1/14/11

Law Firm Profitability and its Impact on the Client


In the series on law firm profitability, the clients weren't directly addressed. As law firms struggle to adapt to a profit margin business model, what will the impact be on how much clients pay and on the quality of services they receive?
We explored two basic methods for lowering the cost of delivery of legal services, which can obviously impact the fees clients pay and the quality of their service. We’ll tackle these methods much like we did from the law firm perspective.
Fewer Hours
First up is finding ways to use fewer hours to provide the same service. This included the use of LPM and process improvement and innovation. The value of LPM to clients, in my opinion, is more about consistency than savings. Having well-defined plans up-front, means more consistent execution and quality of service. Or in other words - standardization equals quality. Fewer things fall through the cracks, when you have a plan to avoid them. An added benefit of LPM is the potential for savings. Just having a thought-out plan can eliminate some unnecessary tasks that would have been done otherwise.
Process improvement has significant potential for benefiting clients – just like it does for law firms. By attacking the plans and processes generated by LPM with an eye towards reducing hours and costs, firms will be indirectly attacking the cost to clients. Every hour reduced is an opening to reduce the costs to clients. And just as importantly, process improvement can maintain and improve quality of service (provided it is done well).
Cheaper Hours
Lowering the cost of service per hour can benefit clients as well. We have 3 options under this heading. First off - new staffing models mean lower cost per hour on comp. Essentially this means giving work to staff attorneys instead of more expensive associates. Staff attorneys will have lower costs and may have lower rates. So the savings to clients in an hourly arrangement will depend on the staff lawyer rates relative to associates’. Typically these rates are lower since most firms base rates loosely on comp. So the savings to firms would be passed on in part along to the client.
Next up is leverage. From our last post, we saw the benchmark of 1% of leverage improvement resulting in about a 1% improvement of law firm profit. Using those same metrics, 1% improvement of leverage results in .6% to .7% savings to a client. Caveats:
  1. This is just a benchmark and will differ based on different firms and practices. 
  2. The metrics are derived with an hourly billing model. 
Even though this is benchmark data, I am guessing the same sort of split between law firm gains and client gains would apply to other fee arrangements and other cost reduction efforts. The difference between the law firm gain and the client gain is a reflection of the ‘Rule of Three’ aspect of law firm economics.
Lastly we have the reduction of firm overhead costs as a means of lowering cost per hour. By driving down a firm’s overall overhead numbers, the cost per hour worked goes down. In this scenario I don’t see the client benefiting.
  1. Major reductions in overhead only bring modest reductions in cost per hour. 
  2. By reducing the amount of resources available to the lawyers, their productivity goes down. 
I haven’t seen any metrics that describe this yet, however, the likely outcome is an increase in the number of hours required to perform the same tasks. One obviously example is lawyers having to perform work they used to give to secretaries. So reductions in overhead for firms probably don’t benefit clients and may well drive their costs up.
Bottom-line: almost all of the efforts described that will improve law firm profitably, will also lower costs for clients, or at least create the opportunity from them to be lower. Additionally they have the ability to maintain or improve quality via standardization and tighter management of tasks and processes.
The one exception is the reduction of firm overhead costs. This effort has the least potential for positively impacting clients and actually may hurt them. Currently it is the primary effort firms have been making and continue to make.
My advice to clients:
  1. Understand the impact of each of these efforts and change your behavior to drive their adoption within the firms you use. 
  2. Pay attention to which ones your law firms employ.


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1 comments:

Anonymous said...

how did you come up with savings of .6% to .7% savings to a client? I reviewed your prior posts to find how the calculation was derived but couldn't locate anything. This would be helpful to know. Thank you!

 

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