• “First, we routinely fail to consider our own past experiences while planning.”
• “Second, we ignore the very real possibility that things won’t go as planned – our future plans tend to be `best-case scenarios.’”
• “Lastly, we don’t think about all the steps or subcomponents that make up the task, and consider how long each part of the task will take.”

When lawyers work in a world that rewards according to time spent, it becomes imperative that we understand better exactly how much time an activity takes.  This means that we have to create systems to counteract the effects of the biases mentioned above.  Chief among these is keeping track of the components of every task, as well as the time actually spent in the past on those components.  If you think this is something you can put off, consider that as we shift to alternative billing arrangements, bad estimates come out of the lawyer’s pocket rather than the client’s pocket.

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Related reading:

• Mary Abraham, Recipe for Alternative Fee Arrangements
• Peter Bregman, Optimize Transitional Time (And Stop Being Late)

[Photo Credit:  American Virus]

While some recipes call for dumping everything in the pot and letting it simmer, there are other cooks that believe that the order and manner in which you cook each component vegetable makes a huge difference in the taste.  I’m not here to give advice on  the best ratatouille recipe,  but I did want to point out an interesting recipe I found that could have useful applications for matter management and practice management. Cooking for Engineers provides a good basic ratatouille recipe, complete with pictures.  The best part for me, however, is at the bottom of the page, where they have presented a detailed time line of the steps you need to take to make this dish efficiently. Perhaps I’ve led a sheltered life, but I thought the chart was brilliant.  If you don’t need wordy descriptions of what you are making, this chart provides a quick and effective way of analyzing the ingredients, the method, the effort and the time required to make a decent ratatouille.

Now imagine what would happen if you had to make a chart like this for every stock offering, asset acquisition or trademark registration your law firm undertook.  Would you be able to identify the ingredients, the method, the effort and the time required to provide great client service?  If you can’t make this kind of chart (or a functional equivalent), you haven’t thought hard enough about how you practice law and you aren’t anywhere near the starting gate for making intelligent decisions with respect to alternative fee arrangements.  Without this kind of analysis, your client services are little more than an undifferentiated mess of chopped vegetables with local seasoning.  In these days of billing pressures, that’s just not good enough.  Clients need to know that you know exactly what you do, and how to do it most efficiently and effectively.

Having the right recipe matters a lot.  What’s yours?

[Photo Credit:  Merlene]

My colleague, Rees Morrison, included in a recent blog post the following assertion by Raymond Bayley that he found curious.  For my part, it reminded me of the false conclusions you can reach when you don’t consider all the factors that motivate lawyer action:

…several studies show that lawyers spend more than 20 percent of their time looking for things. If you can bill 400 or more hours annually looking for things, there is no incentive to build a better knowledge management system to eliminate this wasted expense, unless you provide services on a fixed fee basis, as we do at [Mr. Bayley's firm].

No incentive? What about self-respect?!  Even if I could spend 400 hours looking for things (and get paid for the effort), I wouldn’t.  Why? Because it’s a colossal waste of my time and my client’s money.  Why would I want to spend hour after hour engaged in such soul-sapping activity?

When I plan state of the art law firm knowledge management systems, I’m focused on improving the quality of the services we provide to our clients.  I’m also interested in training lawyers and adopting a responsible approach to risk management.  Finally, I actually take some satisfaction from the fact that these systems make the lives of the professionals in my firm easier and more productive.  The last thing I should be worried about is that efficiency gains will lead to a decrease in billings.  Why?  Because it is healthier for a firm to generate revenue through efficient, high quality service than by cheap tricks that artificially pump up billable hours at the expense of client satisfaction and lawyer self-respect.

Regardless of whether we provide services on a billable hour, fixed fee or pro bono basis, I’ll still keep looking for ways to improve the quality and efficiency of those services.  Why?  Because it’s the right thing to do.

As for those nameless lawyers who allegedly spend their lives as mindless billing machines, someone should remind them that it’s not actually about billing clients.  It’s really about not wasting your life.

[Photo Credit:  Mike Licht]

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With the increasing pressure from clients to have access to the wealth of knowledge generated by law firms, some firms have tried to lance the wound by offering a small collection of their content on password protected extranets. The problem with this approach is that it puts the burden on the client. For example, the client (and in this instance I mean every member of the client’s law department) must (i) know the extranet exists, (ii) figure out its design quirks and how it works, (iii) have some sense of its collection, and (iv) remember the unique password every time they want to consult that archive. Multiply this across the sites of various law firms and you’ve got a major challenge.

I know that a great driver of this approach is to provide access without compromising security and confidentiality, but does it really work for clients? We’ve heard in-house counsel express the desire for law firm content without having to hunt for it. They would like it in an environment of their own choosing and design. So instead of providing content access tools like extranets, should law firms be thinking harder about better content delivery tools?

