently.  Then the economy headed south, and all heck broke loose: a price war has broken out, with some firms racing to the bottom to offer ever better deals.

In the LegalBizDev Survey of Alternative Fees, we asked chairmen and senior decision makers from AmLaw 100 firm about their experience.  The exact question was:

There is a lot of price pressure these days, and some say it is leading firms to bid on projects as loss leaders, in a way that is not sustainable.  Have you seen any examples of this?

Every single respondent said that they had, and a number of examples can be found in a previous post.

The best way to bid in this hyper-competitive environment is a matter of considerable debate.  But it is obvious that if you can offer clients lower costs, it is likely to lead to more business.  And you may be able to do this without lowering hourly rates or profitability by identifying the factors that drive cost up, and finding ways to control them. 

For example, in an article entitled "Alternative Fees for Litigation: Improved Control and Higher Value," James D. Shomper and Gardner G. Courson argue that in fixed fee work it is important for all parties to be aware of the factors that:

Make one case more costly to litigate than another. It may be motions practice in a class of cases in which motions to dismiss or for summary judgment are frequently used. It may be depositions in a class of cases in which gathering the testimony of numerous witnesses is necessary. Whatever the cost driver, inside and outside counsel need to consider it carefully and think creatively about ways to achieve the desired result at a reduced cost.

If depositions are driving the cost of litigation, inside and outside counsel might consider whether fewer depositions can be taken. For example, some third-party witnesses could be interviewed, if willing, instead of deposed, with a resulting lower cost. The cost of depositions can be reduced by making an intelligent and informed analysis of the risk involved in not taking depositions of certain witnesses. Rather than turning over every stone in an effort to find every possible piece of relevant information, the client may be willing to take a small risk of an unpleasant surprise later in the litigation in exchange for cost savings now.

So before you set your budget, consider what you can do to reduce the total cost of meeting the client's true need, ideally while also realizing your standard hourly rates or more. 

Step 5: Assess budget risks

With large matters it can be useful to do a high level analysis of the risks that could increase cost, before you make a commitment to a fee.  The key phrase in this statement is "high level;" it would be overkill to conduct a thorough analysis before you have won the work.

The Legal Project Management Quick Reference Guide includes a Project risk analysis template.  Instead of doing a complete analysis of all the things that could go wrong and ways to prevent them, consider just the top few events or factors that could increase cost substantially.  Then consider whether you should increase your contingency fund or tighten your statement of scope before defining your final budget.

Step 6: Finalize your estimate, and move on

At some point, you will reach the moment of truth and be forced to make a decision: what will you charge for this work?  Recognize that you can't be 100% correct, stop analyzing, and take your best shot.

How can you improve your pricing the next time?  Practice, practice, practice.  In a white paper entitled "Creating the Law Firm of the Future," Ralph Palumbo, founder of the Summit Law Group, says:

To be truly innovative, you have to learn to make your mistakes faster.  Every Summit lawyer has authority to propose any pricing system that the lawyer believes will match the Firm's incentives to the customer's goals. If an innovative pricing arrangement works well in one matter, we use it again. If a pricing arrangement doesn't work, we change it to one that does and don't repeat our mistake.

And don't forget that putting a budget in place is the easy part.  The hard part is getting the work done within that budget.  Much of the discipline of project management is devoted to what comes after you win: how to manage the work.

This post was adapted from The Legal Project Management Quick Reference Guide: Tools and Templates to Increase Efficiency.

Read more on the Legal Business Development Blog.