6/17/10

Yes - It is Time to Re-think Expenses

In response to Mark Medice's post - Yes, it is past time for law firms to re-think expenses. There have been a lot of discussions about firm's cutting expenses. And an equal or greater number of discussions on being more efficient (even here on 3 Geeks). What is needed is a re-thinking that merges these two concepts in a thoughtful way.
Using my traditional car analogy - cutting the costs of the landscaping service around the car assembly plant and reducing travel by admin staff will certainly improve the bottom line for Ford. However, that approach does not address the real question of lowering the cost of producing the cars. This challenge requires re-tooling and modifying the production process. It also requires conversations with suppliers about the costs for their component parts of the car (think Westlaw).
Law firms (for the most part) have not dove in on these types of discussions. The way I challenge lawyers on this topic is by asking how they can lower the cost of providing a specific legal service (e.g. a patent prosecution). What would they do differently in order to delver the same or better product at 60% of the current price?
This question changes the nature of the "re-think expenses" question. It's not about the attorney-to-secretary ratio or the leverage between non-partners and partners. Instead the conversation should focus on doing things differently. This method brings a sharp focus on choice of technologies, number and type of personnel and on how the service is actually performed (think legal project management, ala Hassett, Levy and others).
At the core, law firms are experiencing a shift from a 'cost plus' business model to the 'profit margin' model referenced in Mark's post. The law firm business structure still reflects a 'cost plus' world. So I give a resounding YES to the idea of re-thinking expenses.
'Cost plus' behavior in a 'profit margin' world equals failure.

Bookmark and Share

4 comments:

Steven B. Levy, Author of Legal Project Management: Control Costs, Meet Schedules, Manage Risks, and Maintain Sanity said...

As part of my Legal Project Management classes and training, I spend some time on the economics of margin v. cost-plus pricing, though I don't necessarily use these terms. Understanding profit and risk is necessary not just for pricing fixed or flat fee work, but for thinking about efficiency overall.

That's why I include my "Legalnomics" course in project management training. Economics drives behavior, and Legal Project Management is about behavior -- changing it, putting a framework around it, understanding it, or all of the above.

Jim Hammond said...

The "pricing" model of legal services is going to evolve, will it be flat fee based or some hybrid including straight billable hours, I’m not exactly sure. What you can bet on is that firms who become the “low cost producer” will be in the best position to compete. They need to crank the internal costs down in every area possible.
In my June 2nd blog post “What Law Firms Should Learn from Manufacturing Companies” I mention this concept. Firms can tackle these costs on at least two fronts, the most visible being hard costs in their direct overhead and the less visible, the internal cost of processing everything. The less visible costs are the biggest gains, study everything you do, find ways to be more efficient.

http://www.rainmakerlegalblog.com/2010/what-law-firms-should-learn-from-manufacturing-companies/

Marc Lanzkowsky said...

I am the principal of a boutique claims consultancy and publisher of an industry claims blog. Having worked in the law firm, and then as a claims professional as well as a director of litigation management, I come from a "both sides of the table" perspective. Law firms are under a lot of pressure to cut costs and are being pushed, in the insurance environment, on every aspect of billing. Regardless, when I speak to firms they believe they should be getting more work because they get great results. While getting great results is a key aspect, failing to get good results is a non starter.

The thinking needs to change to ask the question what do my clients need? I think by looking more at what is needed there is room to provide a better product. Cutting expenses, new billing arrangements, technology improvements are all critical elements to the future of legals services. Providing a better product should also be on that list.

Marc Lanzkowsky
Editor www.theclaimsspot.com
Principal www.lanzko.com

Mike Mintz said...

In my experience too many of us in the legal field and the business world spend too much time on being busy. We could likely see costs driven down by working less.

I know people that say they work 70 hours a week and still don't have time to do everything that needs to be done. What are you doing? Is it possible to be 100% productive for 70 hours or more in a week? My take is that at best these people have 3 or 4 hours of solid production per day, and that's pushing it. The rest is likely spent shooting emails back and forth, indulging in spreadsheets, and other busy work. Seth Godin posted on this recently (see Cheating the Clock http://sethgodin.typepad.com/seths_blog/2010/06/cheating-the-clock.html) and said, "The problem with using time as your lever for success is that it doesn't scale very well. 20 hours a day at work is not twice as good as 18, and you certainly can't go much beyond 24..."

 

© 2014, All Rights Reserved.