Using KM in Fixed Fee Pricing

Knowledge Management in the Legal Profession is the subject of the Ark Group’s conference I’m attending in New York City. Here are my notes.

Toby Brown is involved in Client Teams, Alternative Fee Arrangements and Knowledge Management at Fulbright & Jaworski LLP. He’s also a recovering economist. This presentation focuses on the strong role KM can play in establishing fixed fee arrangements (AFAs) within firms.

#1. Analyzing billing data rarely reveals what you need.

Analyzing time and billing records tends to provide limited useful data because until now billing practices have focused on creating a narrative a client will accept and have not been about providing data that help the firm understand the phase, task or type of work involved. Further, going back in time more than two or three years won’t be useful since approaches to legal practice have changed dramatically and continue to change. For example, today it is rare to deploy enormous teams of associates on matters. Finally, Toby’s analysis of the data from similar matters did not reveal the existence of easily identifiable budgets or even strong trends. In fact, he found that the greatest influence on fees came from the specific facts and circumstances of a each matter.

#2. Firms need more knowledge about their work; KM can help provide this.

KM approaches to aggregating knowledge, coupled with improved approaches to creating billing narratives, can help build a knowledge store that is suitable for analysis. Toby believes that KM tools for collaboration, search and analysis. This will help the firm gather the necessary data, which will allow the firm to establish prices with greater certainty. Toby uses Redwood Analytics to analyze data and create a pricing model for a particular matter. Use KM practices to learn from your experience of analyzing the data and creating models. What worked? Where were the proposed prices wildly wrong? What should we change?

#3. KM can have a strong role in monitoring variance of cost to budget.

Toby says this is the “hot thing” on his project list. He is focused on trying to figure out how to provide more effective monitoring, coupled with an early warning system to partners so that they know when they are about to exceed the agreed budget.


Matter-Based Budgeting [#ILTA10]

Budgeting transcends all sorts of fee arrangements — whether hourly billing or alternative fee arrangements. So we should not limit the discussion to a particular kind of matter or billing approach. “This session [outlines] the essential elements required to develop a matter-based budget and how to track progress against it.”


William Auther, Partner, Bowman and Brooke LLP
Keith Lipman, President, Prosperoware
Randy Steere, Owner, Randy Steere LLC
Doug Brown, President, Basal Enterprises, Inc.

[These are my quick notes, complete with (what I hope is no more than) the occasional typo or grammatical error. Please excuse those. From time to time, I may insert my own editorial comments – exercising the prerogatives of the blogger. I’ll show those in brackets.]

So what do you do when a client calls and asks for a budget?

– What does the lawyer need to know?
– What does the accounting/finance department need to know?

The lawyer needs the following information:

– What is the client’s viewpoint or perspective? (is this a routine matter or a bet the farm matter?)
– What are the client’s expectations? (what form and content does the client need to receive?)
– What is the scope of work?
– What is the amount in controversy?
– How difficult does the client expect the project to be?

Focus on the major project management processes: breakdown the engagement into its constituent parts and tasks. Do you know what needs to be done in a stepwise fashion? It’s also very important to identify the phases in which these tasks occur. It isn’t enough to just say that every matter is unique. To do budgeting correctly, you have to dig deeper to find the identifiable tasks, phases and repeatable patterns. Don’t treat a matter (and its budget) as a mystery whose answer is to be revealed in time.

Budgeting is an iterative process. Once the lawyer puts a draft budget on the table, that opens up an important ongoing conversation with the client.

Tools and Methodology

What tools are available to a lawyer who is trying to create a matter budget? Do some data mining on multiple prior engagements so that you can compare the contingencies and costs associated with the work you’ve done before. However, you need to be sure that you are working with clean data — for example, is the information complete or has information been deleted, have you used task-based coding consistently, etc. This process provides data for the current budget, but it also provides clues as to how you might improve your current processes.

It’s very important to do budgeting by staff level/rank rather than by individuals. If you do it on the basis of an named individual, that may obscure the fact that they did this work as a third-year associate rather than a third-year partner.

The foundation for good data is laid at the time the new matter is opened. There needs to be a process in place that ensures that the firm continually refreshes that basic matter information to make sure it reflects accurately the development of the matter.

One enormous challenge is getting lawyers to participate fully in capturing the key data (regarding tasks and phases) that are necessary to build a robust model for matter budgeting. One way is to “drive the data back to them” so that they can see the implications of the data they are providing. In addition, you need to be sure that the feedback loops are good so that as lawyers review the budgeting data they can correct inaccurate data easily.

Where should a firm begin?

– Start by going back to prior similar matters and do the work to ensure that you have complete task/phase coding consistently applied. You can’t do the necessary analysis without this kind of information.

– When you are “managing the budget,” don’t just look at the actuals vs budget of the fees. It’s important to also look at staffing levels and changes in project scope. You need to get a better sense of where the gaps are between actuals and budget, AND WHY those gaps occurred. In addition, you should be analyzing whether your personnel truly are engaged in activities that deliver value to the client and profit to the firm.

A lawyer can really impress her clients by being able to make not only regular reports on how things are going (in terms of actuals vs budget), but also being able to make reasonable projections as to when and where variations from budget are likely to occur. A lawyer who can do this becomes a valuable partner for the client who needs to make similar reports to their company.

Lawyers are beginning to understand the importance of doing accurate budgets. Some firms are even beginning to think about how to reflect budgeting accuracy in their lawyer compensation arrangements.

