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Changing the Law Firm Business Model
For years, ever since we published our first book on Alternative Billing in 1989, this author has been talking about the changes needed in the law firm business model. Most law firms are almost 60 years behind their clients!
For 60 years, the commercial world has been reinventing itself to become more customer-responsive and competitive by mapping the decision and production processes they use to deliver products and services. Industry has been using experts like Edward Deming and more recent authors like those listed below as its guide. I have incorporated many of their ideas into the experience I bring to the process as a consultant to professional firms for many years.
Alternative Fee Arrangements
There are now many articles on AFA (alternative fee arrangements). Recently, there was a good article on the “three P's,” written by Steven Nelson of The McCormick Group, for Attorney at Work. The article covered: 1) pricing; 2) project management; and 3) process. However, in my opinion, there is a problem with the order of these steps. Let me redefine their order of implementation; 1) process development and improvement; 2) project management; and 3) the ability to price work for clients. These steps are confirmed by James H. Saylor in his book, “TQM Field Manual” (McGraw Hill, New York, NY, 1996) (available on Amazon.com at http://amzn.to/1Dkc6ot).
If a law firm wants to conform to a client's need for responsiveness in the new competitive environment, big changes are required in its business model and, culturally, lawyers need to recognize that other professionals are better at certain tasks than lawyers. In addition, studies have shown that 60-plus percent of what lawyers do can be done by other professionals. According to Steve Nelsons's article, more and more law firms are employing project management and pricing professionals to direct their practice. These professionals are much more important to law firms and their future than previously thought. Lawyers are not typically educated in process development and project management due to the old “Hour times a lawyer's rate equals value added” model. This old business model promotes ineffiency by fogging more hours into a file than necessary.
Change will require a whole new set of educational challenges for law schools and law firms. That is why the thoughts of Dr. Michael Hammer (Hammer, Michael & Champy, James: “Reengineering the Corporation,” Harper Collins Publishers, Inc., New York, NY, 1993; available on Amazon.com at http://amzn.to/1sucs5q) and Peter Senge (Senge, Peter: “The Fifth Discipline: The Art & Practice of the Learning Organization,” Doubleday, New York, NY, 2006; available on Amazon.com at http://amzn.to/12RiSH8) are so critical to the future of the legal profession.
Process Improvement
If lawyers cannot define the process by which they deliver services, they will not be able to adapt to the new legal environment. Process development and improvement are an integral first step in understanding what has to be done, by whom, when, and under what timeline and budget constraints. The “new practice” lawyers know that the old model is dead. Value added depends upon much more than time and billing rate. And it depends upon the client's view of value added ' quality of product combined with cost, schedule and risk. For example, suppose a partner offers his clients a value-driven option. If they want him to solve a problem with his team of professionals, he will charge his normal billing rate. However, if they want him to jump on it personally and provide a quick turnaround, his rate would be tripled.
Therefore, lawyers must understand the process by which they deliver a legal solution. That means they understand every task in the process and who should be performing those tasks, whether it is a partner, an associate, a paralegal, or another professional. This requires a flow chart of tasks that are to be performed ' a map of each task on a timeline laid out linearly like any construction product. If an engineering firm is building a plant, it knows by the flow chart when the welders come in and when the painters come in. If everyone on the client service team understands the process, the law firm will be more efficient, clients will be more loyal, and profits will go up. If “effective” means doing the right things while “efficient” means doing things right, upon completion of a matter the process is reviewed to evaluate what in the process can be changed to make it more effective and how tasks can be performed more efficiently.
Once your firm's attorneys understand the process, they are more involved and buy into the ways efficiency can be improved. As a byproduct, turnover will decrease because members of the team are more involved with the process and understand their respective roles. By looking at the process, clients can see where they can make the most effective contribution. Showing the clients the process can improve their understanding of the approach and how efficiency can be achieved by the law firm. In addition, the client team members can see changes coming in the legal environment and alter the process. How? They will have input into their roles in the process, and can suggest appropriate changes.
