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This two-part series was written by LegalBizDev Principal Steve Barrett, former CMO at Drinker Biddle. It is based on an article that will appear in Of Counsel: The Legal Practice and Management Report.
Approaching the second anniversary of the September financial markets collapse, let's look at the major changes that have impacted law firms, aside from drastic force reductions and a slowdown on previously annual rate increases.
Whether alternative fee arrangements (AFAs) will continue to spread is no longer an issue; how quickly they will spread might be. Little energy is being devoted to defending the "old normal." In a period of dramatic transformation, a lot is up for grabs. No defensible survey or study suggests that hourly fees are or will be 100% dead, yet none suggest, either, that AFAs will NOT continue to grow measurably. The consensus cross-section of all recent polls agree that these "changes are permanent." In fact, the latest indicator, the 2010 Altman Weil Flash Survey, reported that:
Over 75% of firms surveyed indicate that they believe that more price competition, more non-hourly billing, and the use of project management to improve efficiency of service delivery will be permanent changes in the legal landscape.
All corporate clients are intensely focusing on cost reductions, be they paper clips, energy, raw materials, restructuring, manufacturing, or benefit plan revisions. The only costs that have apparently NOT dropped over the past decade are healthcare, energy and outside legal (many have already shaved inside legal to the bone). Corporate responses to healthcare cost growth has been simple: switch vendors or reduce available benefits. Likewise, companies are stampeding to get green or reduce energy usage. Outside legal costs are likely to follow such paths, and soon, if the industry's response is ineffective.
A disturbing comment in the same Altman Weil survey was that:
Less than a third of firms track profitability outcomes, feature fee options in marketing communications, provide project management training, or set annual targets for AFAs.
Likewise, many firms are under-prepared to competitively price their offerings, since few have effectively mined their legacy accounting data to discern what many standard types of legal tasks or matters cost.
Project management techniques can reduce costs and increase efficiency and profitability in any type of legal billing arrangement, though the results may be easiest to see with AFAs. When a law firm agrees to handle a certain matter for a flat or constrained price, it must find a way to meet legal needs within a limited budget. The less the firm spends, the more money it will make. But, as one major law firm's CFO explained in responding to our LegalBizDev Survey of Alternative Fees in 2009:
A large number of lawyers do not know how to manage. [In the past], the more hours that got charged, the more money [they] made, and so they've never really had to manage [costs].
The market for legal project management (LPM) training has recently exploded, and a number of vendors have proffered or announced LPM software systems.
Talk to any major law firm COO or IT head and they'll agree that busy private firm partners, for whatever reason, have a VERY limited bandwidth for learning new software or technology - as seen in past conversions of accounting systems, WordPerfect to Word, Groupwise to Outlook, new voicemail systems, landlines to VoIP, time/billing, CRM, Knowledge Management, etc. roll-outs. Most senior law firm administrators will agree that partner appetites for the training and behavioral changes necessary with new technology fall somewhere between limited and non-existent. This should be remembered by firm leaders rushing to implement software PM solutions or comprehensive, Six Sigma-type process improvement initiatives. User resistance is easily underestimated.
Nevertheless, there ARE early adopters of process improvement (Seyfarth Shaw, Eversheds, Foley & Lardner, to name a few), as well as those undertaking legal project management training and/or acquiring LPM software or staff specialists (such as Dechert, Orrick, Osler, McCarthy Tétreault). Most agree that while hourly rates will never disappear, alternative fee arrangements are here to stay, and that LPM is a necessary firm skill to ensure that AFAs do not spell disaster going forward. Yet, even if hourly rates remain dominant, many firms now realize that better understanding of what their services cost AND better matter management can make lasting efficiency changes that will improve client satisfaction and reduce costs, while protecting law firms' margins and competitiveness. The transition to new efficiency will make some law firms winners and some losers. The sooner firms start, the more likely they are to be on the winning side.
With the introduction of UTBMS matter task tracking and LEDES electronic invoicing standards more than a decade ago, major American clients sought to push law firms toward a standardized method of task cost reporting, in order to arrive at a better understanding of the component costs of legal services (more or less a "parts list" of replicated tasks within large projects). Unfortunately, more clients than law firms have developed a full understanding of these costs for future pricing purposes. Indeed, one could argue that the forensic accounting analysis to develop the hi-median-low cost of, for example, an average deposition (UTBMS/LEDES task # L330) would be wasted, since it could be analyzing the cost of an obsolete, inefficient process. But understanding such cost history can help firms avoid "shot-in-the-dark" AFA pricing.
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