Applying Supply Chain Management and the Theory of Constraints to the Practice of Law

As you look around the current legal landscape, you begin to notice a rather less than subtle change in the industry. More and more law firms are beginning to hire experienced business professionals from outside the legal industry to help run their businesses. With this experience from outside the industry, new ideas on how to more efficiently run law firms are being adopted. This article focuses on one such topic, namely the concept of supply chain management and the Theory of Constraints.

It is not uncommon in business management to discuss supply chain theory and immediately tie it to a physical product line. Historically, the term conjures up thoughts of Henry Ford and his ideas around line assembly, or in more recent times Toyota's dominance over its management of its suppliers. After reading several well-known books on the topic (recommended reading ' “The Goal” by Eli Goldratt) and sitting down for lengthy discussions with Dr. Mandyam M. Srinivasan (“Srini,” a leading expert on the topic and author of the book “Streamlined”) it became clear that this concept, while rooted in physical production, has great validity in the service industry.

Although almost all elements of supply chain theory can be applied within a professional service firm, the two key concepts that Srini and I discussed are minimization of lead time through task organization and the Theory of Constraints. As a definition, lead time is simply the length of time it takes for a client to take delivery of a product or to benefit from a service. Whether seeking a product or service, almost every customer wants to know how long it will take to receive the desired result, with the less time the better.

Lead Time

Take a simple “I love you” will in estate planning. A client walks into a law firm, sets forth his expectations on the will and expects the attorney to provide a date when he can receive the document. The “when” is a question of lead time. If the response from the attorney is several months for a simple will, the client would likely walk out the door never to be seen again. Therefore, the goal is to get a quality will delivered to that client in the most expedited manner. While this sounds simple, extrapolate that to the most complex, “bet your company” type litigation engagement. Lead time still plays a major role. There will be many more hurdles to providing an accurate lead time, but a client will nonetheless still have expectations on a result and a time frame.

There can be many obstacles in any engagement that can cause delays, but it is possible to learn from other industries and apply simple steps that can minimize lead times. In a typical day, think of a normal workload and how you go about doing business. The day is likely filled with multiple projects for multiple clients, all of whom are priorities. With such pressure to deliver, it is easy to fall into the habit of doing bits and pieces for each project just to show the clients you are making progress. Unfortunately, this mind-set is a major roadblock to reducing lead time. To illustrate this, we will use a simple example below:

There are 5 clients (A-E) who need engagements completed. Each engagement is a high priority with high client demands, and each task will take eight hours to complete. For simplicity's sake, assume a 40-hour work week and a Monday through Friday schedule. In my experience, Chart 1, below, is a simple illustration of how most service providers, including the bulk of attorneys, would tackle the tasks by hour.

[IMGCAP(1)]

In this example, it is possible to show daily progress on each client, and each of the engagements is completed in about five days. That means your lead time for each client would be five days.

However, if you were to change tactics and take a more-focused approach, tackling one engagement at a time, you might see the results in Chart 2, below.

[IMGCAP(2)]

Using this approach drastically reduces the lead time and likely improved client satisfaction for four of the five clients. Client A has a lead time of one day, B at two days, and so on. No client has an adverse effect. It is a very simple concept, but one that is seldom practiced within service organizations. As service professionals, we want to please all our clients by dedicating time to each of their engagements immediately, but in reality we are doing them a disservice as we are often simply lengthening the time it will take to get their work done.

The Theory of Constraints

The Theory of Constraints introduced by Eli Goldratt in “The Goal” discusses measuring and controlling organizations through three metrics (with the end goal being to increase “throughput” and make more
money):

1. Throughput ' the rate at which processes generate revenue.
2. Inventory ' money and investment for items to sell. (In this case, we are not defining Inventory as Work in Progress (“WIP”) or accounts receivable, as normally defined within a service organization; instead, think of inventory as “hours yet to work.”)
3. Operational Expense ' money spent to turn inventory into throughput; the end goal is to increase throughput or to make more money.

The question is: How can a law firm increase throughput? Goldratt's theory explains that within each process lies one key constraint that must be addressed prior to moving forward. This constraint should be exploited to get the most out of it; other processes need to be realigned to make sure the constraint is ex- ploited; additional changes should occur to drive that constraint to full capacity; and once that constraint is mitigated, you move on to the next opportunity, repeating the process.