Project Management
Project Management is defined as planning, organization, staffing, direction and control. Without a process, there is little planning because there is not a baseline to start with in setting up the project plan. Once the planning is in place, the lawyer can organize the events, and staff people and talents to the process tasks. Then he or she can assign people based upon their experience and talents. Finally, the project plan gives the lead lawyer a way to control the process. He or she can check status reports to determine whether the matter is over or under timeline check points, and review the budget at any time. In some law firms, project managers are not even lawyers. Some firms have brought in project managers from outside.
With real-time information, the team leader can control the investment of time into the matter, come in under budget, and increase profitability. This may be an internal budget where a firm sets up a process and tests the results before launching and pricing a matter for a client. It may also be an external budget demanded by a client. After a project, the lawyers can and should debrief to determine what in the process is ineffective and what can be changed. In the best cases, the client is involved in the debriefing. Debriefing is not a habit of client teams but it is essential.
What are the benefits of a process and good project management? Assume the firm gave the client a fixed fee of $300,000 and through the process and good project management only invested $270,000 of time. The effective billing rate would be 111% of normal rates. That would mean that $30,000 of the fee would go straight to the bottom line without any additional overhead. Increasing the overall return in a $50 million firm by 10% would mean additional distributable income to the partners of $5 million.
Pricing
Once a firm has the process in place and the ability to manage a process, it can set pricing for the matter. The process provides a map of each phase of the project. If there is no process or project management, there is no way a firm can project and meet the expectations of its pricing projections. The process map identifies the tasks required including who will perform the task and how much time is involved on each task and therefore the firm's investment in the matter. A firm cannot use the “dance” that “we cannot project what the other side may do.” The firm is being hired for its experience, not its lack of experience. The firm should know what the “kick-out” provisions should be for a change in scope outside its process plan.
The Cobb Value Curve, discussed in many of my previous articles in this newsletter and its sister Law Firm Partnership & Benefits Report, shows how clients value legal services. Description of the Cobb Value Curve can be found at www.Cobb-Consulting.com. If the matter is a nuclear event for the client, the client will pay more. If the event requires an expert, then the price point is above median price. If the service just requires a recognized brand name (a client-recognized firm), there is usually a discount requested by the client. Finally, if the client perceives the service as a commodity, any lawyer can do the job, then price is a big factor. A lawyer with good process and project management will be able to ask all the right questions in order to define an excellent scope of work to the client.
A few examples will help here. With a process and project management in place, pricing can become more innovative. For example, a firm in California is providing services to a large commercial real estate developer. Its process allowed the lawyers to price each matter based upon the cost per square foot of the development; and, of course, their project management skills enabled them to get a return higher than their average billing rates.
In another example, a nationally known litigator set up a process for the initial assessment of a loan default to bill a client one fee if the client's job is in jeopardy, and a lower fee if the bank's special asset division is involved. In this example, the litigator finds that the client is a loan officer whose $100M loan is in trouble and his job is on the line. The client perceives the problem as a nuclear event and is willing pay more. Therefore, the initial discovery would cost much more and the timeline would be much shorter. If the matter is coming from the bank's special asset division that has hundreds of such loan problems, it is a commodity. If the lead lawyer can delegate the problem to others in the firm to fit the special asset division's requirements, the fee will be lower through leverage, and the timeline will be longer.
Regarding the above examples, if the client feels this is a “you-bet-your-job” issue, he is willing to pay a lot more to quickly solve the problem. If the client is looking at hundreds of the same types of matters, it is a commodity, and the client will not pay those expert fees. Without a process, a firm is likely to lose money on such matters. If the firm has a process to estimate the fees, it can give the client a price. If the firm has project management talent, it can control the investment the law firm must make.
