11/17/10

The End of Write-Offs?


Greg and I were talking over lunch recently about the role of Legal Project Management (LPM). The more I have dug into this topic, the more skeptical I have become about its role with AFAs. The common wisdom is that the fixed fee aspect of AFAs will drive the need for LPM. On its face, this common wisdom makes sense. But after facing the issue head-on in recent dialogues, I have come to a different conclusion.
LPM should be directed at unprofitable work, regardless of the type of billing arrangement. Pointing LPM at all AFAs is like saying all oil leaks come from cracked engine blocks, therefore all oil leaks require engine replacements. Having seen 100’s of AFAs, I can tell you most of them will not benefit that much from LPM.
But LPM does have value. The real question is where is LPM best deployed? To answer that question, let’s talk law firm econ 101. Two primary factors impact law firm profitability: Realization and Leverage. For this discussion, we will focus on realization. Realization is the difference between standard rates billed and money collected. So if 10 hours of work is done, but a firm only collects on 80% of that fee – realization is 80%. Three things impact realization: 1) Discounts, 2) Write downs (before the client sees the bill), and 3) Write-offs. Of the three, write-offs become an obvious place to start, because that is time billed that the client saw on the bill but obviously found no value in. Or in other words, the client is saying that work should not have been done.
Bingo! That is one of the primary roles of LPM – making sure only the right tasks are done.
My advice for getting the most out of LPM efforts: Large and consistent write-offs are strong indicators of cracked engine blocks, so pick your large matters with the biggest write offs and point LPM at those.


Bookmark and Share

5 comments:

wondsteve said...

Of course!!! LPM providers preach BOTH: a) LPM as a way to ensure you get to or below a promised budget level on schedule, and b) a way to get control over write-offs. Top 100 firms' realization rates have ALWAYS (even in "good times") hovered between 90 and 95%, & 100-200 and smaller firms have been in the mid-to high 80s%. Both have worsened dramatically in last 2 yrs., so LPM is darn near the ONLY way to gain back that 7-20% of unbilled/billed write-offs. The unbilled is JUST AS important to reduce, b/c it's usually excess work, poor scope control, latenesses, etc. that clients NEVER see! Many call UBWOs the "asleep at the wheel" kind.
Steve Barrett, Principal, LegalBizDev

Anonymous said...

One additional point, write offs often come from clients that have no money. The client intake process is what needs to be addressed not LPM.

Also, it isn't realization that is always the point. If your billing rate is $2000 an hr, and you collect 50% of it, you still get $1000 an hour.

I agree that LPM needs to be focused in the beginning on work under price pressure. That price pressure tells you they don't think there is value for the $$'s.

Steve said...

Some firm is charging $2,000 an hour?? I gotta go work for them!

Dan said...

The key to law firm profitability is exactly as described above, dramatically reducing write-downs and eliminating write-offs. Document automation and LPM should and can be targeted at un-profitable work. We are working with many AMLaw 100 firms analyzing firm profitability by deal type. It has been a real eye opener for firms reviewing profitability once write-downs have been applied. On deals where firms think they are making 20-30% profitability they are lucky to break even after write-downs are applied. It also does not matter whether a deal is an AFA or hourly billing, the partner has provided an estimate and from a clients perspective it is the same as providing a fixed price. Controlling costs as it relates to the cost of services delivered is where firms should focus their attention. Dan Gaffney, CEO, Brightleaf.

Anonymous said...

2 comments: (1) Clients who have PLENTY of money are often the cause of write-offs, not necessarily clients with no money. (2) Shouldn't we point LPMs at large clients with the biggest write-offs? By the time a large matter has big write-offs it is often over. I think directing an LPM at a troublesome client portfolio makes sense.

 

© 2014, All Rights Reserved.