This theory has significant implications for law firms and processes that lie within them. Take a favorite topic of law firms over the last three years: Alternative Pricing. Attorneys are constantly getting creative pricing or alternative fee pricing requests from clients. These requests often have tight timelines, and attorneys then must scramble, with the help of the business team within the firm, to come up with a price. The set price is frequently developed using incomplete or inaccurate data. Tremendous uncertainty lies on the success of the arrangement. The right questions are not always asked, and the wrong actions are sometimes taken. Dissecting this process, you could identify several constraints within it.

The first constraint is not incorporating systems that can track and then report key data and information to the attorney in a timely manner. The second (and in many cases a direct symptom of the first) is a lack of understanding on the law firm's part of what an engagement will cost and, in many cases, a scope of understanding of what can be done to satisfy the client's needs while maintaining some semblance of profitability.

While there are other constraints, such as business resources, client intake forms, client communication, etc., it is more often the case that the lack of data is the key constraint in this process of alternative fee arrangement pricing. The data simply are not there, and most pricing is haphazard and lacking direction. Therefore, using the Theory of Constraints, that lack of data must be exploited to improve decision making and increase throughput. So, firms should be allocating more resources to make sure that data used to develop alternate fee pricing are correct and that there are guidelines in place to capture the data going forward. Until that is fixed, the other constraints that could be worked on must be put on hold. Once the data are available, then the process continues with the next biggest constraint being addressed.

Lean Thinking

The above example may be an easy one to think about, but the concepts introduced above are much more far-reaching than this simple example. I challenge the profession to use this style of thinking in all of its processes, be it associate development, originations and business development, compensation structures, or even the core of the legal profession: client relationships. By practicing lean thinking to reduce lead time and remove key constraints, attorneys can increase their throughput and use supply chain theory to improve their bottom line.

Russ Haskin is Director of Consulting and Services at LexisNexis' Redwood Analytics Division. He has advised more than 150 law firms across the globe from smaller firms to several within the AmLaw 10. He leads a team that consults with firm leadership on Redwood tools and methodology, business analysis, and process improvement. Haskin has been recognized as an expert in matter management, alternative fee arrangements, and profitability consulting. He has been a featured presenter, panelist and moderator, and his research has been published by multiple journals. Haskin is a primary contributor to the MorePartnerIncome.com blog.

As you look around the current legal landscape, you begin to notice a rather less than subtle change in the industry. More and more law firms are beginning to hire experienced business professionals from outside the legal industry to help run their businesses. With this experience from outside the industry, new ideas on how to more efficiently run law firms are being adopted. This article focuses on one such topic, namely the concept of supply chain management and the Theory of Constraints.

It is not uncommon in business management to discuss supply chain theory and immediately tie it to a physical product line. Historically, the term conjures up thoughts of Henry Ford and his ideas around line assembly, or in more recent times Toyota's dominance over its management of its suppliers. After reading several well-known books on the topic (recommended reading ' “The Goal” by Eli Goldratt) and sitting down for lengthy discussions with Dr. Mandyam M. Srinivasan (“Srini,” a leading expert on the topic and author of the book “Streamlined”) it became clear that this concept, while rooted in physical production, has great validity in the service industry.

Although almost all elements of supply chain theory can be applied within a professional service firm, the two key concepts that Srini and I discussed are minimization of lead time through task organization and the Theory of Constraints. As a definition, lead time is simply the length of time it takes for a client to take delivery of a product or to benefit from a service. Whether seeking a product or service, almost every customer wants to know how long it will take to receive the desired result, with the less time the better.

Lead Time

Take a simple “I love you” will in estate planning. A client walks into a law firm, sets forth his expectations on the will and expects the attorney to provide a date when he can receive the document. The “when” is a question of lead time. If the response from the attorney is several months for a simple will, the client would likely walk out the door never to be seen again. Therefore, the goal is to get a quality will delivered to that client in the most expedited manner. While this sounds simple, extrapolate that to the most complex, “bet your company” type litigation engagement. Lead time still plays a major role. There will be many more hurdles to providing an accurate lead time, but a client will nonetheless still have expectations on a result and a time frame.

