Using Technology to Manage Costs

If you’ve read Alternative Billing Alternatives and Update on Alternative Billing, you now know that the panelists on ILTA’s Using Technology to Manage Costs, Increase Profitability and Support Billable Hour Alternatives session believe that bare discounts are going to have a negative effect on a law firm’s profitability unless that firm significantly trims its costs of delivering legal services. The key to this is knowing exactly what products and services a firm offers, how it produces them and what discrete components of those products and services could be provided more cost effectively.  While the panelists cautioned us that there was no single “killer technology” that could manage costs and increase profitability, there are several available tools that go a long way towards helping a firm realize that goal.

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]

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Alternative Billing Alternatives (ILTA09)

Thinking creatively about alternative billing structures is something increasing numbers of lawyers and law firms are grappling with. To help with this, Thomas Gaines, Jeffrey Brandt, Jeffrey Rovner and Eugene Stein gave a terrific presentation at ILTA09 regarding how technology might assist with alternative billing arrangements.  They started by exploding some common alternative billing myths, chief among which is that it is safe to defer consideration of new cost and billing structures by using discounts.  To illustrate the problem with discounts, Jeff Rovner offered the following numbers:

  • 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]

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