Alternative Fees: "How To" do The Budget

Although I see the appeal of the Just Do It crowd, there needs to be some performance metrics when it comes to Alternative Fee Arrangements (AFAs). And all paths on this subject point to The Budget. So for our next "How To" step towards AFAs, we need to dive in deeper on this subject. The Bottomless Budget The lawyer personality tends to want to eliminate risk (we have mentioned that before here on 3 Geeks). From this perspective, the best budget is the one that takes into account every possible task, the people who will work on it and the number of 6 minute increments each person will apply to these tasks. In a perfect world, this type of budget would be tremendously valuable. Unfortunately, we live here on earth. Besides - this type of budgeting approach allows lawyers to spend all their time analyzing instead of pricing and engaging with clients. In my experience, even when the effort is made to produce a budget like this - it is not a final product. Lawyers will step back (to yet again analyze instead of act) and consider how much resource is going to each task, phase or budget line item. From this larger perspective, it becomes apparent that adjustments must be made. The lawyer knows in his gut that too much resource or not enough is committed to different portions of the budget. So even this "get-down-in-the-weeds" approach to determining a budget and a firm's cost of production will not produce a perfect budget. In fact, this quest for the 'perfect budget' is a journey and not a destination. Which is another way of saying it allows lawyers to do what they like (analysis) and avoid what makes them uncomfortable (talking to clients about price). The Wafer Thin Budget "My gut tells me ... $." Although likely an accurate estimation, the "feels-right-in-my-gut" budget does not give enough information to measure performance. Although at the end of the matter you will see how well you did, a firm will benefit from gaining metrics through-out the representation. Theoretically, you could use the gut measure to estimate various phases of a budget (e.g. investigation, discovery, ...), but those sorts of numbers won't give you a solid profitability measure (a.k.a. leverage). Obviously we need to find some middle ground - somewhere between the "weeds" and "my gut." The Balanced Budget I propose a reasonable, middle-ground for building a matter budget. A seasoned lawyer's instincts on estimated fees are a great resource. We just need to focus them to the right level of detail. Let's start with the UTBMS task codes. I know - these are both universally vilified and praised. I say start with them because they are an existing (and accepted) standard and they are in use in most every e-billing system around. This means even though they may not be the most directly applicable division of tasks, they provide common ground. Another advantage they bring; they provide reasonable case phase definitions (L100, L200, and so on). Now take your seasoned partner's gut and point it at this structure. Get him/her to estimate fees per task code and phase. Take it a step further and have them estimate how each task code should be leveraged - partner to associate wise. Some codes or phases will be partner intensive - some associate. I suggest the resulting budget will be a good approximation of fees, arrived at in short-order and with enough information to serve as a performance metric benchmark. The "Balanced Budget" is one possible approach. There must be others. Whatever a firm or lawyer does for AFAs, they will need to understand the cost of providing services and be able to measure how each matter stacks up in terms of profitability. The Budget will play a central role in meeting both of those needs.

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Ron Baker said...

Hi Toby,

Good post and good points. I firmly believe the answer to your question is in Project Management, a skill I am afraid most professional knowledge firms do not possess. And I'll go a step further: Excellence in project management is critical, NO MATTER HOW A FIRM PRICES (even if it uses billable hours).

My colleague Ed Kless is a Certified Project Manager, and teaches this skill. He wrote a three-part post on our blog that I think you and your readers will find very valuable:




I would also like to point out that no matter how good a firm is at cost accounting and budgeting, those skills will not help it to become better at pricing. The best cost accountants in the world (CPAs) are among the worst pricers in the world.

Cost accounting is a low value activity, and any first year accounting student could do it, especially in a law firm where over 90% of your costs are fixed. This isn't rocket science.

The hard part is not figuring your costs, it's figuring out the value to the client. And this is where professional pricers spend their time. Too many firms focus way too much on how to cost, fearing they are not going to make a profit on every minute they spend. This is the wrong focus. You have to focus on value creation, which greatly exceeds your costs.

Toyota is so good at this it does not have a standard cost accounting system, a fact that should send a chill up the spine of every CPA alive. Read the book Profit Beyond Measure, by H. Thomas Johnson to learn how Toyota values, prices and costs its products.

So yes, if you are going to do Value Pricing here are the essentials:

1) Use Key Predictive Indicators to predict future client and team member behavior, since they measure success the same way the client does. No client judges the success of their law firm by how many they spend or log on a timesheet.

2) Develop your project management skills, which include allocating resources, projecting capacity forward (not looking backwards like timesheets do), and determining turn-around times (which deals with duration, not time spent doing the work).

3) Do After Actions Reviews on every major engagement to add to your firm's intellectual capital, figure out how to do it better next time, and apply lessons learned to future engagements.

4) Appoint a Chief Value Officer and a pricing cartel, a group of people dedicated to getting better at the above skills, and who are responsible for pricing across the entire firm.

This is the path the Fortune 500 companies have traversed, now that most of them have pricing departments.

It's an investment in intellectual capital that will pay substantial dividends. Once you get good at it, you'll stop sweating over how long (in 6 minutes increments) things take, since your firm will be obsessed with value. And if you achieve that, you can be a rather sloppy cost accountant.

I guarantee it, and that's from a former (recovering and repentant) cost accountant.

Ron Baker, Founder
VeraSage Institute

QLex Consulting said...

How wonderful to read these comments. I've been talking to my self about this for too many years...Seriously, I teach lawyers how to "do" project management and budgeting. As a former practising attorney, Partner at a Big Accounting firm and practice group leader, I've had some hands-on experience to develop the skills, syllabus and curriculum. Glad to follow up or brainstorm with anyone who might be interested.
Aileen Leventon


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