The Power of Monitoring for Recovering Lost Revenue

“They saw it by doing something the rest … never thought to do. They looked.”

Let's start right in with the pain:

• Realization has hit an all-time low of 83%, plunging from 93% just a decade ago, according to Peer Monitor. For most AmLaw 200 firms, this represents at least $10 million to $20 million in lost revenue.
• BTI Consulting reports $4 billion in revenues moving in-house this year.
• CitiBank echoes, noting dispersion and volatility are evident, effective rate increases are lower, and the collection cycle lengthened slightly in 2015.

Most firms are building pricing groups as the place to start addressing this pain. This is certainly a good starting point, but if your firm is pricing and not monitoring, you've actually got a problem. Here's why.

Pricing: Everyone's Doing It — So What?

The pricing professionals are here charged with solving revenue leakage as enumerated above, as well as helping respond to the sharp uptick in RFPs issued by clients. Clients are issuing more RFPs, not only in response to internal pressures from their management, but also a new generation of corporate counsel simply having different expectations of their law firms; therefore, leveraging RFPs to investigate service offerings of new firms — and meanwhile testing the bounds of their own influence in terms of controlling outside counsel services, performance and price.

Even more, approximately 75% of those RFPs now require detailed budgets surrounding matters. Regardless of size, pedigree and matter type, firms are responding to more and more RFPs and creating more and more budgets.

Monitoring: Not Everyone Is 'Looking,' and That's a Problem

And here's the disconnect. If you're pricing and not monitoring, you've got a problem. That problem is called “expectations.” Providing a budget to your client at the onset of the engagement establishes the very concrete expectation that your firm will deliver its services not only on time, but on that budget. This means to deliver pricing without monitoring is not only not a best practice but a first step toward failure: You've raised the bar on one side of the equation and not given your partners the tools on the other.

Firms have become very good at pricing work in new and creative ways, but many of those same firms struggle to manage those new fee structures on budget. The information required for better budget management is siloed in various core systems (finance, HR, marketing, etc.), and the task of uniting that information has traditionally been too time-consuming and cumbersome to be effective for real monitoring. The traditional method firms take is simply to look at the pre-bill of the previous month's work. In using this method, however, firms have no easy way to reconcile against the detailed budget established for the matter, nor does it give the team managing the case any runway to head off problems before they get out of control — avoiding a pre-bill surprise at the end of the month. I once heard a partner say, after getting one of these pre-bill surprises, “We'll just make it up next month.” Not surprisingly, they reverted right back to their old habits, and the write-offs continued.

We can do better. Monitoring is the simple concept of looking routinely at the ongoing financial health of your matters, specifically your budget to actual, and ideally the data is delivered in a visual chart that makes it easy for lawyers to decipher the financial health of the matter. It acts as an early warning detection system for each matter's profitability, and this early warning detection system creates better, more frequent and more informed conversations with clients; provides the information partners need to course correct at any point during a matter and avoid write-downs/write-offs and other undesirable surprises; and therefore directly and positively affects firms' overall profits as well as, of course, for the partners and lawyers in question. Unlike full-blown legal project management (LPM), monitoring is also a much easier place to start when a firm is looking at improving matter and budget management.

Here's an example. At a previous firm, I was inserted into an underperforming seven-figure matter portfolio running at 55% realization with the goal of turning things around and improving realization and profitability. At my disposal was a dream arsenal to effect a reversal of fortune: top lawyers with Lean Six Sigma certifications, top tier pricing professionals, innovative technology, and four years of billing data with phase/task codes assigned to each time entry. We applied our analytics tools to the time entries to determine how long, on average, each task and phase cost and had our process experts create a 26-page process map. We folded all this work into an LPM system so that the case team could manage each case armed with the knowledge of what each task and phase should cost and a templated roadmap for project management that each member of the case team could follow. However, none of this effort was translating into a behavior change for the focus partner or the case team.

Ultimately, we realized this was too much rigor, too much detail and too much change to impose on the case team. So, we scaled back the discussion and provided a basic schema: projecting $80,000 over eight months — or a $2,500 per week budget — we asked the partner to simply monitor time billed against that budget on a week-by-week basis and provided her a graphical, color-coded, report to help her action on matters which needed attention. This basic view of monitoring affected an immediate and concrete result in behavior. The partner in question was able to instantly understand by monitoring the budget more closely and regularly where, when, and how to make quick adjustments. In nine months, we were able to increase this one partner's realization by 20 points on a seven-figure portfolio of work.

From Here to Maturity

We are in a market where demand is flat. Everybody knows this. Most firms have done all of the cost-cutting measures they have been able to do in order to widen the margin between revenue and profit. Lateral hirings will also continue to be a play to increase revenues, but these are not all strategic, sustainable plays. Cost-cutting measures are one-offs and not all lateral hires are home runs. Ideally, firms should focus on a sustainable strategy for ensuring profitability in a predictable and repeatable manner, matter-by-matter.

Many firms struggle with where they should start and, when firms attempt to jump from basic budgeting straight to advanced legal project management, we've found it requires too many new skills and introduces too much change too quickly to be successful at most firms. Monitoring builds the core set of muscles firms and their attorneys need to move at a steady and comfortable pace. One roadmap which visualizes recommended, steady maturity to sustainable profitability is Fireman & Co.'s PPI (Profitability, Performance & Innovation) Maturity Model.

Monitoring works so well as the starting place because:

• It doesn't require significant changes in lawyer behavior;
• It is a core skill to build up that will be needed later in the maturity model;
• Clients expect that you are doing it; and
• It delivers the concrete and tangible results that motivate attorneys. Money in the pocket is very motivating.

Monitoring in Real Time

There are many ways to do basic monitoring. Some firms have endeavored to create internally developed tools using Microsoft tools (aka SSRS reporting). This is a good starting point for some firms, but it's not going to be a long-term, scalable solution. Ideally, the firm needs a tool that can scale and account for different ways of working.

Firms are not set up for a one-size-fits-all; different practice groups and partners will have differing needs. Most importantly, however, you will want to provide a monitoring tool that allows your firm to grow, a “system of the future,” if you will. Some of your attorneys will mature very quickly, and some will not. You want to provide the flexibility and room for growth for both sets of professionals and allow as many attorneys as possible to traverse along the maturity model.

In regard to what's out there now, most tools have focused on one side of the equation or the other: pricing or monitoring and legal project management, the firm side or the client performance side. However, one tool we work with that gives firms a holistic view of pricing, monitoring and legal project management from both sides all in one place is Prosperoware Umbria. Another tool we work with is Elevate's Cael product. Other tools that tackle components of this issue are Align Matters and Prio.

Conclusion

Pricing is an important first step, yes — but monitoring is arguably just as important. Firms that are monitoring have a distinct and long term competitive advantage — if not by virtue of doing the thing clients expect all firms to be doing, then by virtue of building the core skills necessary to push through new pathways for sustainable profitability. Your attorneys will get it, your attorneys will like it because it's easy, it will increase profits at your firm — and it will build trust with your clients.

***** Tom Baldwin is a Partner at Fireman & Co. He can be reached at [email protected]. This article also appeared in Law Technology News, an ALM sibling of this newsletter.