Imagine a virtual umbilical cord stretching from a law firm to its client’s knowledge management system, providing a regular supply of helpful resources? Imagine being an in-house lawyer who doesn’t have to go to a thousand places on the internet to find information, but rather can simply surf a single familiar internal platform? Imagine that in-house lawyer’s delight when they can find easily the information appropriate to the decision at hand, and can identify and follow-up with the lawyer and firm that made the retrieval so pain free? Imagine the impact of these experiences on the relationship between that law firm and its client?

This isn’t farfetched. As more and more law firms and law departments move to a SharePoint platform, we will approach a common technical vocabulary for making content available.  Next, we need to push this further to see how to provide that content outside the law firm firewall safely.  This could be a wonderful opportunity to provide exactly the level of law firm transparency and support that clients have been asking for.

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If you’d like to learn more about new ways of using extranets (before they become extinct!), read Are Law Firms Ready for Transparency?

[Photo Credit:  Kevin Zim]

While this may be an unnecessarily dramatic way to think about our relationship with time, think about it we must.  For the last few decades, the billable hour has been the gold standard against we measure a lawyer’s work and worth.  The problem is that a fixation on time can get in the way of thinking creatively about how lawyers (and law firms) actually provide value to clients.  Increasing numbers of clients are unwilling to pay just to keep us around.  They pay us to achieve specific results.

As clients and lawyers think more creatively about alternative fee arrangements, we’re all going to have to reconsider our dependence on the gold standard of time.  Perhaps in the process lawyers will free themselves from the need to do time.

[Photo Credit:  Matti Mattila]

The first, and perhaps most important, category of tools will help a firm do the fundamental financial analysis that is necessary in order to understand exactly what it costs to deliver services and how to reduce those costs.  Here are some financial technologies mentioned by the panelists:

• Fee estimation (Redwood Analytics, Satori)
  • Helps the firm realistically estimate its costs so that it can bid responsibly.

• Profitability analysis reflecting new business model (Redwood, Satori, Elite 3e)
  • Helps ensure that proposed practice area or bid is consistent with the firm’s profit goals.

• Resource Management (viEval, Redwood)
  • Helps allocate work to fee earners in a manner that maximizes overall utilization, efficiency, quality, training and professional goals.

• Task-based billing (Redwood, Satori, Elite)
  • Helps measure the firm’s cost of completing defined tasks, rather than entire matters.  This is useful for bidding and tracking costs.

• Matter Management (Redwood)
  • Helps track the firm’s actual matter costs against budget.

The panel then identified key practice and KM technologies.  While all of these tools provide useful functionality, one panelist opined that if he had to choose only one technology, his choice would be enterprise search since it allows you to reduce the cost of locating precedents, drafting documents, and identifying expertise.  The other high value category of tools is project management, which is critical when you’re trying to manage costs and client expectations.  That said, here is the long list of tools they identified :

• Expertise System
  • Recommind
  • ContactNet
  • BranchIT
  • SharePoint Knowledge Network

• Enterprise Search
  • Recommind
  • Autonomy/Universal Search
  • Microsoft FAST
  • Desktop Search (x1, Google, etc.)
• Work Product Retrieval
  • Real Practice Technologies
  • WestKM

• Project Management
  • Microsoft Project
  • Excel
  • Eclipse from Solution Q
  • Basecamp from 37signals

• Practice Portal
  • LawPort
  • SharePoint

• Document Assembly/Drafting Tools
  • HotDocs
  • DealBuilder
  • Exari
  • DealProof
  • KIIAC
  • Legal MacPac 10
  • Microsystems

• Collaboration
  • Blogs
  • Wikis
  • Threaded Discussions/Discussion Boards
  • RSS
  • Email
  • Extranets
  • Webinars

• Online Training
  • West Legal EdCenter
  • PLI Online

So there you have it — the experts’ guide to key technologies that can help you manage costs and enhance profitability.  Now, what are you going to do?

[Photo Credit:  pansonaut]

• In his original example, he proposed a 10% discount in rates for discussion purposes.  However, in our conversation he told me that a 15% discount is becoming increasingly common in the market.  If that’s the case, the consequences are even more striking.  To prove this, let’s rerun his example using the new discount:
  • Assume a law firm profit margin of 40%
  • Apply a 15% discount on rates
  • This results in a 38% decline in profits
• It’s ill-advised to view ad hoc discounts as a reasonable short-term fix.  Even if current economic conditions last for only a couple of years, the impact of a 38% decline in profits in each of those years could be very damaging to a firm unless competing firms are similarly affected.
• While a firm may successfully reduce the fees it offers clients by implementing alternative billing arrangements, if that firm continues to perform its legal work exactly as it did in the days of the billable hour, it will not be able to off-set lower fees with lower expenses.  The result is a “disguised discount,” with the resulting hit to profits.
• In the panel’s view, the best approach is for a firm to lower its internal costs of delivering client service, and then pass all or part of those savings on to its client through alternative billing arrangements.  By doing so, the client reduces its legal spend and the firm’s profitability is not impaired.