There can be many obstacles in any engagement that can cause delays, but it is possible to learn from other industries and apply simple steps that can minimize lead times. In a typical day, think of a normal workload and how you go about doing business. The day is likely filled with multiple projects for multiple clients, all of whom are priorities. With such pressure to deliver, it is easy to fall into the habit of doing bits and pieces for each project just to show the clients you are making progress. Unfortunately, this mind-set is a major roadblock to reducing lead time. To illustrate this, we will use a simple example below:

There are 5 clients (A-E) who need engagements completed. Each engagement is a high priority with high client demands, and each task will take eight hours to complete. For simplicity's sake, assume a 40-hour work week and a Monday through Friday schedule. In my experience, Chart 1, below, is a simple illustration of how most service providers, including the bulk of attorneys, would tackle the tasks by hour.

[IMGCAP(1)]

In this example, it is possible to show daily progress on each client, and each of the engagements is completed in about five days. That means your lead time for each client would be five days.

However, if you were to change tactics and take a more-focused approach, tackling one engagement at a time, you might see the results in Chart 2, below.

[IMGCAP(2)]

Using this approach drastically reduces the lead time and likely improved client satisfaction for four of the five clients. Client A has a lead time of one day, B at two days, and so on. No client has an adverse effect. It is a very simple concept, but one that is seldom practiced within service organizations. As service professionals, we want to please all our clients by dedicating time to each of their engagements immediately, but in reality we are doing them a disservice as we are often simply lengthening the time it will take to get their work done.

The Theory of Constraints

The Theory of Constraints introduced by Eli Goldratt in “The Goal” discusses measuring and controlling organizations through three metrics (with the end goal being to increase “throughput” and make more
money):

1. Throughput ' the rate at which processes generate revenue.
2. Inventory ' money and investment for items to sell. (In this case, we are not defining Inventory as Work in Progress (“WIP”) or accounts receivable, as normally defined within a service organization; instead, think of inventory as “hours yet to work.”)
3. Operational Expense ' money spent to turn inventory into throughput; the end goal is to increase throughput or to make more money.

The question is: How can a law firm increase throughput? Goldratt's theory explains that within each process lies one key constraint that must be addressed prior to moving forward. This constraint should be exploited to get the most out of it; other processes need to be realigned to make sure the constraint is ex- ploited; additional changes should occur to drive that constraint to full capacity; and once that constraint is mitigated, you move on to the next opportunity, repeating the process.

This theory has significant implications for law firms and processes that lie within them. Take a favorite topic of law firms over the last three years: Alternative Pricing. Attorneys are constantly getting creative pricing or alternative fee pricing requests from clients. These requests often have tight timelines, and attorneys then must scramble, with the help of the business team within the firm, to come up with a price. The set price is frequently developed using incomplete or inaccurate data. Tremendous uncertainty lies on the success of the arrangement. The right questions are not always asked, and the wrong actions are sometimes taken. Dissecting this process, you could identify several constraints within it.

The first constraint is not incorporating systems that can track and then report key data and information to the attorney in a timely manner. The second (and in many cases a direct symptom of the first) is a lack of understanding on the law firm's part of what an engagement will cost and, in many cases, a scope of understanding of what can be done to satisfy the client's needs while maintaining some semblance of profitability.

While there are other constraints, such as business resources, client intake forms, client communication, etc., it is more often the case that the lack of data is the key constraint in this process of alternative fee arrangement pricing. The data simply are not there, and most pricing is haphazard and lacking direction. Therefore, using the Theory of Constraints, that lack of data must be exploited to improve decision making and increase throughput. So, firms should be allocating more resources to make sure that data used to develop alternate fee pricing are correct and that there are guidelines in place to capture the data going forward. Until that is fixed, the other constraints that could be worked on must be put on hold. Once the data are available, then the process continues with the next biggest constraint being addressed.

Lean Thinking

The above example may be an easy one to think about, but the concepts introduced above are much more far-reaching than this simple example. I challenge the profession to use this style of thinking in all of its processes, be it associate development, originations and business development, compensation structures, or even the core of the legal profession: client relationships. By practicing lean thinking to reduce lead time and remove key constraints, attorneys can increase their throughput and use supply chain theory to improve their bottom line.

Russ Haskin is Director of Consulting and Services at LexisNexis' Redwood Analytics Division. He has advised more than 150 law firms across the globe from smaller firms to several within the AmLaw 10. He leads a team that consults with firm leadership on Redwood tools and methodology, business analysis, and process improvement. Haskin has been recognized as an expert in matter management, alternative fee arrangements, and profitability consulting. He has been a featured presenter, panelist and moderator, and his research has been published by multiple journals. Haskin is a primary contributor to the MorePartnerIncome.com blog.