Summary
Process, project management, and pricing go hand in hand. One follows another. A firm cannot do one without another. First, the firm must have a process. Second, it must have people who are good project managers, even if they are not lawyers. And finally, the firm must have pricing people who understand the process and are able to count on the process and the project managers to conform to the pricing budgets. Pricing without the underlying infrastructure will not work.
For years, ever since we published our first book on Alternative Billing in 1989, this author has been talking about the changes needed in the law firm business model. Most law firms are almost 60 years behind their clients!
For 60 years, the commercial world has been reinventing itself to become more customer-responsive and competitive by mapping the decision and production processes they use to deliver products and services. Industry has been using experts like Edward Deming and more recent authors like those listed below as its guide. I have incorporated many of their ideas into the experience I bring to the process as a consultant to professional firms for many years.
Alternative Fee Arrangements
There are now many articles on AFA (alternative fee arrangements). Recently, there was a good article on the “three P's,” written by Steven Nelson of The McCormick Group, for Attorney at Work. The article covered: 1) pricing; 2) project management; and 3) process. However, in my opinion, there is a problem with the order of these steps. Let me redefine their order of implementation; 1) process development and improvement; 2) project management; and 3) the ability to price work for clients. These steps are confirmed by James H. Saylor in his book, “TQM Field Manual” (McGraw Hill,
If a law firm wants to conform to a client's need for responsiveness in the new competitive environment, big changes are required in its business model and, culturally, lawyers need to recognize that other professionals are better at certain tasks than lawyers. In addition, studies have shown that 60-plus percent of what lawyers do can be done by other professionals. According to Steve Nelsons's article, more and more law firms are employing project management and pricing professionals to direct their practice. These professionals are much more important to law firms and their future than previously thought. Lawyers are not typically educated in process development and project management due to the old “Hour times a lawyer's rate equals value added” model. This old business model promotes ineffiency by fogging more hours into a file than necessary.
Change will require a whole new set of educational challenges for law schools and law firms. That is why the thoughts of Dr. Michael Hammer (Hammer, Michael & Champy, James: “Reengineering the Corporation,” Harper Collins Publishers, Inc.,
Process Improvement
If lawyers cannot define the process by which they deliver services, they will not be able to adapt to the new legal environment. Process development and improvement are an integral first step in understanding what has to be done, by whom, when, and under what timeline and budget constraints. The “new practice” lawyers know that the old model is dead. Value added depends upon much more than time and billing rate. And it depends upon the client's view of value added ' quality of product combined with cost, schedule and risk. For example, suppose a partner offers his clients a value-driven option. If they want him to solve a problem with his team of professionals, he will charge his normal billing rate. However, if they want him to jump on it personally and provide a quick turnaround, his rate would be tripled.
Therefore, lawyers must understand the process by which they deliver a legal solution. That means they understand every task in the process and who should be performing those tasks, whether it is a partner, an associate, a paralegal, or another professional. This requires a flow chart of tasks that are to be performed ' a map of each task on a timeline laid out linearly like any construction product. If an engineering firm is building a plant, it knows by the flow chart when the welders come in and when the painters come in. If everyone on the client service team understands the process, the law firm will be more efficient, clients will be more loyal, and profits will go up. If “effective” means doing the right things while “efficient” means doing things right, upon completion of a matter the process is reviewed to evaluate what in the process can be changed to make it more effective and how tasks can be performed more efficiently.
Once your firm's attorneys understand the process, they are more involved and buy into the ways efficiency can be improved. As a byproduct, turnover will decrease because members of the team are more involved with the process and understand their respective roles. By looking at the process, clients can see where they can make the most effective contribution. Showing the clients the process can improve their understanding of the approach and how efficiency can be achieved by the law firm. In addition, the client team members can see changes coming in the legal environment and alter the process. How? They will have input into their roles in the process, and can suggest appropriate changes.