There’s clearly much more than should be discussed about these issues.  I do hope this ILTA session sparks further useful analysis and conversation.

[Photo Credit:  twenty questions]

• Assume that a law firm’s profit margin is 40%
• Apply a 10% discount on rates
• This results in a 25% decline in rates, which is a huge hit to Profits Per Partner

Jeff’s conclusion from these numbers was stark:  even though discounting is popular with clients and may seem like the simplest ad hoc solution to implement, it could well be disastrous for the financial health of the firm.  So, if you’re interested in the long-term viability of your firm, you’ve got to find another way to meet your client’s expectations about billing.

Next, a firm might consider offering “alternative billing” options such as fixed fee, blended fee or success fee arrangements.  However, since these simply shift the cost of legal services from clients to firm, they are in essence “disguised discounts.”  As such, they have a negative impact on Profits Per Partner.  Further, it was the panel’s view that these alternative billing options alone would be insufficient to meet client goals regarding cost reductions.

To find smarter alternatives to bare discounts, the panel took us back to the drawing board by pointing out that while clients are determined to reduce their legal spend  — in fact, they cited a press report that Pfizer intended to reduce its legal costs by 15-20% — clients don’t care how this reduction is achieved as long as the quality of legal services is not impaired.  However, law firms with reduced fees are going to need to find a way to off-set the substantial hit to Profits Per Partner that results from discounting.  The best way to do this is to reduce the costs of delivering legal services.    Put another way, the impact of an alternative billing arrangement is to place the burden of cost overruns on the shoulders of the firm.   If the firm can find a way to contain or reduce costs, the firm can avoid those cost overruns and their deleterious effect on profits.

How does this work in practice?  Eugene Stein discussed how his firm has approached alternative fee structures.  Having agreed to lower their price (but not their quality) of service, they then felt that they could ask the client to give them more work.  Their client, pleased with the service provided and the cost charged,  agreed.  So here we have reduced fees off-set by both lower costs of production and higher volume.  The net result is a better outcome for the firm’s profitability.

Key to all of this is reducing the costs of production.  I’ll dig into that issue more deeply in my next post.  Stay tuned.

**UPDATE (30 September 2009):

After I published this post, I had an opportunity to discuss its main points with Jeff Rovner.  I’ve published the gist of our conversation in a follow-up post, Update on Alternative Billing.

[Photo Credit:  deltaMike]

Setting your holiday shopping plans to the side, have you also noticed that more and more law firms are now offering discounts — regardless of the season?  According to a recent report, London’s  “Magic Circle” firms have reduced their rates by a third as they discount in response to intensified competition.  Not surprisingly, the clients quoted in the article seem pleased with this outcome.  But is it a sustainable path for any business?

Steve McKee writes in BusinessWeek that unless the discounting is done extremely carefully, it almost always will have a deleterious effect.  Here’s how he describes the impact of discounts:

Discounting destroys brand equity, hamstrings investment in innovation, and zaps profitability for companies and their stakeholders.

For companies determined to discount, McKee suggests that they take the following measures:

1. Discount briefly.
2. Discount wisely.
3. Discount creatively.

McKee ends with the following tough advice for businesses contemplating long-term discounts:

The bottom line: In your customers’ eyes, your product is either worth regular price or it’s not. In tough times like these that may be a more difficult case to make, but if you’re not winning the value equation in their eyes you should focus on finding a way to meet their needs without reflexively taking a percentage off the top. If you do choose to incorporate discounting into your strategy, it must appear sensible and smart, not irrational or a result of panic.

People understand that prices are a market mechanism. If you start playing the discount card too much, you’re sending a signal that you don’t believe your product or service is worth it. And if you don’t believe it, who will?

[Hat tip to Nancy Myrland for pointing out this article by Steve McKee.]

[Photo Credit:  rcolonna]

The conversation also led me to think harder about what law firm transparency involves.  For both the sake of the client and the law firm, the purpose of encouraging transparency should not be to play “gotcha.”  Rather it should be to help both parties make their relationship more effective by helping each understand better what goes into creating the work product both need.  And, through this understanding, to help each manage the process better.  From the client’s perspective, if you enter into this transparency looking to find billing infractions, then you have a bigger problem — you have to ask yourself if you are working with the right law firm.  From the firm’s perspective, if you find it necessary to cloak what’s happening within your firm, you too may have a bigger problem — you might need to rethink and revise your internal business processes.  Alternatively, you might have a client whose expectations cannot reasonably be met by your firm.  In each case, transparency will serve only to underscore the need to examine the relationship and the client engagement.

Transparency has the effect of shining a light on your relationships.  Are you ready to tackle what you see?

[Photo Credit: mushi king]