A member of the audience noted that there’s a lot of work involved in monitoring a matter budget and handling the adjustments to the budget, and asked: “Should attorneys be doing this non-legal work rather than practicing law?” According to the panel, you can’t cut the attorney out of the equation — he needs to be on top of this information and is ultimately responsible to the client for this. Further, a non-attorney (coming from project management or IT) may not understand “where the pulse of the matter is” without input from a lawyer involved in the matter. That said, you can build a business process within the firm where non-attorneys (e.g., project managers, “pricing specialists” or others) can provide a substantial amount of support to alleviate the burden on the relationship partner.


Planning Fallacy and Bad Estimates

It turns out that lawyers are human after all – at least with respect to their all too human inability to plan appropriately.  Heidi Grant Halvorson recently published an interesting post on the planning fallacy, which is what psychologists call the inability to estimate accurately how much time an activity can take.  Halvorson’s review of the research in this area suggests several reasons (or biases) that lead to our bad estimates:

  • “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.


Related reading:

[Photo Credit:  American Virus]


Recipe for Alternative Fee Arrangements

We’ll be hosting 15 friends and family for Easter Dinner so I’m deep in the throes of menu planning. Since we always serve lamb, much of the recipe exploration has focused on side dishes. This search led me to a traditional companion to roast lamb: ratatouille. For those of you who have never sampled this dish, it’s a wonderful vegetable stew that tastes of summer.  A less lyrical description would be a mess of chopped of vegetables with Mediterranean seasonings.

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]


Wasting Your Life

After years of sitting quietly listening to the complaints, I’ve finally had enough. Critics of the legal profession and the billable hour speak of all lawyers as if they are identical, mindless billing machines. While many (but not all) of us do account for our time by the billable hour, that does not necessarily mean that all we do is live and breathe solely for the purpose of driving up our hours. Some of us actually have lives outside the office. A few of us even have things in addition to the law that interest us. And many of us still believe that we are members of an honorable profession that serves clients and the public good.

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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Doing Time

What do lawyers and prisoners have in common?  They share a fixation on time.  Both groups are expected to spend a certain amount of time — whether it be expressed as target billable hours or as sentencing guidelines.  However, there is a noteworthy distinction between the groups:  prisoners get time off for good behavior.

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]


Update on Alternative Billing (ILTA09)

Writing Alternative Billing Alternatives gave me an excuse to contact my friend, Jeff Rovner, for some background detail on the superb session he, Jeffrey Brandt,Thomas Gaines, and Eugene Stein presented at ILTA09. In our e-mail exchange today, he provided the following additional insights:

  • 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]


Alternative Billing, Alternative Lawyering

Richard Susskind likes to be provocative.  And, he’s good at it.  After hearing his talk at Harvard’s Berkman Center for Internet & Society, I found my mind churning with ideas of what it might be like if his vision became our reality.  However, I soon felt stymied by the enormity of the challenge of changing our profession’s approach to work and compensation.  And I’m not the only one.  Most law firms have yet to find a comfortable way to determine an alternative billing structure or adopt alternative methods of lawyering. Thankfully, Susskind proposes a solution:  break legal services down into bite-size pieces, analyze them, and then reassemble them in a way that permits alternative lawyering and alternative billing.  Central to this solution is his analysis of legal services, which run the gamut from “bespoke” (i.e., customized, tailor made) to commodity.  Here are the five levels he sees:

  • Bespoke/Customized
  • Standardized
  • Systematized
  • Packaged
  • Commoditized

Most of our firms are awfully good at doing customized work.  Some of our firms have even standardized their work through the creation of checklists and model documents.  A few have attempted systematization through document assembly and automated decision trees.  Even fewer are actually providing packaged online legal services (e.g., Wilson Sonsini’s term sheet generator).  And then, there are the firms that freely admit that their work product is a commodity and act (and bill) accordingly.

Naturally, our billing follows our style of work:  hourly billing is used for bespoke and standardized work, while fixed fee (or alternative) billing is possible with systematized, packaged and commoditized work.  For Susskind, the key is to break down legal services into their component parts and bill each of those parts accordingly.  For example, you may be advising on the world’s most complicated merger, but chances are you won’t be generating a due diligence request list or closing schedule from scratch.  So, what would happen if you billed the parts of the transaction relating to due diligence and closing preparations as if they were systematized, while billing the process of negotiating and drafting the critical sections of the merger agreement as if they were customized?  Suddenly, you’ve expanded the scope of alternative billing and reduced the need (and attendant client relationship risks) of hourly billing.

Now, what if you took each of the components of your transaction, broke them into discrete tasks, and made sure the right people (e.g., legal or lay, working in the office or remotely, employees or subcontractors, etc.) were handling each task using the right tools?  What if, with respect to each component, you searched diligently for ways to provide higher quality work product more efficiently and cheaply by using collaboration and technology?  These steps should result in a cost structure that is substantially reduced and predictable, thereby facilitating alternative billing.

Law firm knowledge managers with practice experience can play an important role in this process.  They can help identify the component tasks, and then find ways to standardize, systematize, package or commoditize as many of those tasks as possible.  They can bring to bear their knowledge of available technology, they can help draft, they can help automate.  Law firm knowledge managers may be the key to solving the alternative billing, alternative lawyering puzzle.  Are you using them?

[Photo Credit:  hto2008]