Project Management
Project Management is defined as planning, organization, staffing, direction and control. Without a process, there is little planning because there is not a baseline to start with in setting up the project plan. Once the planning is in place, the lawyer can organize the events, and staff people and talents to the process tasks. Then he or she can assign people based upon their experience and talents. Finally, the project plan gives the lead lawyer a way to control the process. He or she can check status reports to determine whether the matter is over or under timeline check points, and review the budget at any time. In some law firms, project managers are not even lawyers. Some firms have brought in project managers from outside.
With real-time information, the team leader can control the investment of time into the matter, come in under budget, and increase profitability. This may be an internal budget where a firm sets up a process and tests the results before launching and pricing a matter for a client. It may also be an external budget demanded by a client. After a project, the lawyers can and should debrief to determine what in the process is ineffective and what can be changed. In the best cases, the client is involved in the debriefing. Debriefing is not a habit of client teams but it is essential.
What are the benefits of a process and good project management? Assume the firm gave the client a fixed fee of $300,000 and through the process and good project management only invested $270,000 of time. The effective billing rate would be 111% of normal rates. That would mean that $30,000 of the fee would go straight to the bottom line without any additional overhead. Increasing the overall return in a $50 million firm by 10% would mean additional distributable income to the partners of $5 million.
Pricing
Once a firm has the process in place and the ability to manage a process, it can set pricing for the matter. The process provides a map of each phase of the project. If there is no process or project management, there is no way a firm can project and meet the expectations of its pricing projections. The process map identifies the tasks required including who will perform the task and how much time is involved on each task and therefore the firm's investment in the matter. A firm cannot use the “dance” that “we cannot project what the other side may do.” The firm is being hired for its experience, not its lack of experience. The firm should know what the “kick-out” provisions should be for a change in scope outside its process plan.
The Cobb Value Curve, discussed in many of my previous articles in this newsletter and its sister Law Firm Partnership & Benefits Report, shows how clients value legal services. Description of the Cobb Value Curve can be found at www.Cobb-Consulting.com. If the matter is a nuclear event for the client, the client will pay more. If the event requires an expert, then the price point is above median price. If the service just requires a recognized brand name (a client-recognized firm), there is usually a discount requested by the client. Finally, if the client perceives the service as a commodity, any lawyer can do the job, then price is a big factor. A lawyer with good process and project management will be able to ask all the right questions in order to define an excellent scope of work to the client.
A few examples will help here. With a process and project management in place, pricing can become more innovative. For example, a firm in California is providing services to a large commercial real estate developer. Its process allowed the lawyers to price each matter based upon the cost per square foot of the development; and, of course, their project management skills enabled them to get a return higher than their average billing rates.
In another example, a nationally known litigator set up a process for the initial assessment of a loan default to bill a client one fee if the client's job is in jeopardy, and a lower fee if the bank's special asset division is involved. In this example, the litigator finds that the client is a loan officer whose $100M loan is in trouble and his job is on the line. The client perceives the problem as a nuclear event and is willing pay more. Therefore, the initial discovery would cost much more and the timeline would be much shorter. If the matter is coming from the bank's special asset division that has hundreds of such loan problems, it is a commodity. If the lead lawyer can delegate the problem to others in the firm to fit the special asset division's requirements, the fee will be lower through leverage, and the timeline will be longer.
Regarding the above examples, if the client feels this is a “you-bet-your-job” issue, he is willing to pay a lot more to quickly solve the problem. If the client is looking at hundreds of the same types of matters, it is a commodity, and the client will not pay those expert fees. Without a process, a firm is likely to lose money on such matters. If the firm has a process to estimate the fees, it can give the client a price. If the firm has project management talent, it can control the investment the law firm must make.
Summary
Process, project management, and pricing go hand in hand. One follows another. A firm cannot do one without another. First, the firm must have a process. Second, it must have people who are good project managers, even if they are not lawyers. And finally, the firm must have pricing people who understand the process and are able to count on the process and the project managers to conform to the pricing budgets. Pricing without the underlying infrastructure will not work.
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